Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AA+/Stable/CRISIL A1+’ ratings on the bank facilities of Motherson Sumi Wiring India Limited (MSWIL).

CRISIL Ratings had on April 12, 2023, assigned its ‘CRISIL AA+/Stable/CRISIL A1+’ ratings to the bank facilities of MSWIL.

The ratings continue to reflect established market position of MSWIL in the wiring harness segment of domestic automotive components industry, long term relationships with most major auto original equipment manufacturers (OEMs), robust financial risk profile and strong parentage of Samvardhana Motherson International Limited (SAMIL; erstwhile Motherson Sumi Systems Limited; CRISIL AA+/Stable/CRISIL A1+) and Sumitomo Wiring Systems. These strengths are partially offset by single product portfolio of MSWIL in automotive component industry, geographical concentration in the domestic market, moderating operating profitability due to limited pricing power amidst dependence on OEMs and exposure to cyclicality in auto sector.

In Q1 FY24, MSWIL had achieved revenues of Rs 1,859 crore with operating margins at around 10.4% from 11.1% in fiscal 2023, on account of increase in wages and slightly lower utilization levels on account of maintenance holidays. However, in fiscal 2024, revenues are expected to grow by around 15% y-o-y driven by volume and price increase. Operating profitability is expected to sustain at around 11-12% in fiscal 2024 from around 11.1% in fiscal 2023 and is expected to improve to around 12-13% in the medium term with increase in utilization levels corresponding to capex undertaken in fiscal 2023. Continued increase in scale with improvement in profitability through increasing premiumization and content per car will remain key monitorables.    

MSWIL had achieved revenues of Rs 7,057 crore in fiscal 2023, i.e. growth of 25% y-o-y driven by volume and price increase while operating margins had moderated to around 11.1% due to start-up costs associated with new units set up by MSWIL and certain one-off expenses. MSWIL has undertaken capex of around Rs 198 crore in fiscal 2023 towards capacity enhancement and capex is expected to remain in similar or slightly higher range in the medium term and is expected to be funded primarily through internal accruals.

MSWIL is focused on organic growth through increasing content per car. With domestic wiring harness segment of automotive components industry dominated by few players and MSWIL being the market leader, opportunities for inorganic growth through acquisitions are limited. Hence, leverage of MSWIL is expected to remain low with debt/EBITDA expected to remain below 0.5 times in the medium term.   

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 25.1% 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 0.1-0.2 time in the medium term. Leverage is also expected to remain low with Debt/EBITDA expected to remain below 0.5 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 28.7 times in FY23 and expected to remain at similar range in the medium term.

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 11.1% in FY23 and is expected to remain at around 11-12% in FY24. Operating margins had moderated in FY23 due to capex which is yet to fully scale up, alongwith certain one-time costs. Further, operating margins had moderated to 10.4% in Q1 FY24 on account of increase in wages and slightly lower utilization levels on account of maintenance holidays. 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.

Key Financial Indicators

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