Rating Rationale
December 03, 2020 | Mumbai
Yazaki India Private Limited
Ratings Reaffirmed
 
Rating Action
Total Bank Loan Facilities Rated Rs.84 Crore
Long Term Rating CRISIL A-/Negative (Reaffirmed)
Short Term Rating CRISIL A2+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has reaffirmed its 'CRISIL A-/Negative/CRISIL A2+' ratings on the bank facilities of Yazaki India Private Limited (YIPL).
 
Operating performance is expected to weaken in fiscal 2021 on account of lower sales to original equipment manufacturers (OEMs) due to the Covid-19 pandemic, especially in the first quarter. Revenue is expected to decline by 8-10% while operating margin is expected at 1-3% because of suboptimal fixed cost coverage in fiscal 2021.
 
Furthermore, the financial risk profile is expected to weaken due to decline in cash accrual to Rs 0-20 crore in fiscal 2021. This, coupled with rising short-term debt will constrain the debt protection metrics. Interest coverage ratio is expected to reduce to around 1 time in fiscal 2021 from 2.5 times in fiscal 2020.
 
However, liquidity will remain adequate. YIPL is increasing its bank limit by Rs 100 crore backed by a corporate guarantee from the parent'Yazaki Corporation, Japan (YC) - at attractive interest, bringing the total fund-based working capital limit to Rs 630 crore. Support from the parent and timely enhancement in limit will help the company to recover post the lockdown and maintain adequate liquidity.  
 
The ratings continue to factor in the increasing support to YIPL from YC, by way of equity infusion and operational and technical support. The ratings are, however, constrained by labour-intensive operations, which significantly impact the financial risk profile during slowdown in the industry. The company faces significant competition in the wiring harness industry and has limited pricing power against OEMs.

Analytical Approach

Intangible assets, largely goodwill arising from the merger of YIPL and Yazaki Wiring India, have been amortised over five years from fiscal 2016. CRISIL has applied its criteria for preference share capital and accordingly treated preference capital of Rs 100 crore from YC as part debt and part equity. CRISIL has applied the parent notch-up framework to factor in the strong financial and business support from the parent.

Key Rating Drivers & Detailed Description
Strengths
* Strong operational and financial support from the parent
YIPL benefits from technological support received from the parent for establishing its manufacturing facilities, and for continuous upgrade of systems and processes.
 
YC has extended corporate guarantees for YIPL's entire debt and the latter's bank lines are carved out of the parent's global limits. The parent is shifting 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. YC, a leading auto component company globally with healthy market share in the wiring harness business, clocked revenue of Yen 1,714 billion for July 2019 to June 2020, with adjusted gearing at 0.67 time.
 
* Healthy market position in the Indian wiring harness segment
YIPL is the second-largest manufacturer of wire harnesses in India after Motherson Sumi Systems Ltd ('CRISIL AA+/Negative/CRISIL A1+') and supplies to major OEMs including Tata Motors Ltd ('CRISIL AA-/Negative/CRISIL A1+'), Maruti Suzuki India Ltd (MSIL; 'CRISIL AAA/Stable/CRISIL A1+'), Toyota Kirloskar Motors Ltd, Honda Siel Cars Ltd, and Ford India Pvt Ltd (Ford India).
 
Diversified customer profile and expected improvement in product range with ramp-up of operations in new segments will benefit the business over the medium term. YIPL is likely to undertake capital expenditure (capex) to increase capacity for future programmes of MSIL, which in turn will improve YIPL's market position over the medium term.
 
Operating margin declined by 500 basis points in fiscal 2020 and is expected to moderate to 1-3% in fiscal 2021. Price of copper, a key raw material, fell 7-8% in fiscal 2020 before rising again, which may further impact the operating margin.
 
Weaknesses
* Labour-intensive operations and exposure to volatility in raw material prices
The manufacture of wiring harnesses involves a series of manual processes, and hence is labour intensive. The slowdown because of the pandemic has exacerbated the situation as employee costs and job contract costs are the company's largest cost heads after raw material, accounting for 15-16% of revenue. Profitability is vulnerable to fluctuations in the prices of raw materials and foreign exchange rates.
 
* Limited pricing power due to dependence on OEMs
Intense competition in the wiring harness industry leads to pressure on realisations. Furthermore, high dependence on OEMs limits pricing power. While there is flexibility to pass on increase in input cost to customers, the extent and timing is uncertain. Besides, the ability to pass on increases in other manufacturing overheads is restricted. The operating margin rose from 3% in fiscal 2015 to 11.3% fiscal 2017.
 
In case of prolonged slowdown and lower automobile demand, it is not always possible for OEMs to pass on the price increase. Input cost increases are therefore absorbed by both, the component manufacturers and OEMs. This has led to volatility in YIPL's profitability in the past.
 
* Weak financial risk profile
Lower profitability will result in cash accrual declining to Rs 0-20 crore in fiscal 2021 from Rs 41 crore in fiscal 2020, which along with increase in short-term borrowings, will impact the credit risk profile. Losses in fiscal 2020 and expected losses in fiscal 2021 are likely to erode networth, from Rs 316 crore as on March 31, 2019, to Rs 135 crore as on March 31, 2021. Gearing is expected to increase from 1.6 times as on March 31, 2020, to 3.8-4 times as on March 31, 2021. Modest operating margin and higher short-term debt of Rs 400-450 crore will result in moderation in the debt protection metrics, with interest coverage ratio estimated to decline to 1.98 times in fiscal 2021 from 2.52 times in fiscal 2020. Excessive dependence on short-term debt resulted in weakening of current ratio below 1 time in fiscal 2020. Capex of Rs 130-150 crore will be funded through cash accrual of Rs 0-20 crore and external debt funding. Parent support will remain a key monitorable over the medium term.
Liquidity Adequate

Liquidity is likely to remain adequate over the medium term. Though expected cash accrual of Rs 0-20 crore in fiscal 2021 will be insufficient to cover debt obligation of Rs 38 crore per annum, the company has adequate bank lines and parent support. For capex of Rs 130-150 crore, YIPL will have to depend on external funding. Bank limit of Rs 530 crore was utilised 63% on average during the 10 months through October 2020.

Outlook: Negative

YIPL's credit risk profile will remain under pressure due to the pandemic and modest operating efficiency, and is expected to recover in the second half of fiscal 2021. The financial risk profile is likely to remain moderate driven by increase in debt and lower profitability. YIPL will continue to benefit from the strong support from YC.
 
Rating sensitivity factors
Upward factors
* Increase in revenue and operating margin with recovery in demand leading to cash accrual of over Rs 50 crore
* Improvement in the financial risk profile driven by reduction in debt or equity infusion
 
Downward factors
* Decline in operating margin below 1-2%, resulting in lower cash loss and larger-than-expected debt
* Large, debt-funded acquisition or capex
* Change in 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; 'CRISIL AA-/Stable/CRISIL A1+') and YC. The company began commercial production in 1999; it manufactures wire harnesses for various segments of the automobile 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.
 
YIPL's revenue was Rs 447 crore for the first half of fiscal 2021 (Rs 801 crore during the corresponding period of fiscal 2020), with operating profit and profit after tax of negative Rs 50 crore and negative Rs 113 crore, respectively (Rs 45 crore and negative Rs 32 crore).
 
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 automotive OEMs worldwide. Japan is the company's primary market, followed by the Americas, Europe and Asia. In addition to automobile components, YC and its subsidiaries manufacture a variety of items including air-conditioning equipment, solar thermal conversion equipment, gas equipment and household electric wiring units. YC's revenue was USD 16 billion and operating margin was 1% as on June 30, 2020, against revenue of USD 18 billion and operating margin of 4.2% as on June 30, 2018.

Key Financial Indicators
As on / For the year ended March 31   2020 2019
Revenue Rs crore 1467 2040
Adjusted PAT Rs crore -102 57
PAT margin % -6.9 2.8
Adjusted debt/adjusted networth Times 1.60 1.10
Interest coverage Times 2.52 6.61

Status of non cooperation with previous CRA: Not applicable

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments and are included (where applicable) in the Annexure -- Details of Instrument in this Rating Rationale. For more details on the CRISIL complexity levels, please visit www.crisil.com/complexity-levels.
Annexure - Details of Instrument(s)
ISIN Name of instrument Date of allotment Coupon rate (%) Maturity date Issue size (Rs crore) Complexity level Rating assigned with outlook
NA Buyer's credit^ NA NA NA 30 NA CRISIL A2+
NA Working capital demand loan^^ NA NA NA 24 NA CRISIL A-/Negative
NA Working capital demand loan# NA NA NA 30 NA CRISIL A-/Negative
^Interchangeable with working capital demand loan
^^Interchangeable with buyer's credit and overdraft
#Interchangeable with vendor bill discounting
Annexure - Rating History for last 3 Years
  Current 2020 (History) 2019  2018  2017  Start of 2017
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund-based Bank Facilities  LT/ST  84.00  CRISIL A-/Negative/ CRISIL A2+  29-05-20  CRISIL A-/Negative/ CRISIL A2+  10-12-19  CRISIL A-/Negative/ CRISIL A2+  29-06-18  CRISIL BBB+/Positive/ CRISIL A2  02-03-17  CRISIL BBB/Stable  CRISIL BBB/Negative 
            25-09-19  CRISIL A-/Stable/ CRISIL A2+           
            31-05-19  CRISIL A-/Stable/ CRISIL A2+           
Non Fund-based Bank Facilities  LT/ST    --    --    --    --  02-03-17  CRISIL A3+  CRISIL A3+ 
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
Buyer`s Credit^ 30 CRISIL A2+ Buyer`s Credit^ 30 CRISIL A2+
Working Capital Demand Loan^^ 24 CRISIL A-/Negative Working Capital Demand Loan^^ 24 CRISIL A-/Negative
Working Capital Demand Loan# 30 CRISIL A-/Negative Working Capital Demand Loan# 30 CRISIL A-/Negative
Total 84 -- Total 84 --
^Interchangeable with working capital demand loan
^^Interchangeable with buyer's credit and overdraft
#Interchangeable with vendor bill discounting
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
Criteria for Notching up Stand Alone Ratings of Companies based on Parent Support

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