Rating Rationale
February 06, 2019 | Mumbai
Sundaram-Clayton Limited
Rated amount enhanced
Rating Action
Total Bank Loan Facilities Rated Rs.951.8 Crore (Enhanced from Rs.768 Crore)
Long Term Rating CRISIL AA-/Stable (Reaffirmed)
Short Term Rating CRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has reaffirmed its ratings on the bank facilities of Sundaram-Clayton Limited (SCL) at 'CRISIL AA-/Stable/CRISIL A1+'.
The ratings reflects CRISIL's belief that SCL's business risk profile will benefit over the medium term from expected increase in business levels from recently expanded capacities, continuing improvement in share of business with established customers, and adequate operating profitability. The company's operations have normalised in fiscal 2019, with lower outsourcing costs and air lifting of components to overseas customers. The incremental air freight costs have remained minimal in fiscal 2019, while inventory levels have been enhanced at close to customer's overseas locations to minimize need for air-lifting of components. Consequently, operating profitability, which had declined to 2% in fiscal 2018 has recovered to ~9% during the first nine months of fiscal 2019.
SCL has implemented a large capex of Rs 375 crore spread over fiscal 2018 and fiscal 2019, funded partly by debt. The expanded capacity at its Oragadam plant has been operational since third quarter of fiscal 2019. CRISIL believes that monetization of the expanded capacities, lower capex beyond fiscal 2019, prudent working capital management and progressive debt repayment will result in steady improvement in SCL's financial risk profile over the medium term.
The company has also invested about USD 12.5 million in Sundaram Holding USA Inc (SHUI, 25% stake held by SCL, while 75% stake is held by a step down subsidiary, Sundaram Auto Components Ltd) until fiscal 2019, which is establishing a green-field aluminium castings plant in South Carolina, USA. The unit will be operational from first quarter of fiscal 2020.
SCL's liquidity will be supported by increasing operational cash flows, steady dividend income from its 57.4% subsidiary, TVS Motor Company Ltd (TVS Motor), moderately utilised bank lines, and strong relationship enjoyed with the lending community. SCL's holding (completely pledge free on December 31, 2018) in TVS Motor, valued at about Rs 14,088 crore as on February 1st 2019, further supports its financial flexibility.
CRISIL's ratings on SCL's bank facilities continues to reflect the company's diverse customer base across automobile sub-segments and geographies, and adequate operating efficiency, its moderate though improving financial risk profile and healthy financial flexibility by virtue of its majority ownership in TVS Motor Company Limited. These strengths are partially offset by high revenue dependence on the cyclical commercial vehicle (CV) segment and on original equipment manufacturers (OEMs), which limits pricing power and exposure to increasing competition.

Analytical Approach

For arriving at the 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 and manufacturing subsidiaries as no material distress support is expected to be provided to subsidiaries. Need-based investment in subsidiaries to extent of holding has been factored into the rating assessment.
In fiscal 2013, SCL entered into a non-cancellable sale and lease-back agreement for assets of Rs 84 crore. The assets comprise customised machinery. CRISIL has, therefore, considered the transaction as a financial lease, and capitalised the present value of SCL's future lease rental obligations as fixed assets. Accordingly, the lease rental payable every year has been bifurcated into interest and depreciation for analysing SCL's financials.

Key Rating Drivers & Detailed Description
* 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 enhance 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 9-11.5% 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.
* Moderate, though improving financial risk profile, and healthy financial flexibility
The company's financial risk profile moderated in fiscal 2018, due to , material air-freight costs. While operations normalised in fiscal 2019, impact of the large and partly debt funded capex on since fiscal 2018, impacted key credit metrics in fiscal 2019 also. For instance, gearing and ratio of net cash accrual to total debt are estimated at 1.0 time and 0.2 times respectively in fiscal 2019, compared with 0.5 times and 0.3 times respectively in fiscal 2017. These metrics are expected to gradually improve over the medium term, supported by steady cash generation, prudent capex and working capital management, besides repayment of ~Rs.200 crore of long term debt in fiscals 2020 and 2021.
Strong re-financing capabilities arising from SCL's investment in TVS Motor 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.
* 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 is adequate post restoration of operations, largely supported by steady cash accrual (estimated annually at over Rs.180 crores) and large unutilized bank lines. Accruals, supported by steady dividend flows from TVS Motor, will remain adequate for servicing the debt obligations of ~Rs 200 crore in fiscals 2020 and 2021. Fund-based bank limit of Rs 802.5 crore was utilized at an average of 44% over the 12 months through November 2018, providing significant headroom to meet short-term needs.
Also, SCL is the majority stakeholder in India's fourth-largest motorcycle manufacturer, TVS Motor; market value of SCL's investments in TVS Motor (about Rs 14,088 crore as on Feb 1st, 2019) substantially enhances 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

CRISIL believes SCL's business risk profile will benefit from the expected increase in revenues from expanded capacities, which will help offset a possible moderation in export growth from fiscal 2020 onwards. The company's moderate financial risk profile is also expected to gradually recover, due to steady cash accruals, progressive debt repayment, and moderation in fund requirement for capex and working capital.

Upside scenario
* Significant and sustained increase in revenue, profitability and cash accruals driven by steady monetization of the expanded capacities.
* Considerable improvement in gearing and debt protection metrics
Downside scenario
* Substantially lower-than-expected accrual over the medium term, due to slowdown in the end market or delay in ramping up the expanded capacities.
* Material deterioration in capital structure and debt protection metrics, driven by larger than expected debt-funded capex or debt funded investments in subsidiaries
* A significant decline in the market value of investments in TVS Motor.

About the Company

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.
For the first nine months of fiscal 2019, SCL reported a standalone profit after tax of Rs 69 crore on net sales of Rs 1426 crore, against a post-tax loss of Rs 43.4 crore on net sales of Rs 1189 crore for the corresponding period last year.

Key Financial Indicators
As on / for the period ended March 31   2018 2017
Revenue Rs Crores 1643.0 1394.6
Profit after tax (PAT) Rs Crores 54.9 105.6
PAT margins % 3.3 7.6
Adjusted debt/adjusted net worth Times 1.04 0.65
Interest coverage Times 3.4 6.6

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)
ISIN Name of Instrument Date of Allotment Coupon Rate (%) Maturity Date Issue Size (Rs cr.) Rating Assigned
with Outlook
NA Bank Guarantee NA NA NA 6.0 CRISIL A1+
NA Buyer`s Credit * NA NA NA 40.0 CRISIL AA-/Stable
NA Cash Credit # NA NA NA 235.0 CRISIL AA-/Stable
NA External Commercial Borrowings 20-Mar-17 NA 03-May-22 65.8 CRISIL AA-/Stable
NA External Commercial Borrowings 21-Mar-16 NA 21-Mar-19 20.0 CRISIL AA-/Stable
NA FCNR (B) Long Term Loan 30-Sep-16 NA Mar 2021 67.0 CRISIL AA-/Stable
NA FCNR (B) Long Term Loan 27-Sep-17 NA 27-Sep-22 78.0 CRISIL AA-/Stable
NA Rupee Term Loan NA NA Dec 2022 100.00 CRISIL AA-/Stable
NA Letter of Credit NA NA NA 150.0 CRISIL A1+
NA Proposed Long Term Bank Loan Facility NA NA NA 190 CRISIL AA-/Stable
# Interchangeable with packing credit in foreign currency (PCFC)/Bills Discounting/Short Term Loans
* Interchangeable with cash credit
Annexure - Rating History for last 3 Years
  Current 2019 (History) 2018  2017  2016  Start of 2016
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund-based Bank Facilities  LT/ST  795.80  CRISIL AA-/Stable      18-01-18  CRISIL AA-/Stable      24-10-16  CRISIL AA-/Stable  CRISIL A+/Stable 
                    27-06-16  CRISIL AA-/Stable   
                    13-06-16  CRISIL AA-/Stable   
Non Fund-based Bank Facilities  LT/ST  156.00  CRISIL A1+      18-01-18  CRISIL A1+      24-10-16  CRISIL A1+  CRISIL A1 
                    27-06-16  CRISIL A1+   
                    13-06-16  CRISIL A1+   
All amounts are in Rs.Cr.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Bank Guarantee 6 CRISIL A1+ Bank Guarantee 3 CRISIL A1+
Buyer`s Credit* 40 CRISIL AA-/Stable Buyer`s Credit* 40 CRISIL AA-/Stable
Cash Credit# 235 CRISIL AA-/Stable Cash Credit# 235 CRISIL AA-/Stable
External Commercial Borrowings 85.8 CRISIL AA-/Stable External Commercial Borrowings 143.8 CRISIL AA-/Stable
FCNR (B) Long Term Loan 145 CRISIL AA-/Stable FCNR (B) Long Term Loan 145 CRISIL AA-/Stable
Letter of Credit 150 CRISIL A1+ Letter of Credit 95 CRISIL A1+
Proposed Long Term Bank Loan Facility 190 CRISIL AA-/Stable Proposed Term Loan 106.2 CRISIL AA-/Stable
Rupee Term Loan 100 CRISIL AA-/Stable -- 0 --
Total 951.8 -- Total 768 --
# Interchangeable with packing credit in foreign currency (PCFC)/Bills Discounting/Short Term Loans
* Interchangeable with cash credit
Links to related criteria
CRISILs Approach to Financial Ratios
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating criteria for manufaturing and service sector companies
Rating Criteria for Auto Component Suppliers
CRISILs Criteria for rating short term debt

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