Detailed Rationale

CRISIL Ratings has revised its outlook on the long-term bank facilities of Fiat India Automobiles Private Limited (Fiat India) to 'Positive' from 'Stable' while reaffirming the rating at 'CRISIL AA-'. The short term rating and commercial paper programme has been reaffirmed at 'CRISIL A1+'.

 

The rating action reflects the expectation of sustained improvement in business risk profile of Fiat India over the near to medium term, supported by steady demand for internal combustion engine based passenger cars (contributing 70% of total revenue in fiscal 2021) and electric vehicles from Tata Motors Ltd (TML, rated ‘CRISIL AA-Stable/CRISIL A1+”), higher powertrain sales, and better revenue contribution from own brands ‘Jeep Compass’ ‘Wrangler’ and ‘Grand Cherokee’. Revenue growth is expected to remain healthy at 8-10%, on a significantly high base registered in fiscal 2021, while operating profitability is expected to range between 12-14%, resulting in continued sizeable cash generation.

 

Earlier, in fiscal 2021, driven by ramp up of the powertrain segment (contributing 20% of total revenue) and the healthy demand for TML’s ‘Nexon’ brand of passenger cars, the company registered all time high revenues of Rs 8454 crore, an increase of 42% year-on-year, much higher than anticipated. Ramp up in powertrain revenues was on account of higher supplies to TML as well as MG Motors. Overall, sharp increase in revenues attributable to TML and MG Motors helped offset impact of moderation in domestic sales for Fiat India’s own ‘Jeep Compass’ brand. Healthy overall revenue growth, and an increase in operating profitability to 15.2% in fiscal 2021 (14% in fiscal 2020), driven by better operating leverage and cost optimisation measures, led to all time high operating profits of almost Rs.1300 crore, also boosting annual cash generation.

 

The company’s financial risk profile has further strengthened due to the healthy performance in fiscal 2021, and moderate capital expenditure (capex), resulting in improving debt metrics. The ratio of debt to earnings before depreciation, interest, tax, amortisation and taxation (debt/EBITDA) improved to 1.11 times in fiscal 2021, from 1.86 times in fiscal 2020. Other debt metrics too registered healthy improvement. Capex is expected to increase to Rs.500-600 crores annually in the next two fiscals due to higher investments in new brands; however healthy annual cash generation and sizeable liquid surpluses (over Rs.1300 crore at March 31, 2021) will obviate the need for material debt addition, leading to continued improvement in debt metrics.

 

The ratings continue to reflect Fiat India’s healthy business risk profile supported by committed agreements with the principal shareholders (FCA Italy SPA (FCA; merged with Peugeot S.A. to form  Stellantis NV, rated 'BBB-/Stable/A-3' by S&P Global Ratings) and TML for take or pay arrangement and healthy financial risk profile with robust liquidity. Further, presence of take or pay agreement with JV partners, ensures material operating profits, even during cyclical downturns.  These strengths are partially offset by moderate market position of the principal customers, driven by increasing competition in the domestic passenger car market, and sizeable working capital requirement.

Key Rating Drivers & Detailed Description

Strengths:

Committed agreements with principal customers:

Fiat India is supplying to Tata Nexon brand under TML. Company sells both ICE and EV for the Nexon brand. Company also supplies powertrain for 1.2 litre and 2 litre engines. Strong growth of TML 69% in fiscal 2021 resulted in growth in revenues by 82% from TML. For FCA, company caters to the Jeep brand. In Jan 2021, company launched facelift for Jeep Compass and in the current year, it has also started supplying Jeep Wrangler and Grand Cherokee. Company engages into both domestic and export sales for the Jeep brand. In fiscal 2021, exports volumes for Jeep brand grew by 8%.  Recovery in demand will support sustenance of increased scale for Fiat India.

 

Moreover, the entire capacity is covered under a take-or-pay arrangement with the principal shareholders: FCA and TML. This helps protect investment from the risk of low production. Furthermore, the shareholders pay for fixed costs including interest cost on external borrowings incurred by Fiat India for any unused portion of the reserved capacity.

 

Healthy and improving financial risk profile:

Financial risk profile is supported by sizeable cash accruals, net worth (Rs.4176 crores at March 31, 2021) and comfortable leverage (gearing of 0.36 times, and Debt/EBITDA of 1.11 times in fiscal 2021). Strong cash generation, and prudent funding of capex, has enabled improvement in debt metrics. Despite large capex of ~Rs 1000 crore over last three years, the company’s debt levels did not increase much due to part funding of the same through accruals, and also debt repayment of just over Rs.700 crores.

 

Going forward, the company is expected to incur annual capex of Rs.500-600 crores, which is likely to be funded mainly from annual accruals (estimated at over Rs.900 crores) and liquid surpluses. Besides, ~Rs.1000 crores of existing long term debt will also be repaid by fiscal 2023. Therefore, CRISIL Ratings expects continued improvement in Fiat India’s debt metrics.

 

Weakness:

Moderate market position of key customers: Fiat India’s principal customer, TML has a modest market share of 8.3% in the intensely competitive domestic passenger vehicle (PV) segment, which though has increased from ~5% in fiscal 2020. Besides, FCAIAPL’s own market share in the domestic PV segment remains low at 0.24%.  Though the take-or-pay arrangement covers the fixed cost, revenue and profitability are constrained in case there is a moderation in sale volumes, leading to reduction in Industrial Promotion Subsidy (IPS) refunds. Furthermore, Fiat India’s business prospects are linked to the performance of Jeep Compass and Tata Nexon models. While the company is likely to receive business for upcoming new models of its principal customers, both TML and FCAIAPL are unlikely to materially improve their market shares, given their relatively modest product portfolio compared with the top players in the domestic PV market. Sale of powertrains to other customers, and higher exports, though could prop up revenue growth.

 

Sizeable working capital requirement: Overheads incurred for unused capacity are billed to the principal customers quarterly, but is mainly collected within 90 days of the end of the financial year, leading to higher working capital requirement. In case of sub-par capacity utilisation, dependence on lumpy take-or-pay cash flow settlement increases, leading to further rise in working capital requirement. Any delay in realisation of take-or-pay receivables will remain a key monitorable factor. Moreover, collection of IPS refunds follows a long cycle, requiring working capital funding support. For example, first tranche of IPS receivables of Rs 158 crore pertaining to fiscal 2017-18 was received from Government of Maharashtra in February 2020. Additionally, the structuring of repayment on the Jeep Compass project loan into half-yearly instalments, with most of the annual obligation due in June, mitigates the risk associated with lumpiness in cash flow.

Liquidity: Strong

Liquidity profile is strong, with cash accruals of more than Rs 900 crore per annum and healthy cash surpluses of over Rs.1300 crore. Besides, the working capital bank limits were sparingly utilised over the past 6 months ended May 2021. The company is expected to incur capex of ~Rs 1000-1200 crore in fiscals 2022 and 2023, which may be funded through internal accruals and surplus liquidity. The long term debt repayments of Rs.431 crores in fiscal 2022, and Rs.574 crores in fiscal 2023, can also be serviced largely from internal accruals.

Outlook: Positive

CRISIL Ratings believes Fiat India's business risk profile will benefit from recovery in demand for models of its key customers, higher exports, and ramp up of powertrain supplies. Furthermore, benefits from the take-or-pay agreement with FCA and TML, and better operating leverage will help the company generate healthy cash accruals. This along with prudent funding of capex, and progressive debt repayment, will help sustain a strong financial risk profile.

Rating Sensitivity factors

Upward factors

•         Better-than-expected revenue growth and profitability, backed by increased demand from the principal customers, and exports

•         Sustenance of healthy financial risk profile and debt metrics, supported by prudent funding of capex and efficient working capital management, with net Debt/EBITDA coming below 1-1.25 times

•         Maintenance of healthy liquid surplus, post capex

 

Downward factors

•         Significant decline in demand from the principal customers, impacting cash generation

•         Delay in realisation of take-or-pay receivables, or any adverse change in the sales agreement with the principal customers

•         Weakening of financial risk profile because of large debt-funded capex or stretch in working capital cycle leading to debt/EBITDA of more than 2.5 times

•         Steep downward rating revision of its shareholders

About the Company

Fiat India, established in December 2006, is an equal joint venture of TML and FCA. It has a manufacturing plant on more than a 200 acre site in Ranjangaon, Maharashtra, and has two divisions—cars and powertrains. Annual production capacity of the plant is 130,000 cars and 2,50,000 powertrains. The plant was set up at a project cost of Rs 4,000 crore, funded through Rs 1,900 crore of external debt, Rs 700 crore through loans from promoters, and Rs 1,400 crore through equity contribution of promoters.

 

In June 2017, the company commissioned its Jeep Compass project at a cost of Rs 1,868 crore, funded through external debt (Rs 1,481 crore) and cash accrual (Rs 387 crore). The capex was mainly to modify assembly lines and body shop, and debottleneck the paint shop to manufacture the Jeep Compass model on the existing line. The project included a 2-litre diesel engine line with an annual production capacity of 30,000 engines, to be used for the Jeep Compass model manufactured for the domestic market. The capacity has since increased to 100000 Engines to cater to demand from TML for 2L engines

 

During fiscal 2020, company has completed the first phase of capex to be done for conversion of 1.3 ltr diesel engine powertrain capacity to 1.2 ltr petrol engine for 30K powertrain capacity and phase II for 2.7 lakh engines capex will be completed in fiscal 2021 and 2022 (currently at 1.5 lakh engines of capacity).

Key Financial Indicators

Particulars	Unit	2021	2020
Revenue	Rs crore	8454	5963
Profit after tax (PAT)	Rs crore	578	287
PAT margin	%	6.8	4.8
Adjusted debt/adjusted networth	Times	0.36	0.46
Interest coverage	Times	12.13	6.58

 

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 level	Rating assigned with outlook
NA	Letter of Credit *	NA	NA	NA	10	NA	CRISIL A1+
NA	Cash credit	NA	NA	NA	510	NA	CRISIL AA-/Positive
NA	External commercial borrowings	NA	NA	31-May-23	468	NA	CRISIL AA-/Positive
NA	Foreign currency term loan	NA	NA	31-May-23	93	NA	CRISIL AA-/Positive
NA	Rupee term loan	NA	NA	30-Sep-25	450	NA	CRISIL AA-/Positive
NA	Proposed long-term bank loan facility	NA	NA	NA	369	NA	CRISIL AA-/Positive
NA	Proposed cash credit limit	NA	NA	NA	100	NA	CRISIL AA-/Positive
NA	Commercial paper	NA	NA	7-365 days	625	Simple	CRISIL A1+

* Interchangeable with bank guarantee