Rating Rationale

Key Rating Drivers & Detailed Description

Strengths:

Established market position in the automotive components industry: SAMIL has an established market position and is amongst the world's largest manufacturers of exterior rear-view mirrors with dominant market share and is a leading global player in polymer-based interior and exterior modules. Its market position is further supported by increasing market share in the premium segment in the polymers division in bumpers, instrument panels and door panels. The group is also the largest manufacturer of wiring harnesses for passenger vehicles in India. PKC (acquired in April 2017) has a dominant market share in North American and European heavy truck market. Recently completed acquisitions -- such as Yachiyo Industry and Dr Schneider -- have also globally strengthened its position in modules and polymer segments and with SAS Autosystemtechnik marked its entry as Tier 0.5 supplier in integrated assemblies.

SAMIL’s business risk profile is further supported by the synergies within various business segments, its strong in-house research and development capabilities and long-term technical collaborations with Sumitomo Wiring Systems Ltd (SWS) and other joint venture (JV) partners.

Diversified revenue profile across customers, geographies and product segments: SAMIL has, over the years, significantly diversified its revenue profile through acquisitions. Ramp up of performance of acquired entities has helped the group in establishing a global presence across key product segments.

Further, SAMIL’s customer and geographic diversity has been improving with its focus on increasing content per car. The healthy customer diversity helped SAMIL withstand slowdown in demand multiple times in the past. SAMIL's geographic diversity has also been improving, with exposure to its largest market, Europe, reducing to around 37% in fiscal 2024 from 44% in fiscal 2018 and exposure to Asia Pacific, North America and South America simultaneously increasing. Product diversity has also continued to improve with no component contributing more than 28% of its overall revenue.

Global light vehicle sales growth is expected to remain flat this fiscal in Europe while the Indian auto component industry is expected to grow 8-10% in fiscal 2025, driven by healthy demand from OEMs. This is also expected to lead to similar revenue growth at SAMIL, which derived around 37% of its revenue from Europe, 21% from India, 18% from USA while remaining from the rest of the world in fiscal 2024. Furthermore, SAMIL plans to increase share of non-auto business over the next five years in identified segments such as aerospace, logistics, health and medical and technological and industrial solutions through organic and inorganic routes.

CRISIL Ratings believes that SAMIL will continue to benefit from its diversified customer profile and strong order book, which will enable it to register better-than-industry growth over the medium term.

Healthy relationships with global OEMs: Over the years, SAMIL has forged healthy relationship with major global OEMs owing to its focus on quality and delivery. The group benefits from a sustained inflow of new orders from OEMs, primarily in its major divisions, modules and polymers, wiring harness, vision systems and integrated assemblies evidenced by its automotive booked business of USD 83.9 billion on March 31,2024.

SAMIL has a well-diversified global client base in the passenger and commercial vehicles industry. Its customers include leading global OEMs such as VWG and its group companies, Mercedes-Benz Group AG (rated A/Stable/A-1’ by S&P Global Ratings), Hyundai Motor Co (rated 'BBB+/Positive' by S&P Global Ratings), Maruti Suzuki India Ltd ('CRISIL AAA/Stable/CRISIL A1+'), Bayerische Motoren Werke Aktiengesellschaft (BMW ' rated 'A/Stable/A-1' by S&P Global Ratings), Nissan Motor Co. Ltd (rated 'BB+/Stable' by S&P Global Ratings), Renault S A (rated 'BB+/Stable/B' by S&P Global Ratings), Stellantis N.V. (rated 'BBb+/Stable' by S&P Global Ratings), Paccar Inc (rated 'A+/Stable/A1' by S&P Global Ratings), Ford Motor Company (rated 'BBB-/Stable' by S&P Global Ratings), General Motors Company (rated 'BBB/Stable' by S&P Global Ratings) and Scania AB (rated BBB/Stable/A-2' by S&P Global Ratings), among others.

Strong execution track record of successful turnaround of, and ramp up of utilisation levels at overseas acquired entities: SAMIL has a track record of acquiring distressed companies and turning around their operations in a short span of time. The 43 acquisitions from fiscal 2002 till date have improved its geographical and product profiles, apart from being its growth driver. SAMIL has also successfully integrated and stabilised the operations of the acquired entities.

Over the medium term, operating profitability is expected to remain range bound but healthy at 9-10%, after a 150-bps increase in margin to 9.2% last fiscal. The continued improvement in margin is on account of ramp up of the newer capacities, better operating leverage and successful integration of acquisition, resulting in increased synergies. Resultantly, return on capital employed (RoCE) has improved from Covid-19 pandemic-impacted fiscals 2021 to 2022, to 10.3% in fiscal 2023 and 16.8% in fiscal 2024, which will further improve over the medium term.

Healthy financial risk profile by well-spaced out repayment obligations and strong liquidity: While the group has funded its acquisitions through a combination of debt, equity and cash accrual, it has also prudently ensured its debt obligations are well spaced out, besides also consistently working on lowering the cost of debt. For instance, the group has replaced high cost debt with longer tenure Euro and USD denominated debt at competitive rates over the past five years.

The company’s long-term repayment obligation stands at around Rs 3,000-6,000 crore per year over the medium term, which is expected to either be refinanced or met out of cash accrual projected at more than Rs 7,000-9,000 crore per year over the medium term.

With the company’s focus on capital expansion, SAMIL is expected to undertake annual capex of Rs ~5,000 crore and is expected to continue to undertake M&A-related activities over the medium term. Despite these plans, improvement in profitability leading to higher cash accrual should reduce dependence on debt for acquisitions and capex. Therefore, debt protection metrics are expected to improve over the medium term. Interest coverage ratio and NCA/AD ratio -- which were 5.0 times and 0.35 time respectively in fiscal 2024 -- is expected to improve to 6.0-7.5 times and 0.4-0.55 time, respectively, over the ongoing and next fiscals. Leverage ratio too will see an improvement with net debt/Ebitda and TOL/TNW improving from 1.13 times and 2.47 times respectively in fiscal 2024 to remain below 1.1 times and 2.2 times (though elevated as TOL includes the working capital needs for the throughput revenue and networth adjustments due to amortisation of goodwill as mentioned in the analytical approach) respectively over the medium term. Additionally, interest coverage ratio -- which had moderated from 7.78 times in fiscal 2023 to 5.03 times in fiscal 2024 due to higher gross debt and peak interest rates due to interest rate hikes -- will see gradual improvement to 6.3-6.5 times in fiscal 2025 and 7.3-7.5 times in fiscal 2026. However, any significant, debt-funded acquisition will continue to be a key monitorable.

Weaknesses:

Exposure to cyclicality in demand in global automobile industry: While SAMIL's revenue profile benefits from good geographic, customer and product diversity, it remains closely aligned to the performance of key geographies and customers. Due to dependence on large global OEMs, SAMIL's business prospects are exposed to cyclical demand patterns inherent to the global automobile industry and ability of the OEMs to sustain their operating performance. Additionally, delay in ramp up of new capacities due to the impact of Covid-19 pandemic weakened the overall operating profitability in fiscal 2019 and during the first nine months of fiscal 2020.

Aggressive acquisition-led growth strategy: SAMIL has demonstrated high growth through number of acquisitions since 2002. This has resulted in higher diversification in revenue profile and improved scale of operations. However, with continuation of its aggressive growth policy, SAMIL is exposed to the risk of impact on debt protection metrics due to higher-than-expected debt-funded acquisitions and risk associated with acquiring distressed businesses and integrating acquisitions with SAMIL which are in different line of business.

However, the risk is partially mitigated by strong track record to turnaround distressed businesses that have been acquired by SAMIL and the company’s philosophy to acquire companies driven by customers’ requirement and a prudent funding philosophy. The management believes in not breaching the 2.5 net debt to EBTIDA mark, and if it is breaches the same, it shall be reinstated to previous levels within a period of 12 months.