Rating Rationale
January 18, 2018 | Mumbai
Sundaram-Clayton Limited
Rated amount enhanced
Rating Action
Total Bank Loan Facilities Rated Rs.768 Crore (Enhanced from Rs.620 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 reaffirmation factors in the expectation that SCL's performance, which has been impacted in fiscal 2018 due to high one-off freight and outsourcing costs, will rebound in fiscal 2019. During the first half of fiscal 2018, SCL incurred a breakdown in critical machinery, accompanied by a surge in overseas demand and the consequent depletion in warehouse stock. In order to service client commitments, the company had to air-lift components to overseas customers as well as outsource incremental volumes, resulting in additional cost of Rs 55 crore and as a result incurred a net loss of Rs 41 crore in the first half of fiscal 2018. The higher freight and outsourcing expenditure is likely to continue over the near term, while gradually normalising as the company scales back its production. CRISIL believes that normal operations will, likely, be restored from the first quarter of fiscal 2019, and operating profitability is likely to revert to fiscal 2017 levels at around 11.4%.

In order to meet increase in offtake, SCL is implementing a large capital expenditure (capex) of Rs 475 crore over fiscal 2018 and fiscal 2019, funded partly by debt. While this, along with low accruals in fiscal 2018 will weaken the capital structure and debt protection metrics, CRISIL believes that restoration of operations in fiscal 2019 and lower capex beyond fiscal 2019, will restore these metrics to earlier levels over the medium term.

Liquidity will be supported by steady dividend income from TVS Motor Company Ltd (TVS Motor), moderately utilised bank lines, and ability to refinance its debt obligations. SCL's 57.4% holding in TVS Motor, valued at Rs 21,000 crore as on December 31, 2017, underpins financial flexibility. Cash accruals in fiscal 2018 may, however, be inadequate to service maturing debt of Rs 82 crore in fiscal 2018, and will necessitate refinancing of part of maturing term loans.

CRISIL's ratings on SCL's bank facilities will continue to reflect the company's diverse customer base across automobile sub-segments and geographies, and adequate operating efficiency. These strengths are partially offset by high revenue dependence on the cyclical 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 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.

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
* 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.

* 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

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.

Upside scenario
* Significant and sustained increase in revenue, profitability and cash accruals.
* Considerable improvement in gearing and debt protection metrics

Downside scenario
* Substantially lower-than-expected accrual in fiscal 2019, most likely because of impact on operations continuing beyond fiscal 2018
* Material deterioration in capital structure and debt protection metrics, driven by larger than expected debt-funded capex
* 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 half of fiscal 2018, SCL reported a post-tax loss of Rs 44.3 crore on net sales of Rs 784.8 crore, against a profit after tax of Rs 19.3 crore on net sales of Rs 698.3 crore for the first half of fiscal 2017.

Key Financial Indicators
As on/for the period ended March 31 Unit 2017 2016
Revenue Rs Crores 1,394.6 1,417.7
Profit After Tax (PAT) Rs Crores 105.6 144.4
PAT margins % 7.6 10.2
Adjusted debt/adjusted networth Times 0.65 0.85
Interest coverage Times 6.6 6.7

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 3.0 CRISIL A1+
NA Buyer Credit* NA NA NA 40.0 CRISIL AA-/Stable
NA Cash Credit# NA NA NA 235.0 CRISIL AA-/Stable
NA External Commercial Borrowings 19-Oct-15 NA 21-Mar-19 78.9 CRISIL AA-/Stable
NA External Commercial Borrowings 20-Mar-17 NA 03-May-22 64.9 CRISIL AA-/Stable
NA Foreign Currency Non-Resident Borrowing (FCNRB) Long term Loan 30-Sep-16 NA 29-Mar-18 66.5 CRISIL AA-/Stable
NA Foreign Currency Non-Resident Borrowing (FCNRB) Long term Loan 27-Sep-17 NA 27-Sep-22 78.5 CRISIL AA-/Stable
NA Letter of Credit NA NA NA 95.0 CRISIL A1+
NA Proposed Term Loan NA NA NA 106.2 CRISIL AA-/Stable
*Interchangeable with cash credit
#Interchangeable with packing credit in foreign currency (PCFC)/Bills Discounting/Short Term Loans
Annexure - Rating History for last 3 Years
  Current 2018 (History) 2017  2016  2015  Start of 2015
Instrument Type Quantum Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund-based Bank Facilities  LT/ST  670  CRISIL AA-/Stable    No Rating Change    No Rating Change  13-06-16  CRISIL AA-/Stable    No Rating Change  CRISIL A+/Stable 
Non Fund-based Bank Facilities  LT/ST  98  CRISIL A1+    No Rating Change    No Rating Change  13-06-16  CRISIL A1+    No Rating Change  CRISIL A1 
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
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Bank Guarantee 3 CRISIL A1+ Bank Guarantee 3 CRISIL A1+
Buyer`s Credit* 40 CRISIL AA-/Stable Buyer`s Credit* 30 CRISIL AA-/Stable
Cash Credit# 235 CRISIL AA-/Stable Cash Credit# 235 CRISIL AA-/Stable
External Commercial Borrowings 143.8 CRISIL AA-/Stable External Commercial Borrowings** 150 CRISIL AA-/Stable
FCNR (B) Long Term Loan 145 CRISIL AA-/Stable Letter of Credit 95 CRISIL A1+
Letter of Credit 95 CRISIL A1+ Proposed Term Loan 65 CRISIL AA-/Stable
Proposed Term Loan 106.2 CRISIL AA-/Stable Term Loan 42 CRISIL AA-/Stable
Total 768 -- Total 620 --
*Interchangeable with cash credit
#Interchangeable with packing credit in foreign currency (PCFC)/Bills Discounting/Short Term Loans
**Includes proposed External Commercial Borrowings Rs.70 crores
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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