Key Rating Drivers & Detailed Description

Strengths

Established market position in domestic wiring harness industry

MSWIL has an established market position and is the market leader in domestic wiring harness segment. Its dominant market position is further supported by established long term relationships with most major auto OEMs in India. MSWIL is focused on organic growth in domestic wiring harness industry. With continued increase in features in cars and MSWIL’s focus on increasing content per year, MSWIL’s market position is expected to sustain in the medium term.

Diversified revenue profile across customers and vehicle segments

MSWIL’s revenue profile is well diversified across various domestic customers and segments, with top 10 customers contributing around 70%-75% of overall revenues. Healthy customer diversity is expected to moderate impact in case of slowdown in demand.

Further, MSWIL’s also enjoys moderate diversification in vehicle segment with around 60% of revenues being contributed by Passenger Vehicles (PV) segment and remaining revenues being contributed by Commercial Vehicles, 2 wheelers, off road vehicles etc.

With auto component sector revenues expected to grow by 10-12% in fiscal 2024, MSWIL is expected to benefit from the same. In the previous decade, MSWIL’s revenues have grown by CAGR of more than 10% whereas PV segment production has grown at around 2%.

Strong parentage of Samvardhana Motherson International Limited and Sumitomo Wiring Systems

MSWIL enjoys strong parentage of Samvardhana Motherson International Limited (rated CRISIL AA+/Stable/CRISIL A1+) and Sumitomo Wiring Systems (SWS) which holds 33.4% stake and 25.3% stake in MSWIL respectively. SAMIL and SWS both have strong financial flexibility backed by robust financial position.

Further, MSWIL is also backward integrated with SAMIL and a significant percentage of raw materials and components are being sourced directly from parent companies SAMIL and SWS. MSWIL also utilizes manufacturing facilities and offices of SAMIL as per agreement at the time of group reorganization and demerger of domestic wiring harness business from SAMIL. 

Strong financial risk profile 

Financial risk profile of the company is strong backed by NIL long term borrowings and repayment obligations in the medium term. Capital structure is robust with gearing expected to remain at around 0.1-0.15 time in the medium term. Leverage is also expected to remain low with Debt/EBITDA expected to remain at 0.1-0.2 times in the medium term. With 3-4 players dominating the domestic wiring harness market and opportunity for inorganic expansion through acquisitions remaining low, leverage is not expected to materially increase.

Debt protection metrics are also strong with adjusted interest coverage of 26.5 times in FY22 and expected to remain at similar range or higher in FY23. Further, debt protection metrics are expected to remain in similar range in FY24 as well.

Weaknesses 

Product and geographic concentration

MSWIL derives its revenues from a single product line i.e. wiring harnesses. The product concentration exposes MSWIL’s operating performance to demand moderation in auto sector. Also, entire revenues are generated from sales within India, resulting in a concentration risk in case of an economic downturn in the domestic market.

Further, in case of slowdown in auto sector demand, premiumization of passenger vehicles may reduce which may also impact operating performance of MSWIL.

Moderation in operating profitability and limited pricing power due to dependence on OEMs 

Operating profitability has moderated from around 16.5% in FY19 to around 13.4% in FY22 and is expected to remain at around 11% in FY23. Operating margins have moderated in FY23 due to capex which is yet to fully scale up, alongwith certain one-time costs. However, operating margins are expected to improve to 12-13% levels in the medium term, with scaling up of operations leading to better absorption of fixed costs.

Further, 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, there is a lag in timing.

Exposure to cyclicality in demand in automobile industry

MSWIL’s revenues, though diversified, remains closely aligned with performance and demand in automobile industry. Due to dependence on auto OEMs, MSWIL’s business prospects are exposed to cyclical demand patterns inherent to automobile industry and ability of auto OEMs to sustain their operating performance.

Rating Sensitivity factors

Upward factors:

• Increased diversity in product profile and geographic presence
• Significant ramp up of operations with cash accruals sustaining above Rs 1000 crore

Downward factors:

• Significant deterioration in business profile marked by decline in revenue and/or weakening of operating margins leading to annual cash accruals of less than Rs 250 crore for prolonged time
• Sharp deterioration in financial risk profile due to any large capex or debt funded acquisition or deterioration in liquidity profile.

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