Rating Rationale
July 10, 2020 | Mumbai
Motherson Lease Solution Limited
Rating Reaffirmed
 
Rating Action
Total Bank Loan Facilities Rated Rs.125 Crore
Long Term Rating CRISIL AA/Stable (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has reaffirmed its 'CRISIL AA/Stable' rating on the long-term bank facility of Motherson Lease Solution Limited (MLSL).
 
The rating continues to reflect the healthy counterparty risk profiles of Samvardhana Motherson group (SMG) entities, steady cash flow from lease rentals  to MLSL and its holding company, Motherson Auto Limited (MAL, 'CRISIL AA/Stable') and healthy debt protection metrics. The rating also factors in strong business and financial linkages with, and support from, SMG. These strengths are partially constrained by performance of MAL and MLSL being directly linked to the growth prospects and performance of SMG companies.
 
The rating action also takes a note of announcement of reorganisation plan by Samvardhana Motherson Group on 2nd July 2020.
 
The primary income of MAL is through lease rental from the land and buildings owned on which SMG have their plants and offices in India while MLSL earns through lease rental from the vehicles and equipment provided to SMG.
 
In fiscal 2021, consultancy business (29% to MAL Consolidated) will be transferred to another Group company, Samvardhana Motherson International Limited (SAMIL, 'CRISIL AA-/Watch Positive/CRISIL A1+') and new business segments in defence and aerospace sector to be taken over by MAL from SAMIL (net cashflow involved in the transaction is ~Rs 12 crore).
 
However the debt service coverage ratio at MAL consolidated level is expected to comfortable at remain above 1.5 times over medium term.
 
Earlier in fiscal 2020, the operating performance of MAL (including MLSL) improved with revenue improving by 10% to Rs 209 crore compared to previous fiscal while the operating profitability improved to over 83% from 80%.

While the COVID-19 will impact the operations of the group companies, the company has adequate cushion available. The liquidity remains comfortable with cash and equivalents of over Rs 20 crore as on March 2020 and an overdraft facility of Rs 10 crore in MAL and Rs 55 crore in MLSL.

Analytical Approach

CRISIL has taken a consolidated view of MLS and has combined its business and financial risk profiles with that of its parent, MAL.

Furthermore, CRISIL has applied the group notch-up to the ratings of MLSL. This is because MAL's promoters also own SAMIL and MSSL and have supported MAL through inter-corporate deposits. Leveraging of the common group name helps MAL negotiate better financial and operating terms with all the stakeholders on behalf of smaller group companies and ensures high moral obligation for SMG to support MLSL, if required.

Please refer Annexure - Details of Consolidation, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description
Strengths:
* Steady cash flow from operating lease income and strong counterparty risk profile
MAL acts as the lessor for factories and corporate and registered offices of SMG companies. Over 90% of the lease rentals come from subsidiaries and joint ventures of MSSL and SMIL. Renewal, vacancy, and counterparty risks are low as MSSL/SMIL group entities occupy most of the space leased out. Hence, cash flows will continue to be supported by leasing income over the medium term.

MLSL leases movable fixed assets and provides insurance solutions to the SMG companies. Vehicles (comprising 58% of the asset portfolio) contributed 60% to the total revenue in fiscal 2019, while equipment leasing (42%) accounted for the rest. The vehicles are leased for four years, after which they are sold in the open market. For equipment, the lease period is 3-7 years. MLS also provides insurance solutions to group companies, though revenue contribution of this business remains low. The entire vehicle requirement and a large portion of SMG's equipment requirement are met by MLS, thus ensuring steady cash flow in the form of operating leases. Furthermore, counterparty risk is low as all customers are SMG group companies. Growing asset base under lease should continue to augment income and cash flow over the medium term.

* Healthy debt protection metrics
Cash flows from rental income are more than suffice to cover debt obligation. A DSRA is not available for the loans; however, an overdraft line of Rs 65 crore (Rs 10 crore for MAL and Rs 55 crore for MLSL) is available in case of any cash flow mismatch or delay in receipt of rent. Further, cash and bank balances stood at Rs 20 crore as on March 31, 2020 for MAL and MLSL together.

Debt metrics improved in fiscal 2020 on consolidated basis, for instance, the ratio of gross debt to the earnings before interest, taxes, depreciation and amortization (EBIDTA) improved to 2.5 times in fiscal 2020 from 3.03 times in previous fiscal. External debt decreased to Rs 439 crore as on March 31, 2020 from Rs 467 crore as on March 31, 2019. Debt service coverage ratio is expected to be comfortable through the tenure of the loan.

* Strong business and financial linkages with, and support from, SMG
MAL is critical for operations of SMG entities, as the group does not prefer to work on third-party rented premises for setting up factories to ensure continuity of operations. Further, the corporate office is also held by MAL and leased out to group companies. Some of the companies operate on a small scale, which increases the economic incentive for centralised operations.

Also, MLS plays an important role in driving the group philosophy of high return on capital employed. By availing of leasing services through MLS, capital of the group entities does not get blocked in non-core assets, while centralised leasing and insurance services drives efficiency within SMG entities. This also results in tax benefits for both MLS (through higher depreciation) and SMG entities (through operating lease rentals).

Though currently self-sufficient, promoters and group companies are expected to support both the entities in case of contingencies. Leveraging of the common group name helps the entities negotiate better financial and operating terms with all stakeholders on behalf of smaller group companies and ensures high moral obligation for SMG to support MLS, if required.

Weaknesses:
* Performance directly linked to growth prospects/performance of group companies
Services provided by MAL and MLSL are mainly for entities within the SMG. As a result, growth in rental income would be directly linked to expansion of operations or new entities being set up within the group. However, as these are long-term lease contracts, with escalation clauses, cash flows from existing rental arrangements should be sufficient for debt servicing.

Any change in the credit risk profiles of the key operating companies in the group will remain a rating sensitivity factor.
Liquidity Strong

Liquidity remains healthy. Cash flows from rental income and existing assets are more than suffice to cover debt obligation. A DSRA is not available for the loans; however, an overdraft line of Rs 65 crore is available in case of any cash flow mismatch or delay in receipt of rent. Further, cash and bank balances stood above Rs 20 crore as on March 31, 2020. Debt servicing including interest payments stands at Rs 85 crore for fiscal 2021 for both MAL and MLSL combines. Promoters also own SAMIL and MSSL, and will support both the entities in case of exigency.

Outlook: Stable

MLS should maintain adequate debt protection metrics over the medium term, backed by steady cash flow from the operating lease business and growth in services provided to SMG entities.

Rating Sensitivity Factor
Upward Factors
* Higher-than-expected cash flow improving debt protection metrics on a sustained basis
* Revision in ratings of key companies in SMG.

Downward Factors
* Significant weakening of financial risk profile due to decline in income from operating leases, delay in receivables, or large debt
* Any significant deterioration in credit quality of key companies in SMG.

About the Company

MAL, incorporated in 1983, is promoted by Mr Vivek Chaand Sehgal, Mr Laksh Vaaman Sehgal, and Ms Renu Alka Sehgal. Incorporated in 2009, MLS is a wholly owned subsidiary of MAL. MLS leases assets and provides insurance solutions within the SMG companies. Assets such as vehicles, equipment, plant and machinery, software, furniture, and fixtures are provided on lease to group companies. MLS also offers insurance solutions: guidance, advisory, and procurement and claim settlement services.

For fiscal 2020, the revenue and profit after tax for MLSL standalone stood at Rs 69 crore and Rs 9 crore respectively as against Rs 67 crore and Rs 8 crore respectively during previous fiscal.

Key Financial Indicators - MLSL (Standalone)
As on/for the period ended March 31 Unit 2019 2018
Revenue Rs crore 58 63
Profit After Tax (PAT) Rs crore 8 9
PAT margin % 13.6 13.9
Adjusted debt/adjusted networth Times 3.6 2.5
Interest coverage Times 10.7 12

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 Term Loan NA NA Feb-23 125 NA CRISIL AA/Stable
 
Annexure - List of Entities Consolidated
Names of Entities Consolidated Extent of Consolidation Rationale for Consolidation
Motherson Auto Limited Full Parent company
Motherson Lease Solutions Limited Full Wholly owned subsidiary of MAL
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
Fund-based Bank Facilities  LT/ST  125.00  CRISIL AA/Stable  15-05-20  CRISIL AA/Stable  26-08-19  CRISIL AA/Stable  25-06-18  CRISIL AA/Stable  05-05-17  CRISIL AA/Stable  -- 
        05-02-20  CRISIL AA/Stable               
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
Term Loan 125 CRISIL AA/Stable Term Loan 125 CRISIL AA/Stable
Total 125 -- Total 125 --
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
CRISILs Bank Loan Ratings
CRISILs Criteria for Consolidation
Criteria for Notching up Stand Alone Ratings of Companies based on Group Support
Understanding CRISILs Ratings and Rating Scales

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