Rating Rationale
December 10, 2019 | Mumbai
Yazaki India Private Limited
Rating outlook revised to 'Negative'; ratings reaffirmed
 
Rating Action
Total Bank Loan Facilities Rated Rs.84 Crore
Long Term Rating CRISIL A-/Negative (Outlook revised from 'Stable' and rating reaffirmed)
Short Term Rating CRISIL A2+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has revised its outlook on the long-term bank facilities of Yazaki India Private Limited (YIPL) to 'Negative' from 'Stable', while reaffirming the rating at 'CRISIL A-'.  Short term rating has been reaffirmed at 'CRISIL A2+'.
 
The revision in outlook reflects YIPL's weak operating performance in fiscal 2020 due to weak automobile demand with expected decline of 20% and drop in operating margin by about 300 basis points (bps) to 5.5% in fiscal 2020. During the first half of fiscal 2020, revenue declined by 24% while operating margin reduced to 6.5% by 230 bps compared to 8.8% during the similar period of last fiscal. Thus, cash accrual is likely to drop to Rs 60-70 crore in fiscal 2020 from Rs 170 crore in fiscal 2019. Total debt is expected at Rs 240-280 crore over the medium term.
 
Debt protection metrics also weakened owing to the decline in profitability. Interest coverage is expected to reduce to 3.1 times in fiscal 2020 from over 6.0 times in fiscal 2019.
 
The ratings continue to factor in the support YIPL receives from the parent, Yazaki Corporation (YC), in the form of equity infusions, operational support and technical support. Any such support in the near term, benefiting cash flow or capital structure, will be a key rating sensitivity factor.

The ratings are, however, constrained by labour-intensive operations, which significantly impacts the financial risk profile in times of slowdown in the industry. YIPL also faces significant competition in the wiring harness industry and has limited pricing power over original equipment manufacturers (OEMs).

Analytical Approach

* Intangible asset, largely goodwill arising from merger of YIPL and Yazaki Wirings, has been amortised for a period of five years starting 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 parent notch up framework to factor the financial and business support from the parent, YC.

Key Rating Drivers & Detailed Description
Strengths
* Strong operational and financial support from the parent, YC
YIPL benefits from the technological support received from YC for establishing its manufacturing facilities, and for continuous upgrade of systems and processes.
 
The company also benefits from the strong financial support from the parent. YC has extended corporate guarantees for YIPL's entire debt programme and the company's bank lines are carved out of the parent's global limits. YC is also shifting its global information technology support segment to India. Ramp up of this segment will further improve strategic importance of YIPL to YC over the medium term.   
 
* Healthy market position in Indian wiring harness segment
YIPL is the second-largest manufacturer of wire harnesses in India after Motherson Sumi Systems Ltd (rated 'CRISIL AA+/Stable/CRISIL A1+') and supplies to major OEMs including Tata Motors Ltd (rated 'CRISIL AA-/Negative/CRISIL A1+'), Maruti Suzuki India Ltd (MSIL rated '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 diversity with ramp up of new segments to benefit the business over the medium term. YIPL is likely to incur capital expenditure (capex) to expand its capacity for future programmes of MSIL, which is likely to benefit from YIPL's market position over the medium term.
 
Operating margin declined sharply during the first half of fiscal 2020 due to sub-optimal coverage of fixed costs and delay in pass through of higher raw material costs. Operating margin is likely to be impacted by 150-300 bps for fiscal 2020 and could moderate to 5-6%.
 
* Comfortable financial risk profile
The capital structure has improved significantly over fiscals 2018 and 2019, aided by healthy cash accrual of Rs 149 crore and Rs 161 crore, respectively, and reduction in total debt. This moderated the gearing to 1.08 times as on March 31, 2019, from 1.42 times a year ago.
 
However, going forward, YIPL may look for external funding support for sufficient debt repayment and capex requirement. Parent support will remain key monitorable in the medium term.
 
Weaknesses
* Labour-intensive operations and exposure to volatility in raw material prices
The manufacture of wiring harnesses involves a series of processes, which are done manually, thus making it labour intensive. The ongoing slowdown is further exacerbating the situation for YIPL as employee costs and job contract costs are its largest cost heads after raw material costs, accounting for 15-16% of the revenue. Profitability also remains vulnerable to fluctuations in the prices of raw materials and foreign exchange rates.
 
* Limited pricing power due to dependence on OEMs
The wiring harness industry is intensely competitive, leading to pressure on realisations. Furthermore, high dependence on OEMs limits pricing power. While there is flexibility to pass on input cost increases to customers, the extent and timing is uncertain. Besides, the pass-on is restricted for increases in other manufacturing overheads.
 
Furthermore, in case of a prolonged slowdown and decreasing automobile demand, it is not always possible for OEMs to pass on the price hike. Input cost increases are therefore absorbed by both, the component manufacturers and OEMs. This led to volatile  profitability in the past.
Liquidity Adequate

Liquidity is likely to remain adequate over the medium term. Cash accrual is projected at Rs 70 crore per annum for fiscals 2020 and 2021 each, sufficient to meet the yearly maturing debt of  Rs 35-40 crore; the surplus cash will be used as working capital. Thus, the bank limit worth Rs 264 crore has been utilised at just 40% during the six months ended October 30, 2019.

Outlook: Negative

CRISIL believes YIPL's credit risk profile may deteriorate further owing to the ongoing slowdown in the automobile industry, and modest operating efficiency. Financial risk profile may weaken due to low cash accrual, leading to decline in tangible networth and increasing debt. However, YIPL will continue to benefit from the strong parental support.
 
Rating sensitivity factors
Upward factor
* Operating margin increasing to over 10%, backed by diversifying customer and product profiles
* Sizeable cash accrual or substantial equity infusion
 
Downward factor
* Operating margin dropping to below 4-5%, resulting in decline in cash accrual and higher-than-expected debt
* Large, debt-funded acquisition or capex
* Change in credit risk profile of the parent

About the Company

YIPL was incorporated in 1997 as an equal joint venture between Tata Autocomp Systems Ltd (TACO; rated 'CRISIL AA-/Stable/CRISIL A1+') and Yazaki Corporation, Japan. YIPL, which began commercial production in 1999, manufactures wire harnesses for various segments of the automobile industry. YC acquired TACO's 50% stake in December 2012. Thus, 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 re-named Siemens Yazaki Wiring Technologies Ltd. Subsequently, in 2004, Yazaki Wiring Technologies GmbH, Germany a wholly owned subsidiary of YC Japan acquired the complete ownership 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 the appointed date, April 1, 2015.
 
About Yazaki Corporation, Japan
Set up in 1941, YC is one of Japan's largest privately held company. 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. Revenue was 1,945,492 (JPY Millions) in fiscal 2019 (Year ending June 2019).
 
YIPL reported revenue of Rs 801 crore for the first half of fiscal 2020 (Rs 1,041 crore for the corresponding period of fiscal 2019), with operating profit and profit after tax (PAT) of Rs 52 crore and a negative Rs 32 crore, respectively (Rs 92 crore and Rs 25 crore).

Key Financial Indicators
As on/ For the year ended March 31   2019 2018
Revenue Rs crore 2040 1977
Adjusted PAT Rs crore 52 42
PAT margins % 2.5 2.1
Adjusted debt/adjusted networth Times 1.08 1.42
Interest Coverage Times 6.59 5.99

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 Buyer`s Credit^ NA NA NA 30 CRISIL A2+
NA Working Capital Demand Loan^^ NA NA NA 24 CRISIL A-/Negative
NA Working Capital Demand Loan# NA NA NA 30 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 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  84.00  CRISIL A-/Negative/ CRISIL A2+  25-09-19  CRISIL A-/Stable/ CRISIL A2+  29-06-18  CRISIL BBB+/Positive/ CRISIL A2  02-03-17  CRISIL BBB/Stable      CRISIL BBB/Negative 
        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-/Stable
Working Capital Demand Loan# 30 CRISIL A-/Stable Working Capital Demand Loan# 30 CRISIL A-/Stable
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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