Detailed Rationale

CRISIL Ratings has removed its rating on the non-convertible debentures of Samvardhana Motherson International Limited (SAMIL) from ‘Rating Watch with Positive Implications’ and upgraded it to ‘CRISIL AA+’ from ‘CRISIL AA’. Further, ‘Stable’ outlook has been assigned to the long-term rating. Effective, January 21, 2022, SAMIL is merged with Motherson Sumi Systems Ltd (MSSL, rated ‘CRISIL AA+/Stable/CRISIL A1+'). Hence, the non-convertible debentures have been transferred to MSSL and the rating is withdrawn from SAMIL. Further, the rating on commercial paper programme has been withdrawn on company’s request as there is no outstanding commercial paper. This is in line with CRISIL Ratings’ withdrawal policy.

 

The ratings action follows completion of the merger of SAMIL with MSSL. After receipt of approval from NCLT in December 2021, the merger completed on 21st January 2022. The credit risk profile of SAMIL is now equivalent to MSSL, post completion of the proposed merger.

 

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 original equipment manufacturers (OEMs), and strong execution track record of successful turnaround of overseas acquired entities. The ratings also reflect the company’s 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, rated 'BBB+/Stable/ A-2' by S&P Global Ratings, comprising of Volkswagen, Audi, Seat, Skoda, and Porsche) and exposure to cyclicality in demand in global automobile industry.

 

In fiscal 2022, revenue is expected to grow at ~10% on-year driven by expected gradual recovery in global automotive sales and increase in product price realisation due to higher commodity prices. The operating profitability is expected at 7.5-8.5% with passing on increase in raw material prices and recovery in demand. Gradual easing of chip shortage resulting in recovery in vehicle sales globally, strong orderbook of MSSL, minimal risk of electrification and strong market positioning in its product segments will drive industry leading growth in the medium term. The operating profitability is estimated at 9-10% p.a. over medium term driven by recovery in revenues and ramp up in profitability at Greenfields.    

 

Also, over medium term, company’s organic capex is expected at ~Rs 2000-3000 crore per annum and mainly funded through cash accruals. Long term debt repayment obligations stand at ~Rs 1800 crore in fiscal 2022 and Rs 1000 crore in fiscal 2023 as against expected cash accrual of Rs 4500 – 5500 crore p.a. This, coupled with efficient working capital management, will keep key credit metrics at healthy levels. For instance, CRISIL expects MSSL's gross debt to earnings before interest, tax, depreciation and amortization (EBITDA) to improve to below 2 times by fiscal 2023 and ~1.5 times by fiscal 2024 (from 2.1 times for fiscal 2022). In addition to the same, the company is expected to maintain the cash surpluses of over Rs 3000 crore. While the company has announced its 2025 vision of multiplying the revenues by three times and a part of this revenue growth will be through acquisitions, the funding philosophy is expected to be prudent as seen during past acquisitions. Having said that, material acquisitions, and funding philosophy, will remain a key monitorable.

 

The liquidity levels also remain strong with large cash surpluses of Rs 3433 crore as on 30th September 2021 (majority in overseas subsidiaries). Besides, the company’s global revolver facility and domestic working capital lines, were also only moderately utilised.

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 (acquired in April 2017) has a dominant market share in North American and European heavy truck market. Recent acquisitions such as Nanchang JMCG Mekra Lang Vehicle Mirror Co and CIM Tools Private Limited are likely to strengthen its position in mirrors in China and aerospace components respectively.

 

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 helped the MSSL group withstand slowdown in demand multiple times in the past. The MSSL group's geographic diversity has also been improving, with exposure to its largest market, Europe, reducing to 45% in fiscal 2021 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.

 

Global light vehicle sales are expected to grow about 6-8% in calendar year (CY) 2022, after growing slower recovery seen in CY 2021. The global auto recovery will also reflect in similar revenue growth at MSSL which derived ~45% of its revenue in Europe, 15% in USA, 11% in India while remaining from the rest of the world in fiscal 2021. The Indian passenger vehicle segment is also expected to witness volume growth of 15-20% in fiscal 2022. Furthermore, MSSL plans to increase share of non-auto business over next five years in identified segments such as aerospace, logistics, health & medical and technological & industrial solutions through organic and inorganic routes.

 

CRISIL Ratings believes that the MSSL group will benefit from its diversified customer profile and strong order book, which will enable it to register better than industry 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. The holding company of the major international operations of the group, SMRP BV’s (rated BB/Stable, by S&P Global Ratings) order book stood at EUR 15.3 billion at September 30, 2021.   

 

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, Daimler AG (rated A-/Stable/A-2’ by S&P Global Ratings), 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 'BBB-/Negative/ A-3' by S&P Global Ratings), Renault S.A. (rated 'BB+/Negative/B' by S&P Global Ratings), Ford Motor Company (rated 'BB+/Positive/B' by S&P Global Ratings), General Motors Company (rated 'BBB/Stable' by S&P Global Ratings), and Toyota Motor Corp (rated A+/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 25 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. With the large scale efficiency measures undertaken by company as well as the initial teething issues and the ramp up costs now over, these plants achieved breakeven in 2nd quarter of fiscal 2021 onwards. PKC has also demonstrated improvement in operating performance since acquisition in March 2017. Operating margin of SMRP BV and PKC moderation during first six months of fiscal 2022 due to lag in passing on increase in raw material prices, supply chain challenges and one-off expenses. With gradual recovery in demand, pass through of costs, operating margin are expected to normalise for these business in the near term.

 

Over medium term, overall operating profitability is expected at 9-10%, compared with 7.6% in fiscal 2021 and estimated at ~8% in fiscal 2022, owing to recovery in revenue growth, ramp up in profitability at Greenfields and normalisation of supply chain. MSSL group’s return on capital employed (RoCE) will recover fast as market conditions improve.

 

* Well-spaced out repayment obligations, resulting from long maturity of MSSL group's debt

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 three years.

 

The company’s long term repayment obligations stand at ~Rs 1800 crore in fiscal 2022 and Rs 1000 crore in fiscal 2023 which are expected to be met out of cash accrual expected at Rs 4500-5000 crore p.a.

 

Despite pandemic impact the credit metrics remained relatively less affected with interest coverage estimated at ~9-10 times in fiscal 2022 as against ~8.8 times in fiscal 2021 and also gross debt to EBIDTA estimated at ~2.0 times as against 2.5 times in fiscal 2021. This was owing to controlled organic capex, efficient working capital management and cost optimization initiatives undertaken by the company. With improvement in revenues and profitability, the credit metrics are expected to improve over medium term, such as gross debt to EBITDA to improve to below 2 times by fiscal 2023.

 

Weakness:

* 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 and first nine months of fiscal 2020.

 

* Aggressive acquisition-led growth strategy

The MSSL group has demonstrated high growth through a number of acquisitions since 2002. MSSL group achieved revenues of about USD 8.9 billion in fiscal 2020. However, enhancement of 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 2020, 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., and Peugeot S.A. (PSA) in fiscal 2019.

Liquidity: Strong

Cash and cash equivalents stood at Rs.3433 crore on September 30, 2021 at consolidated level (mainly in overseas subsidiaries). The utilization of revolving credit facility (RCF) of Euro 350 million at SMRP BV stood at Euro 73 million as on 30th September 2021. The utilization of fund based working capital limits of Rs 1000 crore at standalone level stood at an average of ~ 20% for last 5 months ending November 2021.

 

The company’s long term repayment obligations stand at ~Rs 1800 crore in fiscal 2022 and Rs 1000 crore in fiscal 2023. The company has a track record of refinancing of higher cost debt at lower rates in the past. Over medium term, company’s organic capex is expected at ~Rs 2000-3000 crore, and mainly funded through cash accruals. Material acquisitions and funding philosophy will remain key monitorable.

Outlook: Stable

CRISIL Ratings believes that MSSL group'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 ramping up of liquidity and improving working capital management and profitability.

Rating Sensitivity factors

Upward factors:

• Substantial increase in market share in existing and new product segments benefitting geographic and customer diversity
• Operating profitability maintained at over 7.5-8.5% resulting in healthy cash generation
• Sustained improvement in financial risk profile, supported by healthy cash generation and prudent organic and inorganic growth strategy; gross Debt/EBITDA reducing to below 1.0-1.25 time
• Sustenance of healthy cash surplus

 

Downward factors:

• Operating margins weaken considerably on a sustained basis
• Significant deterioration in debt protection metrics, most likely due to higher than expected debt-funded acquisitions or capex, impacting debt metrics; gross debt/EBITDA of more than 2.25-2.50 times on a sustained basis.
• Sizeable cash outflow in the form of dividends or share buyback, severely depleting cash surpluses

About the Company

SAMIL (formerly, Samvardhana Motherson Finance Ltd) was incorporated in 2004, as a holding company of MSSL, the flagship company of the Samvardhana Motherson group. SAMIL is the largest shareholder in MSSL, which is listed on the Bombay Stock Exchange and the National Stock Exchange with a market capitalisation of Rs 74,432 crore (as on November 15, 2021). SAMIL also holds stake in other operating companies, including SMRP BV, most of which are present in the automotive components segment. Both SAMIL and MSSL are promoted by Mr VC Sehgal who, along with his family, holds 90.46% stake in SAMIL; Sojitz Corporation, Japan, holds 6.46% stake, while the remaining is held by the employees of the group and the employees' welfare trust.

 

On December 24, 2021, the scheme of arrangement wherein SAMIL to be merged with MSSL received NCLT approval. SAMIL is merged into MSSL effective January 21, 2022.

Key Financial Indicators

As on/for the period ended March 31	Unit	2021	2020
Revenue	Rs.Cr	125	403
Profit After Tax (PAT)	Rs.Cr	204*	169
PAT Margin	%	163.2	41.9
Adjusted debt/adjusted networth	Times	0.39	0.58
Interest coverage	Times	0.85	4.67

*includes exceptional income of Rs 217 crore

Any other information: Not applicable