Rating Rationale
July 30, 2020 | Mumbai
Mahle Anand Thermal Systems Private Limited
Rating Reaffirmed
 
Rating Action
Total Bank Loan Facilities Rated Rs.70 Crore
Long Term Rating CRISIL A+/Stable (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has reaffirmed its 'CRISIL A+/Stable' rating on the long-term bank facilities of Mahle Anand Thermal Systems Private Limited (MATL).
 
Revenue declined 21% during fiscal 2020 over the previous fiscal due to slowdown in the auto industry and lower-than-expected schedule from original equipment manufacturers (OEMs) especially from the passenger vehicle (PV) and commercial vehicle (CV) segments as well as the impact of measures taken to contain the Covid-19 pandemic. Moderation in operating performance to continue in fiscal 2021 due to overall contraction in the economy resulting in a fall in income levels caused by pandemic disruption.
 
Operating margin is likely to moderate due to negative operating leverage to 6-7% in fiscal 2021. MATL has been reducing import content in overall purchase to further benefit the company. Lower raw material, especially aluminium prices (down 9% year-on-year) will arrest the erosion in margin.
 
Financial risk profile remains healthy in the absence of any long-term debt and a short-term debt of just Rs 35 crore as on March 31, 2020. An additional limit of Rs 30 crore sought will support liquidity. A capital expenditure (capex) of over Rs 50 crore is scheduled for the current year and MATL is unlikely to pay any dividend in fiscal 2021.
 
Prudent funding of capex, efficient working capital management, and low dependence on external long-term debt should lead to a sustained improvement in key credit metrics and liquidity over the medium term.
 
The rating continues to reflect MATL's established market position in the domestic automotive components industry, its healthy financial risk profile, and the continued strong operational and financial support from the promoters. These strengths are partially offset by moderate susceptibility to fluctuation in raw material prices, and volatility in foreign exchange (forex) rates and exposure to cyclicality in demand in the automobile industry. 

Analytical Approach

CRISIL has factored in the strong operational, financial, and technological support from the parent, MAHLE GmBH due to robust business and financial linkages.

Key Rating Drivers & Detailed Description
Strengths
* Established market position backed by diversified customer base
MATL has strong market position in the automotive air-conditioning (AAC) and engine-cooling system (ECS) segments, and competes with Subros Ltd, Visteon Automotive Systems India Ltd, Climate Systems India Ltd and Tata Toyo Radiators Ltd (rated CRISIL AA-/Stable/CRISIL A1+). The company is the market leader in Visco fans (used for engine cooling) and is significantly scaling up volumes in this segment.
 
The impact of the lockdown due to Covid-19 will moderate the operating performance of the company especially in the first quarter of fiscal 2021. The CV and PV segments are expected to report a decline in volume due to contraction in economic activity caused by the pandemic. CRISIL believes MATL's revenue growth will moderate in fiscal 2021 due to slowdown in the auto industry.  However, medium term outlook is healthy due to strong demand for EGR (exhaust gas recirculation), a nitrogen oxide emissions reduction technique used in petrol/gasoline and diesel engines, and Visco product segments and its established market position in the AAC and ECS segments, a gradual revival in export, new business from existing customers and improving customer diversification.
 
* Healthy financial risk profile
The financial risk profile is comfortable supported by healthy networth of Rs 185 crore as on March 31, 2020 and unutilised bank limits of Rs 30-40 crore. Adjusted debt increased to Rs 35 crore as on March 31, 2020, from Rs 20 crore a year ago and consists of primarily short-term borrowings. Consequently, debt protection metrics were strong. Financial risk profile should remain healthy because of modest capex, adequate cash accrual in the absence of any dividend payout, prudent working capital management and comfortable liquidity.
 
* Continued strong operational and financial support from the promoters
MATL continues to receive strong operational and financial support from its promoters, MAHLE group and the Anand group. MAHLE is among the world's 20 largest automotive suppliers and among the top three in its three core business areas: engine systems and components, filtration and engine peripherals, and thermal management.  The promoters have demonstrated their willingness to extend financial support in case of exigency.
 
CRISIL factors in the support MATL gains from its parent, MAHLE GmbH and MATL's strategic importance to the parent. MATL will continue to leverage strong technology support from its parent to grow its business in India. Further, need-based funding support from the promoters is expected to continue.
 
Weaknesses
* Moderate susceptibility to raw material prices, and volatility in forex rates
While MATL has undertaken several productivity improvement and cost reduction initiatives to control costs, its operating profitability remains susceptible to increasing competition in the automotive components segment and pricing pressure from OEMs. MATL imports less than 40% of its raw material, and is susceptible to fluctuations in forex rates despite a partial natural hedge and MATL's focus to reduce its import content by localisation / import substitution. Margins are expected to be impacted due to higher operating leverage in fiscal 2021. Lower raw material prices such as aluminium (down 9% year-on-year) will arrest some erosion in margins.
 
* Exposure to cyclicality in demand in the automobile industry
Although there is moderate diversity in MATL's revenue because of presence in the aftermarket and industrial segments, revenue growth and operating profitability will remain susceptible to the inherent cyclicality in the automotive industry. Schedules over fiscal 2021 from both PV and CV OEMs will remain key monitorable.
Liquidity Strong

The company has unutilised limit of Rs 30-40 crore and adequate expected cash accrual of Rs 70-80 crore to support capex of over Rs 50 crore in fiscal 2021 and nil debt obligations. Any large, debt-funded capex or acquisition affecting the credit metrics will remain a key rating sensitivity factor.

Outlook: Stable

CRISIL believes that MATL's business risk profile will be impacted due to Covid-19 in fiscal 2021 in-line with the industry. However over the medium term, the company is likely to be supported by its established market presence, and with improving revenue diversity, resulting in sustained increase in cash generation. The financial risk profile is also expected to improve supported by steady cash flow, moderate capex, and nil long-term debt.

Rating sensitivity factors
Upward factors:
* Revenue growth of 15% and above and operating margins of 9-10% on a sustained basis on account of improving demand, and ramp up of business from new customers
* Sustenance of healthy financial risk profile
 
Downward factors:
* Sharp decline in operating performance, margins consistently below 6%
* Large debt-funded capex/acquisitions weakening debt metrics

About the Company

MATL was set up in 1997 as a 60:40 joint venture between Stuttgart (Germany)-based MAHLE-Behr group and the Anand group. The company manufactures AAC and ECS. Its major customers are Tata Motors Ltd (CRISIL AA-/Negative/A1+), Mahindra & Mahindra Ltd ('CRISIL AAA/Stable/CRISIL A1+'), Volkswagen India Pvt Ltd, Renault Nissan India Pvt Ltd, Maruti Suzuki India Ltd ('CRISIL AAA/Stable/CRISIL A1+') and the MAHLE-Behr group companies worldwide.
 
In July 2010, Behr GmbH and MAHLE GmbH signed an agreement to the effect that MAHLE GmbH will take over Behr GmbH in phases. In the first stage, MAHLE GmbH acquired 36.85% stake (including 19.9% in 2010) till September 2011. In May 2013, MAHLE GmbH increased its stake to 50.7%, thereby becoming the majority stakeholder in MAHLE Behr GmbH.

Key Financial Indicators
Particulars Unit 2020* 2019
Revenue Rs crore 739 950
Profit after tax (PAT) Rs crore 11 42.8
PAT margin % 1.5 4.5
Adjusted debt/adjusted networth Times 0.19 0.10
Interest coverage Times 8.1 37.88
*Provisional

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 Cash credit & working
capital demand loan		 NA NA NA 20.0 NA CRISIL A+/Stable
NA Fund based limit^ NA NA NA 40.0 NA CRISIL A+/Stable
NA Fund based limit NA NA NA 10.0 NA CRISIL A+/Stable
^Interchangeable with working capital loan upto Rs 30 crore or with buyers credit upto Rs 40 crore
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
Vendor Financing  ST                      CRISIL A2+ 
Fund-based Bank Facilities  LT/ST  70.00  CRISIL A+/Stable      09-07-19  CRISIL A+/Stable  29-06-18  CRISIL A+/Stable/ CRISIL A1  16-03-17  CRISIL A+/Stable/ CRISIL A1  CRISIL A-/Positive/ CRISIL A2+ 
            27-06-19  CRISIL A+/Stable           
Non Fund-based Bank Facilities  LT/ST    --    --    --  29-06-18  CRISIL A1  16-03-17  CRISIL A1  CRISIL A2+ 
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
Cash Credit & Working Capital demand loan 20 CRISIL A+/Stable Cash Credit & Working Capital demand loan 20 CRISIL A+/Stable
Fund-Based Facilities^ 40 CRISIL A+/Stable Fund-Based Facilities^ 40 CRISIL A+/Stable
Fund-Based Facilities 10 CRISIL A+/Stable Fund-Based Facilities 10 CRISIL A+/Stable
-- 0 -- Proposed Fund-Based Bank Limits 195 Withdrawn
Total 70 -- Total 265 --
^Interchangeable with working capital loan upto Rs 30 crore or with buyers credit upto Rs 40 crore
Links to related criteria
Assessing Information Adequacy Risk
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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