| Sundaram-Clayton Limited | ||||||
| Rated amount enhanced | ||||||
| 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+'. |
| Analytical Approach |
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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 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 * Healthy financial risk profile, despite a temporary blip in fiscal 2018 Financial risk profile has improved steadily over the past five years, owing to healthy cash accrual and steady repayment of debt, translating to improvement in gearing to 0.65 time in fiscal 2017. Gearing is however expected to increase to around 1.2 times in fiscal 2018 due to low accrual and large capex, but improve thereafter on the back of restoration of accrual, scheduled repayment of debt, and moderation in capex after fiscal 2019. The financial flexibility and strong re-financing capabilities arising from SCL's investment in TVS Motor, and the liquidity provided by healthy dividend from TVS Motor should partially offset decline in accrual in fiscal 2018. Turnaround in domestic and export markets and the consequent impact on operational cash flows from fiscal 2019, should help strengthen financial risk profile over the medium term. * Diverse customer base, spread across auto sub-segments and geographies Customer base is diverse, spread across sub-segments of the auto sector, such as two-wheelers, passenger cars, and CVs, and across geographies. Exports contributed around 40% to revenue in fiscal 2017, enhancing revenue diversity. While the company's share of export revenue declined marginally in the past two years due to economic slowdown in Europe, strong demand prospects should gradually contribute to revenue over the medium term. 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, should also help revenue grow over the medium term. * Adequate operating efficiencies Operating profitability has been largely stable at 10.0-11.5% since fiscal 2010, 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 strong operating capabilities. Operating profitability in fiscal 2018 is expected to be significantly lower, due to the one off operational costs. However, operating margins in fiscal 2019 are expected to revert to fiscal 2017 levels and stabilize at 11-12% in the medium term. Weakness * Significant exposure to cyclical CV segment SCL has a high exposure to the CV segment given that SCL almost derives its entire export revenues from the CV segment, although the domestic customer base is spread across auto 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 is increasing its production capacity and hence will be able to manage sudden surge in offtake by customers over the medium term, any break-down of machinery will remain a challenge. SCL will also remain vulnerable to cyclical offtake 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 mitigated the impact. |
| Outlook: Stable |
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CRISIL believes SCL's business risk profile will benefit from the expected increase in revenue from existing customers and from addition of clients from fiscal 2019 onwards. The expected decline in debt due to healthy accrual from fiscal 2019, progressive debt repayment, and moderation in fund requirement for capex and working capital will help maintain a comfortable financial risk profile. |
| 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 packing credit in foreign currency (PCFC)/Bills Discounting/Short Term Loans |
| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Table reflects instances where rating is changed or freshly assigned. 'No Rating Change' implies that there was no rating change under the release. | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annexure - Details of various bank facilities | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
#Interchangeable with packing credit in foreign currency (PCFC)/Bills Discounting/Short Term Loans **Includes proposed External Commercial Borrowings Rs.70 crores | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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