Detailed Rationale

CRISIL Ratings has downgraded its rating on the long-term bank facilities of Sunbeam Lightweighting Solutions Pvt Ltd (SLSPL) to ‘CRISIL D’ from ‘CRISIL B-/Negative’.

 

The downgrade reflects the delay in servicing of interest obligations pertaining to Guaranteed Emergency Credit Line (GECL) term loan facility availed from one of its bankers.

 

The rating reflects the delay in debt servicing by SLSPL, low net cash accruals against debt repayment obligations and weak financial profile coupled with customer concentration risk, sub-par operating efficiency and vulnerability of performance to OEM offtake during cyclical downturns. These weaknesses are partially offset by the market position of SLSPL in the aluminium die casting component (ADCC) market, its business linkages with Hero MotoCorp Ltd (HMIL, rated ‘CRISIL AAA/Stable/CRISIIL A1+’) and Maruti Suzuki India Ltd (MSIL, rated ‘CRISIL AAA/Stable/CRISIIL A1+’).

Analytical Approach

CRISIL Ratings amortised the goodwill of Rs 365 crore on acquisition of Sunbeam Auto Pvt Ltd (SAPL), now SPSLPL, over a period of five years starting June 2018.

Key Rating Drivers & Detailed Description

Weaknesses:

• Delay in debt servicing: SLSPL had GECL loan outstanding of ~Rs.22 crore as of December 2023. While the company was servicing its debt obligations pertaining to this facility till April 2024, interest obligations for the month of May 2024, was not serviced by SLSPL on account of weak liquidity position, inadequate net cash accruals against debt obligations, partial unavailability of bank lines and delay in expected equity infusion of Rs.350 crore respectively.

 

• Sub-par operating profile: SLSPL has a huge workforce at its Gurgaon facility with high employee cost, which, along with low-margin orders, has been impacting operations in the last few fiscals. In order to enhance its operating profitability, SLSPL is targeting to increase share of high-margin exports in the next fiscal and has shifted majority of domestic operations to low-cost production centres in Halol and Bawal. from Gurgaon. The transit costs, along with settlement payouts for employees at Gurgaon, are expected to result in material one-time expense over the near term.

 

• Weak financial risk profile: The last 4-5 consecutive years of subdued performance and net losses have weakened debt protection metrics, despite continued equity infusion by Kedaara. With increase in cash losses, debt level increased to Rs 609 crore as on December 31, 2023, from Rs 559 crore as on March 31, 2023, thereby further weakening the debt metrics. The company also incurred capex of ~Rs 43 crore in fiscal 2024 for new product development, maintenance capex and expansion of its existing facilities at Bawal and Halol, which was partly debt-funded. SLSPL also had capex plans of Rs 70-80 crore annually over the next 2-3 fiscals, however raising of funds will remain critical for implementation of capex plans.

 

Net cash accruals continued to remain negative in fiscal 2024 on account of losses arising out of operations and high interest payouts. SLSPL was considering material equity raise before January 2024 to deleverage its balance sheet and also lower impact of high interest payout on net profits. However, on account of delay in due diligence process, fund infusion was expected to be completed in tranches in April 2024 and September 2024. However, subsequent to partial suspension of SLSPL’s bank limits on May 4, 2024, the potential external investor has withdrawn participating in the fund-raising process.

 

Furthermore, the company also had realigned the second instalment of its NCD repayment to time it with receipt of expected infusion of equity, in agreement with the lender during March 2024. However, the same is presently uncertain and company’s ability to raise funds immediately from its parent, Kedaara Capital Fund II LLP (Kedaara) or any other external investors will be critical for debt servicing and sustaining the operations. Besides, successful monetisation of the Gurgaon facility will also help fund employee Voluntary Settlement Programme (VSP) expenses and capex requirements which can help alleviate near term liquidity pressures.

 

• Customer and segment concentration risk in revenue: HMCL and MSIL accounted for over ~70-75% of the company’s domestic sales. Limited segmental diversification and large dependence on key clientele expose the company’s performance highly dependent on to the performance of OEMs. This is reflected in the fact that slowdown in the production volumes of HMCL had affected demand for SLSPL during the pandemic. In an attempt to diversify customer base, the company has been actively adding clients and focusing on exports. Nevertheless, it remains susceptible to any significant decline in demand from key vehicle segments/customers as witnessed in the recent past. Like SLSPL, its peers too have been impacted by weak sale of motorcycles between fiscals 2021-23; though peers have managed better due to more customer and segmental diversity, and presence in export markets.

 

• Vulnerability to offtake from automotive OEMs, especially during cyclical downturns: The automobile industry in India is intensely competitive, leading to limited pricing power for automotive component suppliers. SLSPL has the flexibility to pass on hike in input cost (mainly aluminium) with a lag of 3-4 months, but not the increases in other manufacturing overheads. In case of a prolonged slowdown and decreasing automobile demand, it is not always possible for OEMs to pass on any cost increases to the end user. Input cost increases are, therefore, absorbed by both the component manufacturers and OEMs. Profitability, thus, remains exposed to pricing pressures from OEMs. Besides, during business downturns, OEMs frequently change production schedules due to market uncertainties, thereby impacting offtake of supplies and leading to increased vulnerability of component suppliers, especially those such as SLSPL.

 

Strengths:

• Established market position in the domestic ADCC market and strong business linkages with leading OEMs: SLSPL is a prominent ADCC manufacturer in India. It is the principal supplier of ADCC and pistons to some of the leading OEMs in the two-wheeler and four-wheeler segments. The manufacturing units in Gurgaon, Tapukara, Bawal and Halol are largely in proximity to customer locations, thereby enabling optimal inventory and freight costs.

 

Continued focus on diversifying customer base has led to share of two-wheeler segment in overall sales declining to 60% in fiscal 2023 from 66% in fiscal 2021, while revenue share of the four-wheeler segment went up to 36% from 30%. However, this revenue mix has changed during the nine months of fiscal 2024, with the two-wheeler segment contributing 63% and the four-wheeler contribution dropping to 33%, which has been majorly on account of better demand for two-wheeler OEMs during the period. However, exports declined by ~20% during nine months fiscal 2024 after witnessing healthy growth of 33% at Rs 184 crore in fiscal 2023 (Rs 138 crore in fiscal 2022), with major growth coming from North America and France. SLSPL is planning to increase its share of export revenue to 20% over the medium term from ~14% in fiscal 2023. Overall revenue growth could be driven by continued demand from HMCL and MSIL, increased exports, and stable increase in orders from other domestic players.

 

• Financial flexibility in the form of need-based support from sponsor: The sponsor, Kedaara, is a private equity fund with an established track record of investing in and successfully scaling up companies across multiple sectors. Kedaara’s team of advisors includes senior professionals with decades of experience in leadership positions across industries. This should help SLSPL ramp up its operations in the ADCC business by diversifying in terms of geography as well as clientele over the medium term. Additionally, Kedaara has been continuously providing financial support to SLSPL over the years. In fiscal 2020, considering the challenging business environment and to support the company’s balance sheet, Kedaara had infused Rs 187 crore equity. It further infused Rs 46 crore in fiscal 2021 and Rs 140 crore in fiscal 2022 to support operations and was expected to participate in the fund raising process along with external investor, which is currently delayed. Immediate support from Kedaara in form of equity or temporary loans to fund the operations and ensure servicing of bank debts will remain as key monitorable.

Liquidity: Poor

Liquidity is poor on account of unavailability of bank limits to the extent of Rs.50 crore since May 4, 2024, leading to delay in fund raising activity. Also, on account of partial unavailability of bank limits, company has not yet settled outstanding of Rs 15-20 crore with respect to bills discounted from banks between May 6, 2024, and May 14, 2024. Besides, the repayment obligation of ~Rs 28 crore pertaining to the second tranche of NCD due in March 2024 was realigned ahead of its scheduled repayment date. Also, the debt obligations totalling Rs 170-180 crore due in fiscal 2025, was expected to be serviced mainly from equity proceeds of Rs 350 crore. The process of identifying new investors is on but may take some time. In the meantime, immediate support from Kedaara will be critical to ensure debt servicing as well as sustenance of operations. This will remain a key monitorable.

 

SLSPL had also planned to monetize its Gurgaon facility spanning ~16 acres to meet the VSP needs which is under initial stages. Company is presently managing its operations through customer advances and working capital from other banks. Working capital bank limit of ~Rs 120 crore was utilised at ~87-88% over the 16 months through February 2024, and is expected to be almost completely utilised at present.

Rating Sensitivity factors

Upward factors:

• Track record of timely debt servicing for atleast over 90 days
• Strong improvement in debt metrics and liquidity, including through immediate material equity infusion

About the Company

SLSPL was incorporated in December 2017 as Novy Mir Lightweighting Solutions Pvt Ltd and was renamed on September 04, 2018, after the complete acquisition of Sunbeam Auto Private Ltd.(SAPL). Presently, it is a wholly owned subsidiary of Kedaara, a Mumbai-based private equity fund. SLSPL was formed for the acquisition of SAPL, which manufactured automotive and automotive components. After the acquisition, SAPL and SLSPL were merged into a single entity, SLSPL.

 

Presently, it is a wholly owned subsidiary of Kedaara Capital Fund II LLP, a Mumbai-based private equity fund. SLSPL was formed for the acquisition of SAPL, which manufactured automotive and automotive components. After the acquisition, SAPL and SLSPL were merged into a single entity, SLSPL.

About the Group

SAPL was incorporated as a subsidiary of Highway Industries Ltd, part of the erstwhile Hero group. Following the arrangement between the Munjal families in May 2010, Mr Ashok Munjal, representing the Dayanand Munjal group, retained management control over SAPL. Mr Ashok Munjal and his wife, Ms Neelam Munjal, held stake in SAPL’s equity through Munjal Holdings, an investment company also owned by Mr Ashok Munjal. In June 2018, the promoters sold their entire stake to SLSPL. SAPL also had an associate entity, Munjal Castings, which was merged with SAPL in May 2018. Munjal Castings was incorporated in 1980 to manufacture ADCCs. The firm supplied aluminium as well as zinc die castings to the automotive and non-automotive sectors, from its manufacturing facility in Ludhiana.

Key Financial Indicators

As on/for the period ended March 31*		2023	2022
Operating Income	Rs crore	1362	1182
Profit after tax (PAT) with goodwill amortisation	Rs crore	(259)	(257)
PAT without goodwill amortisation	Rs crore	(181)	(185)
PAT margin (with goodwill amortisation)	%	(18.26)	(21.78)
PAT margin (without goodwill amortisation)	%	(13.29)	(15.65)
Adjusted debt/adjusted net worth	Times	(3.29)	6.00
Interest coverage	Times	0.51	(1.02)

    *CRISIL Ratings adjusted numbers

    As per unaudited financials for nine months ended fiscal 2024, SLSPL recorded revenue of Rs 991.4 crore and net loss (without goodwill amortization) of Rs 129.2 crore.

Any other information: Not Applicable