| Sundaram-Clayton Limited | ||||||
| Ratings Reaffirmed | ||||||
| Rating Action | ||||||
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| 1 crore = 10 million | ||||||
| Refer to annexure for Details of Instruments & Bank Facilities |
| Detailed Rationale |
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CRISIL has reaffirmed its ratings on the bank facilities of Sundaram-Clayton Limited (SCL) at 'CRISIL AA-/Stable/CRISIL A1+'. CRISIL has also withdrawn its ratings on Rs 243.24 Cr bank facilities at the company's request. The same is in line with CRISIL's policy on withdrawal of ratings. |
| Analytical Approach |
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For arriving at its rating, CRISIL has considered SCL's standalone business and financial risk profiles, and has not combined the business and financial risk profiles of TVS Motor and other investment subsidiaries as they are in different business lines. Need-based financial support has been factored in case of investment subsidiaries. Also, financial flexibility arising from sizeable value of stake in TVS Motor has been factored into the rating assessment of SCL. |
| Key Rating Drivers & Detailed Description |
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Strengths: * Diverse customer base, spread across automotive sub-segments and geographies SCL's customer base is diverse, spread across sub-segments of the auto sector, such as two-wheelers, passenger cars, and CVs, and across geographies. Healthy demand growth from two-wheeler and domestic CV segment in fiscal 2018, and for most of fiscal 2019, has enabled good growth in domestic volumes for SCL, besides offsetting impact of sluggish demand from passenger vehicle OEMs. Albeit, a moderation in aluminium prices in recent months (which is a pass through) has impacted realisations. The company has recently enhanced its production capacity, including for passenger OEM customers, which should contribute to revenues from fiscal 2020. Albeit, some temporary volatility in domestic revenues is possible in the last quarter of fiscal 2020 and first quarter of fiscal 2021, due to migration of vehicles to BS VI norms, which will increase costs to consumers. Healthy share of exports also enhances SCL's revenue and geographic diversity. While the company's share of export revenue declined to 35-37% in fiscals 2017 and 2018, from over 40% in fiscal 2016 due to sluggish demand from European customers, better demand from US markets helped exports recover to over 40% of revenues in fiscal 2019. However, export growth in fiscal 2020 is expected to be moderate due to a gradual moderation in CV growth rates in the USA, and continued muted demand from Europe. Presence across sub-segments and geographies, partially offsets the impact of cyclicality inherent in the business. The diverse customer base and increased demand from export as well as domestic customers, and increased contribution from recently expanded capacities should support revenue growth over the medium term. * Adequate operating efficiencies Operating profitability has been largely stable at 9-12% since fiscal 2010 (except a temporary blip in fiscal 2018), backed by ability to pass on changes in raw material prices onto end customers. Implementation of industry-wide best practices, such as Total Quality Management, enterprise resource planning and other internal automation measures, help products meet the rigorous standards of the top global auto manufacturers. Despite limited technological collaboration, SCL has maintained steady business with most customers, on the back of its adequate operating capabilities. * Adequate financial risk profile and healthy financial flexibility SCL's financial risk profile is adequate marked by high networth of over Rs 650 crore, and moderately comfortable capital structure and debt protection metrics. SCL had undertaken large capital expenditure in fiscals 2018 and 2019 which was partly funded through debt. This in turn led to moderation in capital structure with gearing increasing to 1.06 times as of March 31, 2019. However, with completion of the large capex in fiscal 2019 and only nominal capital spends expected over the next two fiscals, gearing should improve to less than 1 time over the medium term, with progressive repayment of debt obligations. Debt protection metrics like interest cover and net cash accruals to total debt (NCATD) ratios should also sustain at over 5 times and 0.2 times respectively over the medium term (as compared to 5.2 times and 0.22 times respectively in fiscal 2019) albeit slight moderation expected in fiscal 2020 due to the moderation in business cash flows. Besides, strong re-financing capabilities arising from SCL's investment in TVS Motor (market value of over Rs 12,000 crore as on December 12, 2019) enhance its financial flexibility, while steady dividend flows from TVS Motor support SCL's cash accruals, besides partially mitigating impact of volatile business cash flows. Weaknesses: * Significant exposure to cyclical CV segment: SCL has a high exposure to the CV segment given that it almost derives its entire export revenues from the CV segment, although the domestic customer base is spread across automotive industry sub-segments. Any cut in production schedules by key CV customers could result in a decline in capacity utilisation, and return on capital employed (RoCE), especially with specific lines being devoted to key customers. While SCL has enhanced its production capacity and hence will be able to manage sudden surge in offtake by customers over the medium term, it remains vulnerable to cyclical offtake mainly by the CV segment, which could affect both revenue and profitability. * Susceptibility to pricing pressure from OEMs SCL is highly dependent on offtake by Tier-I auto component suppliers as well as OEMs, in both the domestic and export markets. High exposure to OEMs exposes the company to significant pricing pressure. While SCL is able to pass on key raw materials costs to its customers, it has limited flexibility in passing on increase in conversion costs like power costs, employee costs etc., although the continuous cost control measures and process improvements over the years have partly mitigated the impact. |
| Liquidity Strong |
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Liquidity is strong largely supported by steady cash accrual (estimated annually at over Rs.130 crores) and adequate headroom in bank lines (average utilization of ~33% on sanctioned bank limits of Rs 936 crore over the last 12 months ended October 2019). Accruals, supported by steady dividend flows from TVS Motor, will remain adequate for servicing the debt obligations of ~Rs 50 crore in fiscal 2020. However, repayment obligations are estimated to be higher at over Rs.150 crore in fiscal 2021, which will require part refinancing. Nevertheless, refinancing risk is expected to be limited considering SCL is the majority stakeholder in India's fourth-largest motorcycle manufacturer, TVS Motor; with market value of SCL's investments in TVS Motor (about Rs 12,300 crore as on December 12th, 2019) substantially enhancing financial flexibility. CRISIL believes SCL is unlikely to dilute its stake in TVS Motor; the market value of the stake will continue to underpin SCL's financial flexibility, in addition to providing steady dividend income. |
| Outlook: Stable |
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CRISIL believes that despite business challenges which are expected to continue for part of fiscal 2021, SCL's credit risk profile will continue to remain supported by its diversified business risk profile and adequate financial risk profile. Moreover, its financial flexibility remains strong, supported by material market value of its holdings in TVS Motor. |
| Rating Sensitivity factors |
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Upward factors: * Revenue growth of 12-15% on y-o-y basis driven by increased market share in both domestic and overseas markets. * Stronger than anticipated growth in cash accruals (over Rs.225 crores annually) on sustained basis, supported by improved business performance * Prudent capital spending and working capital management, which along with routine debt repayment and better cash accruals would strengthen credit metrics; for instance, gearing to under 0.5 times Downward factors: * Further deterioration in revenues by over 10% owing to continued slowdown in demand from domestic and export markets, and decline in operating margins to less than 7-8% owing to sub-optimal capacity utilization and higher overheads * Large debt funded capex or acquisition or significant stretch in working capital levels denting capital structure; for instance, gearing deteriorating to over 1.7-1.8 times * Sizeable reduction in shareholding in TVS Motor, affecting financial flexibility |
| About the Company |
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SCL was incorporated in Chennai in 1962 and is part of the TVS group led by Mr. Venu Srinivasan. The company is a leading manufacturer of aluminium die-casting components. It supplies to major automotive OEMs including TVS Motor, the Cummins group, the Volvo group, Hyundai Motor India Ltd (rated 'CRISIL A1+), Ford Motors, the Daimler group, and to component suppliers such as Wabco India Ltd and the Visteon group. SCL was set up by the TVS group and the UK-based Clayton Dewandre Holdings Ltd. The TVS group holds 75% stake in SCL, with the balance held by mutual funds (12%), public, and others. |
| Key Financial Indicators | ||||||||||||||||||||||||
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Any other information: Not applicable |
| Note on complexity levels of the rated instrument: CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments. |
| Annexure - Details of Instrument(s) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
*Interchangeable with cash credit |
| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| All amounts are in Rs.Cr. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annexure - Details of various bank facilities | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
*Interchangeable with cash credit | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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