Detailed Rationale
CRISIL Ratings’ ratings on the bank facilities and debt instruments of Sundaram-Clayton Limited (SCL) continues on ‘Rating Watch with Developing Implications’.
On September 22,2022, SCL disclosed to the stock exchanges that SCL has acquired 50.05% stake in Sundaram Holdings USA Inc (SHUI), holding entity of Sundaram-Clayton USA Limited (SCUL) from Sundaram Auto Components Limited (SACL, a wholly owned subsidiary of TVS Motor Company Limited (TVSM) for a consideration of Rs.317 crores. SCL already held 49.95% stake in SHUI. The consideration was funded through liquid surplus from the stake sale in TVSM.
SCUL is currently making losses, and its performance is expected to improve from next fiscal, as business levels ramp up. On a consolidated basis, SCL’s business performance will moderate compared with earlier expectations in fiscal 2023 due to losses at SCUL, and then improve over the medium term. Also, SCL’s debt metrics will remain adequate, despite moderating, due to debt relating to SCUL.
Earlier on February 17, 2022, CRISIL ratings had placed the ratings on SCL on ‘ Rating Watch with Developing implications’ following SCL’s intimation to the stock exchanges, on the proposal to restructure the existing company into a holding and an operating company, and consolidation of holding companies of the Venu Srinivasan faction of the TVS group. SCL had filed the application with the stock exchanges and have received No Objection Certificate (NOC) from the exchanges for the restructuring scheme. SCL has filed application with the National Company Law Tribunal (NCLT) on 4th August 2022.
SCL will demerge its operating assets (aluminium die casting business) which accounts for ~100% of operating revenues into Sundaram Clayton Limited DCD (SCLDCD). SCLDCD and SCL will have a mirror shareholding and both entities will be simultaneously listed with similar shareholding. Thus, post culmination of this entire transaction, there will be two listed entities, SCL, which will act as a holding company for TVSM, and SCLDCD which will act as an operating company.
Further, as per the intimation, SCL proposes to issue bonus Non-Convertible Redeemable Preference Shares (NCRPS) of Rs 10 each at a ratio of 116:1 for each listed equity share of Rs 5 each, totaling ~Rs.2347 crores. The NCRPS will be listed on the exchanges and will be redeemed latest by February 02, 2024, or 12 months from date of issuance, whichever is later. The issuance of these NCRPS will be done from SCL’s reserves and is subject to NCLT approval which is expected by this fiscal.
As part of streamlining of holdings held by TVS family members in various TVS group companies, the key promoter family members in fiscal 2021, decided to align the ownership of different group companies with the respective arms of the families managing them. As part of the restructuring, a composite scheme of amalgamation and arrangement has been completed involving T.V. Sundram Iyengar & Sons Ltd. (TVS & Sons), Sundaram Industries Private Ltd. (SIPL) and Southern Roadways Private Ltd. (SRPL) and the family holding companies. The scheme has received approval from the NCLT and is being implemented. As a part of the scheme, TVS Holding Pvt Ltd (THPL) has acquired the shareholdings of TVS & Sons, SIPL and SRPL and consequently as on date holds ~64.72% in SCL. Another holding company of the Venu Srinivasan family - VS Investment Pvt Ltd (VSIPL) has also raised ~Rs 1600 crore of loans which ultimately was used to facilitate the entire rearrangement of shares. Ultimately, under the recent announcement, THPL and VSIPL will be merged with SCL and thereby NCRPS issued to THPL will be extinguished against the loan of Rs.1600 crore.
SCL will utilize part proceeds realized on sale of shares of TVS Motor for redemption of balance NCRPS (issued to public shareholders and other promoter entities). While most operating companies of the TVS group are not directly part of the family agreement, their holdings will witness a change, as the intent of the scheme is to also simplify the shareholding structure and give control to family factions managing them. SCLDCD, SCL and its leading subsidiary, TVS Motor, and current subsidiaries under these companies, will remain within the Venu Srinivasan faction of the TVS group.
CRISIL Ratings will closely monitor the outcome of this proposed rearrangement scheme, issuance of NCRPS, and will remain in dialogue with the management of SCL. The ratings will be removed from watch and final rating action taken once necessary approvals are in place, and more details are made available on the restructuring scheme, resultant financial position of the entities, as well as stance of support from promoters to the operating entities.
On the operational front, fiscal 2022 revenues grew by 48% driven by pick up in certain domestic OEM segments barring two-wheelers as well as strong exports demand and higher realizations in keeping up with higher aluminium prices. Better operating leverage and continuation of past cost rationalization measures have helped SCL to sustain the operating margins ~13%. Some moderation in revenue growth to 9-11% is likely in fiscal 2023, as aluminium prices, which are a pass through, are likely to see some decline after a sharp increase in the past two fiscals. Operating profitability is expected to stabilize at 12-14% next fiscal, leading to steady operating profits.
SCL’s financial risk profile is supported by its healthy net worth (~Rs. 2900 crores at March 31,2022), and adequate debt metrics. Steady dividend flow from TVS M supports net profits. Gearing improved to 0.25 times at March 31, 2022 from 0.88 times at March 31, 2021 mainly due to sizeable profits of ~Rs.2100 crores generated on sale of ~7% stake in TVSM in fiscal 2022. The said proceeds are likely to be utilized for redemption of NCRPS and for repayment of loan post completion of the restructuring exercise. In the interim, strong re-financing capabilities arising from SCL’s stake in TVSMr (market value of ~Rs 14500 crores as on date) continues to drive its financial flexibility.
The ratings continue to reflect SCL’s diverse customer base across automobile sub-segments and geographies, above average operating efficiency, and adequate financial risk profile. The ratings are also supported by SCL’s sizeable investment in TVSM, which also enhances its financial flexibility. These strengths are partially offset by high revenue dependence on the cyclical commercial vehicle (CV) segment, and on OEMs, which limits pricing power; and exposure to increasing competition.