Rating Rationale

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 (acquired in April 2017) has a dominant market share in North American and European heavy truck market.

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 49% in fiscal 2019 from 59% in fiscal 2015; the exposure to Asia Pacific, North America and South America has simultaneously increased. Integration of SMRC has further driven the improvement in geographic and customer diversity. The SMRC acquisition added five more countries to the geographical footprint of MSSL, taking the total revenue contributing countries to 41.

CRISIL believes that the group will continue to benefit from its diversified customer profile and strong order book, leading to better than industry 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 SMR. Consequently, the MSSL group's order book improved to 'У'ТЌ18.2 billion (Rs 147,263 crore) as on March 31, 2019 compared with 'У'ТЌ17.2 billion (Rs 129,785 crore) as on March 31, 2018.

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 'BBB+/Stable' 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-/Negative/ A-2' by S&P Global Ratings), Renault S.A. (rated 'BBB/Negative/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 22 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 improved to 11.3% in fiscal 2019 from negative margins at the time of the acquisition. SMP's operating margin stood at 8% in fiscal 2019 (adjusted for losses in greenfield plants commissioned in 3^rd quarter of fiscal 2019, acquisition of SMRC in August 2018 and impact of Ind-AS 115) from 4% at the time of acquisition. The overall margin at SMP moderated in fiscal 2019 to 4.5% owing to large operating losses at Greenfield plants.

PKC has also demonstrated improvement in operating performance since acquisition in March 2017. In fiscal 2019, PKC reported 21% growth in revenues whereas operating profitability improved to 8.9% as compared to 7.0% during the corresponding period of the previous fiscal. The latest major acquisition, SMRC, posted revenues of Rs 5061 crore in eight months ended March 31, 2019 with operating profitability of 5.7%. The operating margins at SMRC are expected to improve in fiscal 2020 with integration with MSSL.

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 591 crores in fiscal 2020 and Rs 85 crore in fiscal 2021. In fiscal 2022, major part of existing debt (Rs 3910 crore) will fall due. In fiscal 2020, the company refinanced a higher cost loan at PKC at lower rates.

Overall, moderation in organic capex, possible mid-sized acquisitions, and healthy annual accrual of around Rs 3500 crore will result in gradual strengthening of credit metrics over the medium term.

The group's liquidity also benefits from its healthy cash generating ability, significant undrawn working capital bank lines of SMRP BV of 'У'ТЌ427 million (around Rs 3300 crore), as on 30^th June 2019; and cash of Rs 3,491 crores on June 30, 2019 at consolidated level. Cash reserves may however, deplete in case of any material acquisitions.

Weaknesses
* 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. MSSL group achieved revenues of about USD 9.1 billion in fiscal 2019 including SMRC acquisition, and material inorganic growth will be required to achieve projected revenue targets by fiscal 2020. However, enhancement of return on capital employed (RoCE) is expected to be the main criteria for acquisitions. While MSSL may continue with its aggressive growth strategy over medium term, 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 26% in fiscal 2019, 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 SMRC in August 2018. The SMRC acquisition has resulted 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) in fiscal 2019.

* 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 has undertaken significant capex to cater to OEMs through Greenfield plants in USA as well as Hungary. Delay in earlier envisaged ramp up of these plants impacted the overall operating profitability in fiscal 2019.

Additionally, any potential tariff wars in Europe and US may possibly imply significant cost escalations for European OEMs (which accounted for 49% of the revenue in fiscal 2019) 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, thereby impacting overall operating performance.

Liquidity: Strong
Cash and cash equivalents stood at Rs.3491 crore as on June 30, 2019 at consolidated level (mainly in overseas subsidiaries). The utilization of revolving credit facility of Euro 575 million at SMRP BV stood at Euro 148 million as on 30^th June 2019. The utilization of fund based working capital limits at standalone operations of MSSL stood at 33% for the twelve months ended June 2019. The liquidity position is expected to remain strong, supported by annual cash generation of upwards of Rs. 3500 crore as against the debt repayments of Rs 591 crore in fiscal 2020 and Rs 85 crore in fiscal 2021. In fiscal 2022, major part of existing debt (Rs 3910 crore) will fall due. The company has a track record of refinancing of higher cost debt at lower rates in the past. The organic capex is expected to be Rs 2000-2500 crore per annum over medium term which will be funded mainly out of internal accrual.