Rating Rationale
October 30, 2018 | Mumbai
Motherson Sumi Systems Limited
Long-term rating upgraded to 'CRISIL AA+/Stable'; short-term rating reaffirmed
 
Rating Action
Total Bank Loan Facilities Rated Rs.715 Crore
Long Term Rating CRISIL AA+/Stable (Upgraded from 'CRISIL AA/Positive')
Short Term Rating CRISIL A1+ (Reaffirmed)
 
Rs.150 Crore Commercial Paper Programme CRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has upgraded the ratings on the long term bank loan facilities of Motherson Sumi Systems Limited (MSSL) to 'CRISIL AA+/Stable' from 'CRISIL AA/Positive'. The ratings on the short term bank loan facilities and commercial paper programme have been reaffirmed at 'CRISIL A1+'.
 
The upgrade in the long term rating reflects the strengthening market position of MSSL driven by sustained market share improvement across product segments, improving client diversity, including due to recent acquisitions, and expected ramp up in major newly added capacities in Hungary, USA and Mexico. The same is expected to lead to improvement in MSSL's revenues, operating profits and return on capital employed (RoCE) over the medium term.  MSSL has added 27 new plants in last three fiscals, the benefit of this large capital expenditure (capex) will accrue in the medium term.
 
Expected ramp up in new capacities supported by order book of EUR 17.2 billion as on March 31, 2018 (as compared to EUR 12.9 billion as on March 31, 2017) and benefits from recent acquisitions will drive revenue growth of 15-20% in the medium term. Benefit of operating leverage with ramp up of new facilities for polymer business, increasing vertical integration opportunities at PKC Group Plc (PKC) and recently acquired Reydel Automotive Group (Reydel) will drive improvement in MSSL's RoCE to over 20% in the medium term, from 15.6% in fiscal 2018.    
 
The company's financial risk profile is expected to strengthen further, as organic capex is expected to be lower and largely funded through continuing healthy cash accruals. This, coupled with efficient working capital management, will lead to continued improvement in key credit metrics. For instance, CRISIL expects MSSL's gross debt to earnings before interest, tax, depreciation and amortization (EBITDA) to improve to 1.5 times (2.01 times for fiscal 2018) in the medium term. Material acquisitions, and funding philosophy, will remain a key monitorable.
 
The rating continues to reflect MSSL's established market position in the automotive components industry, its diversified revenue profile across customers, geographies, and product segments, healthy relationships with global OEMs, strong execution track record of successful turnaround of overseas acquired entities and healthy financial profile backed by well-spaced out repayment obligations and adequate liquidity. These strengths are partially offset by aggressive acquisition led growth philosophy, high albeit reducing, revenue concentration towards Volkswagen Group (VWG) and exposure to cyclicality in demand in global automobile industry.

Analytical Approach

For arriving at its ratings, CRISIL has combined the business and financial risk profiles of MSSL and its subsidiaries, including Samvardhana Motherson Automotive Systems Group B.V (SMRP BV; rated 'BB+/Stable' by S&P Global Ratings), together referred to as the MSSL group. This is because of the operational and financial linkages among the entities. Further, the goodwill of Rs. 1,871 crore generated on acquisition of PKC is being amortised over a period of 5 years, from the date of completion of the transaction.

Key Rating Drivers & Detailed Description
Strengths
* Established market position in the automotive components industry
The MSSL group has an established market position and is amongst the world's largest manufacturers of exterior rear-view mirrors with dominant market share, and is a leading global player in polymer-based interior and exterior modules. Its market position is further supported by increasing market share in the premium segment in the polymers division in bumpers, instrument panels and door panels. Moreover, the group is also the largest manufacturer of wiring harnesses for passenger vehicles in India. PKC had a dominant market share in North American and European heavy truck market in fiscal 2018. Furthermore, ramp up in China will continue to drive market share gain.
 
The MSSL group's business risk profile is further supported by the synergies within various business segments, its strong in-house research and development capabilities, and long-term technical collaborations with Sumitomo Wiring Systems Ltd (SWS) and other joint venture (JV) partners.
 
* Diversified revenue profile across customers, geographies, and product segments
The MSSL group has, over the years, significantly diversified its revenue profile through acquisitions. Ramp up of performance of acquired entities has helped the MSSL group in establishing a global presence across key product segments.
 
Further, the MSSL group's customer and geographic diversity has been improving. The healthy customer diversity has helped the MSSL group withstand the slowdown witnessed by its largest customer, Volkswagen Group (VWG; rated 'BBB+/Stable/ A-2' by S&P Global Ratings, comprising of Volkswagen, Audi, Seat, Skoda, and Porsche) due to diesel engine emission issue. The MSSL group's geographic diversity has also been improving, with exposure to its largest market, Europe, reducing to 51% in fiscal 2018 from 59% in fiscal 2015; the exposure to Asia Pacific, North America and South America has simultaneously increased. Integration of recent Reydel acquisition will further drive the improvement in geographic and customer diversity.
 
CRISIL believes that the group will continue to benefit from its diversified customer profile and strong order book, leading to steady revenue growth over the medium term.
 
* Healthy relationships with global OEMs
Over the years, the MSSL group has forged healthy relationships with major global OEMs, on account of its focus on quality and delivery. The group benefits from a sustained inflow of new orders from OEMs, primarily in its major operating subsidiaries, Samvardhana Motherson Peguform (SMP) and Samvardhana Motherson Reflectec (SMR). Consequently, the MSSL group's order book improved to EUR 17.2 billion (Rs 138,099 crore) as on March 31, 2018 compared with EUR 12.9 billion (Rs 103200 crore) as on March 31, 2017 The order book includes a large order of EUR 2.2 billion (Rs 16,000 crore) from Daimler AG (rated 'A/Stable/A-1' by S&P Global Ratings). The order will increase the MSSL group's revenue share from the North American market, thereby further improving its geographic diversity.
 
The MSSL group has a well-diversified global client base in the passenger vehicles industry. Its customers include leading global OEMs such as VWG and its group companies, Hyundai Motor Co. (rated 'A-/Negative' by S&P Global Ratings), Maruti Suzuki India Ltd (rated 'CRISIL AAA/Stable/CRISIL A1+'), Bayerische Motoren Werke Aktiengesellschaft (BMW ' rated 'A+/Stable/A-1' by S&P Global Ratings), Nissan Motor Co. Ltd (rated 'A/Stable/ A-1' by S&P Global Ratings), Renault S.A. (rated 'BBB/Stable/A-2' by S&P Global Ratings), Ford Motor Company (rated 'BBB/Negative/A-2' by S&P Global Ratings), General Motors Company (rated 'BBB/Stable' by S&P Global Ratings), Daimler AG, and Toyota Motor Corp (rated 'AA-/Stable/A-1+' by S&P Global Ratings), among others.
 
* Strong execution track record of successful turnaround of, and ramp up of utilisation levels at overseas acquired entities
The MSSL group has a track record of acquiring distressed companies and turning around their operations in a short span of time. The 21 acquisitions from fiscal 2002 till date have improved its geographical and product profiles, apart from being its growth driver. The MSSL group has also successfully integrated and stabilised the operations of the acquired entities. SMR's operating margin and RoCE improved to 11.6% and 42% respectively in fiscal 2018 from negative margins and RoCE at the time of the acquisition. SMP's operating margin and RoCE improved to 7.7% and 12% respectively in fiscal 2018 (adjusted for start-up costs for its plants in USA and Hungary commissioned in 2018) from 4% and 1% at the time of acquisition, and is expected to further improve over the medium term, driven by the stabilisation of these new plants.
 
PKC has also demonstrated improvement in operating performance since acquisition in March 2017. In first three months ended 30th June 2018, PKC reported 17% growth in revenues as against for corresponding period in previous fiscal. Operating profitability also saw an improvement to 9.5% as compared to 7.9% during the corresponding period of the previous fiscal).
 
Prudent acquisition strategy with demonstrated turnaround abilities will continue to benefit the business profile in the medium term.
 
* Well-spaced out repayment obligations, resulting from the long maturity of the MSSL group's debt, and the group's adequate liquidity
While the MSSL group has funded its acquisitions through a combination of debt, equity and accruals, it has also prudently ensured its debt obligations are well spaced out, besides also consistently working on lowering the cost of debt.  For instance, the group has replaced high cost debt with longer tenure Euro and USD denominated debt at competitive rates over the past two years. The MSSL group has repayment obligations of Rs 1410 crores in fiscal 2019; however, repayment obligations are expected to reduce to Rs 560 crore in fiscal 2020 and nil in fiscal 2021. In fiscal 2022, major part of existing debt (Rs 4250 crore) will fall due. Overall, moderation in organic capex, possible mid-sized acquisitions, and healthy annual accrual of over Rs 3800 crore will result in strengthening of credit metrics over the medium term. Higher than expected debt funded acquisition resulting in debt/EBITDA increasing beyond 2.5 times on sustained basis, will remain a key monitorable.
 
The group's liquidity also benefits from its healthy cash generating ability, significant undrawn working capital bank lines of SMRP BV of Euro 356 million (Rs 2848 crore) as on 30th June 2018; and cash of around Rs 2,778 crores as on March 31, 2018. Cash reserves may however, deplete in case of any material acquisitions.
 
Weakness
* Aggressive acquisition led growth strategy
The MSSL group has demonstrated high growth through a number of acquisitions since 2002, and the management's stated intent is to more than triple the group's revenues to USD18 billion by fiscal 2020, from USD 5.5 billion in fiscal 2015. The MSSL group has achieved revenues of about USD 10 billion in fiscal 2018 including Reydel acquisition, and material inorganic growth will be required to achieve projected revenue targets by fiscal 2020. Therefore, while MSSL is expected to continue with its aggressive growth strategy, demonstration of management intent to prioritise sustenance of RoCE at healthy levels over revenue targets will be critical.
 
* High, albeit reducing, revenue concentration towards VWG
The MSSL group's long-term strategy is to ensure that no single customer, country or component contributes more than 15% to the turnover. However, while the customer diversity is improving, VWG remains MSSL group's largest customer. The share of VWG reduced to 33% in fiscal 2018, from 49% in fiscal 2014. The share of VWG is expected to reduce further with the execution of large orders from Daimler and completion of acquisition of Reydel group in August 2018. The Reydel group acquisition will result in increase in the share from Renault S.A. (Renault; rated 'BBB/Stable/A-2' by S&P Global Ratings), and Peugeot S.A. (PSA) to 10% from 5% in fiscal 2018 and decrease in share of VWG to 30% from 33% in fiscal 2018. 
 
* Exposure to cyclicality in demand in global automobile industry
While MSSL's revenue profile benefits from good geographic, customer and product diversity, it remains closely aligned to the performance of key geographies and customers. Due to dependence on large global OEMs, MSSL's business prospects are exposed to cyclical demand patterns inherent to the global automobile industry and ability of the OEMs to sustain their operating performance, more so as it is recently undertaken significant capex to cater to OEMs. Additionally, any potential tariff wars in Europe and US may possibly imply significant cost escalations for OEMs exporting into the US and cause a significant slowdown in their operating performance. Regulatory issues like new environmental standards could also impact the performance of global auto OEMs. Overall moderation in global auto sales growth may result in slower ramp up of new facilities.
Outlook: Stable

CRISIL believes that MSSL's credit profile will benefit from its strong business positions across its various businesses as well as focus on improving customer and geographic diversity alongside its efforts towards improving working capital management and profitability.
 
Upside scenario
* Continued improvement in geographic and customer diversity
* Better than expected scale up in operation with ramp up of new plants resulting in improvement in RoCE
* Debt/EBITDA reduces to below 1.5-1.7 times (2.01 times as on March 31, 2018) and gearing to below 0.6 times (0.84 times as on March 31, 2018) on a sustained basis

Downside scenario
* Operating margins weaken considerably
* Significant deterioration in debt protection metrics, most likely due to higher than expected debt-funded acquisitions or capex, such that debt/EBITDA increases beyond 2.50-2.75 times on a sustained basis.
* Sizeable cash outflow in the form of dividends or share buyback

About the Company

MSSL, the flagship company of the Samvardhana Motherson group, was incorporated as a JV between Samvardhana Motherson International Ltd (SMIL, rated 'CRISIL AA-/Stable/ CRISIL A1+') and SWS in 1986. As on June 30, 2018, MSSL was owned by SMIL (33.43%), SWS (25.10%), the Sehgal family (2.85%), and public and others (38.62%). The company has over 140 subsidiaries with over 180 facilities across Asia, Europe, North America, South America, the Middle-East, Australia, and Africa as on March 31, 2018.
 
For fiscal 2018, the wiring harness division contributed 27% of the MSSL's revenues and 38% of the group's EBITDA. SMR (rear view mirrors division) contributed 21% and 27% of the group's revenues and EBITDA respectively, whereas SMP (polymers division) contributed 47% and 29% of the group's revenue and EBITDA respectively.
 
For the three months ended June 30, 2018, the MSSL group (consolidated) reported a net profit of Rs 618 crore on an operating income of Rs 14,776 crore as against Rs 347 crore on an operating income of Rs 13,305 crore for the corresponding period of the previous year.
 
On a standalone basis, MSSL reported a net profit of Rs 879 crore on an operating income of Rs 7,667 crore for fiscal 2018, as against a PAT of Rs 827 crore on an operating income of Rs 7002 crore for fiscal 2017. For the three months ended June 30, 2018, MSSL, on a standalone basis, reported a net profit of Rs 188 crore on an operating income of Rs 2,004 crore as against Rs 191 crore on an operating income of Rs 1,910 for the corresponding period of the previous year.

Key Financial Indicators (Consolidated)
Particulars Unit 2018 2017
Revenue Rs. Cr. 56,296 42,360
Profit after tax Rs. Cr. 1,770 2,091
PAT margins % 3.1 4.9
Adjusted Debt / Adjusted Net Worth Times 0.84 1.01
Interest Coverage Times 13.0 12.1

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments.
Annexure - Details of Instrument(s)
ISIN Name of Instrument Date of Allotment Coupon
Rate (%)		 Maturity
Date		 Issue Size
(Rs Crs.)		 Rating Assigned
with Outlook
NA Cash credit* NA NA NA 300 CRISIL AA+/Stable
NA Cash credit** NA NA NA 30 CRISIL AA+/Stable
NA Cash credit*** NA NA NA 40 CRISIL AA+/Stable
NA Cash credit $ NA NA NA 40 CRISIL AA+/Stable
NA Cash credit & NA NA NA 65 CRISIL AA+/Stable
NA Overdraft limit ^* NA NA NA 45 CRISIL AA+/Stable
NA Overdraft limit ^** NA NA NA 80 CRISIL AA+/Stable
NA Letter of credit ^*** NA NA NA 50 CRISIL A1+
NA Letter of credit $* NA NA NA 50 CRISIL A1+
NA Foreign Exchange Forward $**@ NA NA NA 5 CRISIL A1+
NA Proposed Long Term
Bank Loan Facility		 NA NA NA 10 CRISIL AA+/Stable
NA Commercial Paper NA NA 7-365 days 150 CRISIL A1+
*Interchangeable with Working Capital Demand Loan, Packing Credit in Foreign Currency, Foreign Bill Purchase
** Interchangeable with Working Capital Demand Loan, Export Packing Credit, Foreign Bill Purchase, Foreign Bill Discounting
*** Interchangeable with Working Capital Demand Loan, Packing Credit in Foreign Currency, Foreign Bill Discounting
$ Interchangeable with Foreign Bill Discounting, Packing Credit in Foreign Currency
& Interchangeable with Working Capital Demand Loan, Usance Letter of Credit
^* Interchangeable with Working Capital Demand Loan, Packing Credit in Foreign Currency
^** Interchangeable with Working Capital Demand Loan, Packing Credit in Foreign Currency, Export Bill Discounting
^*** Interchangeable with Bank Guarantee
$* Interchangeable with Bank Guarantee, Forward Limit
$**@ Foreign exchange forward has a notional value of Rs 250 crore
Annexure - Rating History for last 3 Years
  Current 2018 (History) 2017  2016  2015  Start of 2015
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
-  CCR    --    --    --    --  30-06-15  Withdrawal  CCR AA-/Stable 
Commercial Paper  ST  150.00  CRISIL A1+  05-04-18  CRISIL A1+  30-11-17  CRISIL A1+      30-06-15  CRISIL A1+  CRISIL A1+ 
Short Term Debt (Including Commercial Paper)  ST          27-01-17  CRISIL A1+  14-10-16  CRISIL A1+    --  -- 
                08-08-16  CRISIL A1+       
Fund-based Bank Facilities  LT/ST  615.00  CRISIL AA+/Stable/ CRISIL A1+  05-04-18  CRISIL AA/Positive/ CRISIL A1+  30-11-17  CRISIL AA/Positive/ CRISIL A1+  14-10-16  CRISIL AA/Stable/ CRISIL A1+  30-06-15  CRISIL AA-/Positive/ CRISIL A1+  -- 
            27-01-17  CRISIL AA/Stable/ CRISIL A1+  08-08-16  CRISIL AA-/Positive/ CRISIL A1+       
Non Fund-based Bank Facilities  LT/ST  100.00  CRISIL A1+  05-04-18  CRISIL A1+  30-11-17  CRISIL A1+  14-10-16  CRISIL A1+  30-06-15  CRISIL A1+  -- 
            27-01-17  CRISIL A1+  08-08-16  CRISIL A1+       
All amounts are in Rs.Cr.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Cash Credit* 300 CRISIL AA+/Stable Cash Credit* 300 CRISIL AA/Positive
Cash Credit** 30 CRISIL AA+/Stable Cash Credit** 30 CRISIL AA/Positive
Cash Credit*** 40 CRISIL AA+/Stable Cash Credit*** 40 CRISIL AA/Positive
Cash Credit$ 40 CRISIL AA+/Stable Cash Credit$ 40 CRISIL AA/Positive
Cash Credit& 65 CRISIL AA+/Stable Cash Credit& 65 CRISIL AA/Positive
Foreign Exchange Forward$**@ 5 CRISIL A1+ Foreign Exchange Forward$**@ 5 CRISIL A1+
Letter of Credit^*** 50 CRISIL A1+ Letter of Credit^*** 50 CRISIL A1+
Letter of Credit$* 50 CRISIL A1+ Letter of Credit$* 50 CRISIL A1+
Overdraft^* 45 CRISIL AA+/Stable Overdraft^* 45 CRISIL AA/Positive
Overdraft^*** 80 CRISIL AA+/Stable Overdraft^*** 80 CRISIL AA/Positive
Proposed Long Term Bank Loan Facility 10 CRISIL AA+/Stable Proposed Long Term Bank Loan Facility 10 CRISIL AA/Positive
Total 715 -- Total 715 --
*Interchangeable with Working Capital Demand Loan, Packing Credit in Foreign Currency, Foreign Bill Purchase
** Interchangeable with Working Capital Demand Loan, Export Packing Credit, Foreign Bill Purchase, Foreign Bill Discounting
*** Interchangeable with Working Capital Demand Loan, Packing Credit in Foreign Currency, Foreign Bill Discounting
$ Interchangeable with Foreign Bill Discounting, Packing Credit in Foreign Currency
& Interchangeable with Working Capital Demand Loan, Usance Letter of Credit
^* Interchangeable with Working Capital Demand Loan, Packing Credit in Foreign Currency
^** Interchangeable with Working Capital Demand Loan, Packing Credit in Foreign Currency, Export Bill Discounting
^*** Interchangeable with Bank Guarantee
$* Interchangeable with Bank Guarantee, Forward Limit
$**@ Foreign exchange forward has a notional value of Rs 250 crore
Links to related criteria
CRISILs Approach to Financial Ratios
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating criteria for manufaturing and service sector companies
Rating Criteria for Auto Component Suppliers
CRISILs Criteria for rating short term debt

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