Detailed Rationale

CRISIL Ratings has continued its ratings on the bank facilities of Yazaki India Pvt Ltd (YIPL) on ‘Rating Watch with Developing Implications’.

 

The ratings were placed on watch, following a fire incident at one of the company’s manufacturing plants at Maraimalai Nagar, Chennai on September 27, 2023. The plant contributed to around 15% of the overall revenue. As informed by the management, the damage was confined to stock and goods in the raw material storage location and two of the eight manufacturing lines were impacted by the fire. Operations have resumed at the site. The company has an adequate insurance cover for the fire incident and has received around Rs 40 crore as interim payment.

 

CRISIL Ratings will continue to engage with YIPL’s management and shall take appropriate rating action once there is more clarity of the impact on the financial risk profile as well as timelines for settlement of the entire insurance claim.

 

The ratings continue to reflect the healthy market position of YIPL in the domestic wiring harness industry, and support from its parent, Yazaki Corporation (YC) via equity infusion, preference shares and loans, apart from operational and technical support. YIPL also benefits immensely from the financial flexibility of its parent, YC, which is expected to provide need-based support, as evidenced in the past. However, these rating strengths are partially offset by the labour-intensive operations and exposure to volatility in raw material prices, which could impact profitability and even cause working capital mismatches during a slowdown in the industry. Further, the company plans to incur a large capital expenditure (capex) of over Rs 1,500 crore over the medium term. Execution of this capex, its funding and implications on the key credit metrics are key rating sensitivity factors in the near-to-medium term. Besides, the impact of the slowdown in the global economy and the automotive industry in regions to which the parent caters to, on the credit risk profile of the parent, YC remains a monitorable.

 

Revenue has grown at a healthy pace of 47% to Rs 3,457 crore during fiscal 2023. Growth was driven by an uptick in volume, due to strong recovery in demand from auto OEM manufacturers post pandemic, coupled with an increase in share of business from new customers. Volume growth should sustain with expansion of the customer base, increasing wallet shares from existing customers and launch of premium products. Hence, the company is expected to maintain revenue growth of 15-20% over the medium term.

 

Operating margin rose by more than 200 basis points to 9.3% in fiscal 2023, due to correction in prices of key inputs (mainly copper) and positive operating leverage gains, led by volume growth. Stable input prices, changes in product mix with rising share of premium products, implementation of cost optimisation techniques and increasing focus on localisation should help the margin rise further. However, faster execution of the large capex planned over the medium term may lead to higher overhead cost and this will be a key monitorable.

 

Financial risk profile remains modest, marked by an average capital structure, resulting from networth of Rs 251 crore against total debt of Rs 1,106 crore as on March 31, 2023. While debt levels remained high, around 40% is availed from the parent, thereby ensuring flexibility on repayment terms. With significant revival in the operating performance in fiscal 2023, key debt protection metrics such as interest cover and debt/ EBITDA have improved significantly to over 6.5 times and around 3.5 times, respectively (vis-a-vis 3.2 times and 6.9 times, respectively, in fiscal 2022). That said, given the company plans to incur large-size capex of over Rs 1500 crore, the execution plan of the capex, its funding and the likely implications on the company’s key credit metrics will be a key rating sensitivity factor.

 

Annual cash accrual of over Rs 190 crore, coupled with cushion in the working capital limit, should suffice to cover the annual debt obligations and working capital expenses over the medium term. The company has the option to refinance or extend the loan tenor of the external commercial borrowing (ECB) from the parent, in case of distress or insufficient cashflow. The working capital limit was utilised only to an extent of 61% for the 12 months ended July 31, 2023. The entire debt sanctioned to YIPL is backed by a corporate guarantee from the parent, YC. Support from the parent and timely enhancement in the limit will help the company to maintain adequate liquidity. 

Analytical Approach

CRISIL Ratings has also applied its parent notch-up framework to factor in the strong financial and business support from the parent, Yazaki Corporation. Preference shares from the parent, YC, aggregating Rs 100 crore and scheduled for repayment in July 2026, have been treated as debt.

Key Rating Drivers & Detailed Description

Strengths:

• Strong operational and financial support from the parent: YC, a leading auto component company globally, holds a healthy market share in the wiring harness business. It clocked revenue of Yen 1804 billion during the year ended June 30, 2022 (increased from Yen 1612 billion for the year ended June 30, 2021), with adjusted gearing at 0.81 time. Impact of the ongoing slowdown in the global economy and the automotive industry in regions that YC caters to, on its credit risk of profile, remains a key monitorable.

 

YIPL benefits from the technological support extended by the parent for setting up manufacturing facilities and upgrading its systems and processes continuously. The parent has shifted its global information technology support segment to India. Ramp-up of this segment will enhance the strategic importance of YIPL to YC over the medium term. Further, on the operational front, around 25% of raw material consumed is imported from the parent and its associate companies.

 

Though limits sanctioned to YIPL are standalone, they do draw comfort from the parent’s support. YC has extended corporate guarantees to cover the entire debt of YIPL.

 

• Healthy market position in the domestic wiring harness segment: YIPL is the second-largest manufacturer of wire harnesses in India, with a market share of around 29% in fiscal 2023, after Motherson Sumi Wiring India Ltd (‘CRISIL AA+/Stable/CRISIL A1+’). It supplies to major original equipment manufacturers (OEMs), such as Maruti Suzuki India Ltd (MSIL; ‘CRISIL AAA/Stable/CRISIL A1+’), TATA Motors Ltd (CRISIL AA/Stable/ CRISIL A1+), Toyota Kirloskar Motors Ltd, Honda Cars India Ltd and Ashok Leyland Ltd.

 

The diversified customer profile, increased wallet share with existing clients and diversification into new products with ramp-up of operations in new segments will benefit the business over the medium term. YIPL plans to incur a large capex to expand capacity for its component and wire harness systems, so as to cater to new clients. It also plans to set up factories for Augmented Reality Head-Up Display (ARHUD) and a Battery Disconnect Unit (BDU), which should support revenue growth and enhance the market position over the medium term.

 

Weaknesses:

• Labour-intensive operations and exposure to volatility in raw material prices: Manufacturing of wiring harnesses involves various manual processes, and is thus, labour intensive. Cost of labour forms the second largest component (15-20%) after raw materials (66-70%) over the past five fiscals. Further, the company imports around 50% of its raw material requirement from various countries such as Japan, Europe, Thailand and China due to a shortage in the domestic market. Operating margin remains vulnerable to fluctuations in prices of raw materials and foreign exchange rates, and hence, prices of key raw materials like copper will remain a key monitorable.

 

• Limited pricing power due to dependence on OEMs: High dependence on OEMs limits pricing power. While the company has flexibility to pass on any hike in input cost to customers, the extent and timing involves a lag. Besides, there is not much scope to transfer the impact of rise in other manufacturing overheads. In case of a prolonged slowdown and sluggishness in demand, OEMs too are unable to pass on the price increase. Rise in input cost is therefore, absorbed by both component manufacturers and OEMs. This has led to volatility in profitability of YIPL over the past years.

 

• Modest financial risk profile: Financial risk profile is marked by a networth of Rs 251 crore, and high gearing and total outside liabilities to tangible networth ratios of 4.40 times and 6.76 times, respectively, as on March 31, 2023. While the company plans to incur debt-funded capex of over Rs 1,500 crore over the next three years, it is yet to finalise the source of funding. However, CRISIL Ratings understands that the capex will be largely funded through ECBs from the parent and the balance via equity and internal accrual. The parent too is likely to infuse equity of Rs 100 crore over the next 1-2 months. The debt/EBDITA ratio should be in the range of 4-5 times over the medium term (3.4 times in fiscal 2023). Loans from the parent are for a tenure of three years with a bullet repayment. Progress of capex, its funding and implications on key credit metrics are key monitorables in the near-to-medium term.

 

Capital structure may remain modest though networth and gearing are likely to improve to over Rs 400 crore and 4 times, against debt of Rs 1,500-1,900 crore (including loans of Rs 600-1,050 crore from the parent). Support from the parent will remain a key monitorable over the medium term.

Liquidity: Adequate

YIPL reported cash accrual of Rs 128 crore during fiscal 2023 and held a surplus of Rs 27 crore as on March 31, 2023. Liquidity will remain adequate, supported by expected cash accrual of over Rs 190 crore in the medium term. This, along with cushion available in the working capital limit, should suffice to cover the annual debt obligation and working capital requirement over the medium term. Bank limit utilisation was also moderate, averaging 61% for the 12 months ended July 31, 2023, thus providing a buffer in case of exigencies. The company also draws support from the parent and can refinance or extend the loan tenor in case of distress or insufficient cashflow.

Rating Sensitivity factors

Upward factors

• Significant growth in revenue and sustained improvement in operating margin, driven by better product offerings, addition of new customers and increasing wallet share of existing customers.
• Improvement in financial risk profile with debt-to-EBITDA remaining below 3 times on sustained basis.
• Improvement in the credit risk profile of the parent.

 

Downward factors

• Sharp decline in operating margin and larger-than-expected debt levels.
• Any major debt-funded capex or acquisition, weakening debt metrics with debt-to-Ebitda remaining above 4 times on sustained basis.
• Weakening of the credit risk profile of the parent.

About the Company

YIPL was incorporated in 1997, as an equal joint venture between Tata Auto Comp Systems Ltd (TACO) and YC. The company began commercial production in 1999. It manufactures wire harnesses for various segments of the auto industry. YC acquired TACO's 50% stake in December 2012, making YIPL its wholly owned subsidiary.

Yazaki Wiring India was established by Siemens AG (Siemens) in 1998, mainly to supply wiring harness solutions to Ford India. In 2002, YC acquired 50% stake and entered into a joint venture with Siemens, and the company was renamed Siemens Yazaki Wiring Technologies Ltd. Subsequently, in 2004, Yazaki Wiring Technologies GmbH, Germany, a wholly owned subsidiary of YC acquired the entire stake of the company, through its subsidiary YGP Pte Ltd, Singapore, and renamed it as Yazaki Wiring India.

Pursuant to the scheme of amalgamation approved in the Bombay High Court, Yazaki Wiring India was merged with YIPL on April 1, 2015.

About YC

Set up in 1941, YC is one of Japan's largest privately held companies. It operates in 42 countries and has business ties with major auto OEMs worldwide. Japan is the primary market, followed by America, Asia, Europe and Africa. In addition to auto components, YC and its subsidiaries manufacture equipment for air-conditioning, solar thermal conversion, gas units and household electric wiring units. Operating revenue and margin stood at Yen 1804 billion and 0.5%, respectively, as on June 30, 2022, against revenue of Yen 1612 billion and operating loss of 0.4% as on June 30, 2021.

Any other information: Not Applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs.Crore)	Complexity  levels	Rating assigned with outlook
NA	Buyer’s credit limit^	NA	NA	NA	30	NA	CRISIL A2+/Watch Developing
NA	Working capital demand loan^^	NA	NA	NA	24	NA	CRISIL A-/Watch Developing
NA	Working capital demand loan#	NA	NA	NA	30	NA	CRISIL A-/Watch Developing
NA	Term loan	NA	NA	31-Mar-2026	73.3	NA	CRISIL A-/Watch Developing

^Interchangeable with working capital demand loan

^^Interchangeable with buyer’s credit and overdraft

#Interchangeable with vendor bill discounting