Detailed Rationale

CRISIL Ratings has reaffirmed its rating on the bank facilities of Sunbeam Lightweighting Solutions Private Limited (SLSPL) at ‘CRISIL A-/Negative’.

 

The reaffirmation of SLSPL’s ratings is on account of CRISIL Ratings’ anticipation of sizable equity infusion, into SLSPL, including from its sponsor, over the next 3-4 months, which will materially benefit the company’s financial risk profile. Proceeds are expected to be deployed to lower debt significantly, besides part funding capital expenditure, leading to improved debt metrics.

 

Sizeable equity infusion will be critical to prevent further deterioration in the already sub-par financial risk profile of SLSPL and will remain a key monitorable. While SLSPL’s operating profits are likely to witness a reasonable improvement due to better business levels, net losses are expected to continue over the near to medium term, due to sizeable outgo relating to voluntary retirement of part of its workforce, adding to strain on SLSPL’s financial risk profile. CRISIL Ratings also expects support from Kedaara Capital Fund II LLP (Kedaara).to be forthcoming in the event of delay in equity raise from external investors. 

 

The ratings also follow expectations that continuing cost reduction initiatives and focus on higher margin exports will lead to gradual improvement in the company’s operating profitability in the near to medium term.

 

The rating continues to reflect SLSPL’s established market position in the domestic aluminium die casting component (ADCC) market, supported by its strong business linkages with India's leading automotive original equipment manufacturers (OEMs), including Hero MotoCorp Ltd (HMCL, rated ‘CRISIL AAA/Stable/CRISIL A1+’) and Maruti Suzuki (India) Ltd (MSIL, rated ‘ CRISIL AAA/Stable/CRISIL A1+’). Besides, the rating also continues to derive support from the financial flexibility in the form of need-based support from its sponsor, Kedaara. These strengths are partially offset by customer concentration risk, sub-par operating efficiency, and financial risk profile and vulnerability of performance to OEM off-take during cyclical downturns.

 

Operating income witnessed a healthy growth of 16% during fiscal 2023 as compared to 8% in fiscal 2022 backed by strong demand from MSIL, and moderate demand from HMCL. Domestic revenues from the two wheeler segment grew by 21% and 37% from four-wheeler segment in fiscal 2023. SLSPL continued focus on diversifying its 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 four wheeler segment went up to 36% from 30% during the same period. Also, exports witnessed a healthy growth of 33% to Rs.184 crores in fiscal 2023 (Rs.138 crore in fiscal 2022), with major growth coming from North America and France. SLSPL is targeting to increase its revenue share from exports to 20% over the medium term, from ~14% in fiscal 2023. Overall, CRISIL Ratings expects SLSPL to be able to maintain overall revenue growth of 8-10% annually.

 

SLSPL’s operating profitability improved to 3.3% in fiscal 2023 as compared to operating losses in fiscal 2022, mainly driven by the cost correction measures undertaken and with increased volumes and realization backed by the strong OEM demand. Albeit the operating margins remaining lower than most of its peers, due to high employee costs and manufacturing expenses, which offset benefit of cost reduction initiatives undertaken. That said, with ongoing cost reduction initiatives and focus on enhancing high margin exports, operating profitability is expected at ~3.5% in fiscal 2024, and improve over 5-7% in the medium term. This will be supported by cost efficiency measures being undertaken by SLSPL, including relocation of major operations to lower cost and more automated facilitie at Bawal and Halol from Gurgaons, as well as workforce reduction initiatives. However, net losses are expected to continue over the medium term, due to sizeable, extraordinary expenses on voluntary retirement of employees, mainly at Gurgaon plant.

 

The company’s financial risk profile continues remain sub-par for the rating, with debt level also increasing to Rs. 528 crore in fiscal 2023 from Rs. 483 crore in fiscal 2022, on account of capex and to support term debt repayments, further impacting the already weak debt metrics. Net worth remains negative after adjusting for goodwill. Interest cover ratio was also modest at 0.69 time in fiscal 2023 and is expected to be just under 1 time in fiscal 2024. This is despite continuous support from its sponsor, Kedaara. SLSPL’s management however proactively arranged for additional debt from banks and was able to manage working capital requirements, as well as capex and term debt repayments. The company is expected to undertake annual capex of Rs.60-70 crore, going forward Should the company be able to raise material equity, net worth will get a boost, while sizeable debt will also be repaid, resulting in improved debt metrics.

Analytical Approach

CRISIL Ratings has amortized the goodwill of Rs. 365 crore on acquisition of Sunbeam Auto Pvt Ltd (SAPL) over a period of five years' starting June 2018.

Key Rating Drivers & Detailed Description

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 two-wheeler and four-wheeler segments such as HMCL and MSIL. The manufacturing units in Gurugram, Bhiwadi (Rajasthan), Bawal (Haryana) and Halol (Gujarat) are in proximity to customer locations, thereby enabling optimal inventory and freight costs.

 

• Financial flexibility in form of need-based support from sponsor: SLSPL’s 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 to ramp up its scale in the ADCC business by diversifying in terms of geography as well as client base 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 SLSPL’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 the company’s operations. CRISIL Ratings also expects Kedaara will continue to support SLSPL in raising additional funds, as well as infusing equity to lower its debt levels, and for capex, and operations, as demonstrated in the past.

 

Weaknesses:

• Customer and segment concentration risk in revenue: HMCL and MSIL contributes to over ~75% of SLSPL’s domestic sales. Limited segmental diversification and large dependence on key clientele renders the company’s performance highly dependent on the performance of OEMs. This is evidenced by the slowdown in production volumes of HMCL which in turn impacted demand for SLSPL during the pandemic. In an attempt to diversify its customer base, SLSPL has been actively adding customers, 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 motorcycle sales in the past 3 fiscals; albeit the impact on them has not been somewhat offset by better revenues and customer diversity, in domestic and export markets.

 

• Vulnerability to off-take from automotive OEMs, especially during cyclical downturns: The automobile industry in India is marked by intense competition, leading to limited pricing power for automotive component suppliers. SLSPL has the flexibility to pass on a hike in input cost (mainly aluminium price) 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, OEMs during business downturns, frequently change production schedules due to market uncertainties, impacting off-take of supplies, and leading to increased vulnerability of component suppliers, especially those like SLSPL, which has also recently added capacity.

 

• Moderate cost structure: SLSPL has a huge workforce at its Gurgaon facility with high employee cost, which along with low margin orders executed on behalf of OEMs has been impacting operating in recent years. In order to enhance its operating profitability, SLSPL is targeting to increase share of high margin exports, and also in the process of moving material portion of domestic operations from Gurgaon plant to lower cost production centres at Halol and Bawal. This transit costs along with settlement payouts for employees at Gurgaon, are expected to result in material one-time expense in the near to medium term. However, once completed, there is expected to be better cost economics for SLSPL.

 

• Weak financial risk profile: The last 4-5 consecutive years of subdued performance and net losses have weakened the debt metrics of SLSPL, despite continued equity infusion by Kedaara. With increase in cash losses, debt level increased to Rs 528 crore as on March 31, 2023, from Rs 483 crore as on March 31 2022, thereby further weakening the debt metrics. The company also undertook capex of ~Rs.81 crore in fiscal 2023 for new product development, maintenance capex and expansion of its existing facilities at Bawal and Halol, which was partly debt funded. Capex is expected at Rs.65-70 crores annually over the next 2-3 years, mainly for adding lines for export customers, and for routine modernisation.

 

SLSPL is presently considering material equity raise over the next 3-4 months to deleverage its balance sheet and also lower impact of high interest payout on net profits. While the support from Kedaara is nevertheless expected, The company is also contemplating to refinance a part of its debt, given large obligations of Rs.145 crore in fiscal 2025 (Rs.43 crore in fiscal 2024, of which Rs.22 crore was already paid by September 30, 2023), and raise longer maturity debt. Sizeable debt reduction through equity proceeds can materially improve the company’s financial risk profile and debt metrics, and will remain a monitorable. Besides, successful refinancing of debt with extended maturity, ahead of forthcoming large debt obligations, can help alleviate near term liquidity pressures.

Liquidity: Adequate

SLSPL’s liquidity is adequate largely due to expected timely support from Kedaara, which has been demonstrated in past years. While the net cash accruals may not be adequate to fund the capex of Rs. 60-70 crore each for next 2 fiscals and repayment obligation of Rs. 43 crore and Rs 145 crs in fiscal 2024 and 2025 respectively, SLSPL has raised additional borrowings for Rs. 50 crore in Q4 fiscal 2023 and is in process of raising equity which is expected to suffice its fund requirements of the upcoming fiscal. Working capital bank lines were utilised at ~90% over 12 months through July 2023. Further, in case of any financial stress, CRISIL Ratings takes comfort of Kedaara Capital, which shall continue to provide timely support.

Outlook: Negative

SLSPL’s business performance, while improving due to better demand from OEMs, continuing cost efficiency measures shall affect its near-term profitability while it is expected to rebound over the medium term. Debt metrics will also continue to remain sub-par in the near term considering low cash generation. Nevertheless, timely refinancing of the existing debt portion along with additional equity infusion will be critical to obviate liquidity pressures, and improve the financial risk profile.

Rating Sensitivity Factors

Upward factors:

• Better than anticipated recovery in revenue, and EBITDA margins of 7-8%, benefitting cash generation.
• Sustained improvement in debt metrics and liquidity, including through material equity infusion, expected in near term.

 

Downward factors:

• Slower than anticipated business recovery leading to continued sluggish revenue growth and modest EBITDA margins (below 3-4%).
• Further increase in debt levels due to higher capex or elongation of working capital cycle, or inadequate equity support from Kedaara and other investors, leading to further moderaton in already sub-par debt metrics.

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. 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 Sunbeam Auto Private Ltd which was in the business of automotive and automotive components manufacturing, post the acquisition, SAPL and SLSPL was amalgamated into one entity as SLSPL.

About the Group

SAPL was incorporated as a subsidiary of Highway Industries Ltd (CRISIL A+), 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 sector, from its manufacturing facility in Ludhiana.

Key Financial Indicators

As on/for the period ended March 31		FY 2022	FY 2021
Operating Income	Rs crore	1182	1099
Profit after tax (PAT) with goodwill amortisation	Rs crore	(257)	(184)
PAT without goodwill amortisation	Rs crore	(185)	(111)
PAT margin (with goodwill amortisation)	%	(21.78)	(16.74)
PAT margin (without goodwill amortisation)	%	(15.65)	(10.10)
Adjusted debt/adjusted net worth	Times	6.00	1.92
Interest coverage	Times	(1.02)	(0.21)

    As per provisional financials of fiscal 2023, SLSPL reported a net loss (without goodwill amortization) of Rs. 129 crores on revenues of Rs.1,372 crore.

Any other information: Not applicable