| Samvardhana Motherson International Limited | ||||||
| Rating outlook revised to ‘Positive’; ‘CRISIL AA+/Positive’ assigned to Non Convertible Debentures | ||||||
| Rating Action | ||||||
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| Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings. | ||||||
| 1 crore = 10 million | ||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has assigned its ‘CRISIL AA+/Positive’ rating to the Non Convertible Debentures of Rs 1500 crore of Samvardhana Motherson International Limited (SAMIL; formerly Motherson Sumi Systems Limited (erstwhile MSSL)). CRISIL Ratings has also revised its outlook on long-term bank loan facilities and corporate credit rating to ‘Positive’ from ‘Stable’ while reaffirming the rating at ‘CRISIL AA+’. The rating on short term bank facilities has been reaffirmed at CRISIL A1+.
The revision in outlook reflects significant improvement in leverage profile of SAMIL with net debt to earnings before interest, depreciation, tax and amortization (EBIDTA) expected to remain in range of 1.1 to 1.5 times, lower than our earlier expectations of 1.5-2.0 times, over the medium term. Improvement in leverage is driven by scale up of cash accruals supported by increasing production volumes led by ramp up of large capacities set up by SAMIL over the last few years, recent acquisitions and improvement in profitability due to easing commodity and energy inflation. Leverage improvement is expected to continue despite new debt availed to fund announced acquisitions. SAMIL had improved its EBITDA margins over fiscal 2023 progressively as commodity inflation pressures & supply chain situation eased in overseas markets. This indicates benefits of SAMIL’s diversified presence and their strong integration with customer business plans. Further, SAMIL will continue to garner benefits of its diversification strategy of 3CX10 i.e. no customer, component or country to contribute more than 10% of overall revenues which should offset any recessionary impact in any particular geographies.
In fiscal 2024, revenues are expected to grow by more than 20% y-o-y driven by organic as well as inorganic growth. Organic growth is expected to be driven by both increase in volumes and realisations. Inorganic growth is expected to be driven by acquisitions with SAS Autosystemtechnik GmbH expected to be the primary contributor. Operating profitability has improved in Q1 FY24 and Q4 FY23 as compared to previous fiscal and is expected to remain between 9-10% in the medium term, driven by sharing of inflationary costs with OEMs, scale up of organic capacity expansion completed over the last few years, easing of commodity & energy prices and higher margin acquisitions contributing to accruals. Continued diversification of revenues with increasing contribution from APAC region, healthy orderbook and strong market position in its product segments will drive SAMIL’s organic growth in the medium term while announced acquisitions should concurrently contribute to inorganic growth, though demand in certain geographies may remain muted in the medium term.
SAMIL is expected to continue to undertake M&As in the medium term. However, based on established track record of acquisitions of SAMIL, the acquisitions are expected to be primarily driven by customers’ requirement with prudent funding philosophy. Though, with improvement in profitability leading to higher accruals should reduce dependence on debt for acquisitions, any significant debt funded acquisition will continue to remain a key monitorable.
SAMIL’s organic capex intensity is expected to low over the medium term as production volumes are yet to reach pre-pandemic levels. Annual capex is expected to remain at around Rs 3300 crore in fiscal 2024 and in similar or slightly higher range in the medium term and is expected to be funded primarily through internal accruals.
The rating continues to reflect SAMIL's established market position in the automotive components industry, its diversified revenue profile across customers, geographies, and product segments, healthy relationships with global original equipment manufacturers (OEMs), and strong execution track record of successful turnaround of overseas acquired entities. The ratings also reflect the company’s healthy financial profile backed by well-spaced out repayment obligations, and adequate liquidity.
These strengths are partially offset by aggressive acquisition led growth philosophy, moderate albeit reducing, revenue concentration towards Volkswagen Group (VWG, rated 'BBB+/Stable/ A-2' by S&P Global Ratings, comprising of Volkswagen, Audi, Seat, Skoda, and Porsche) and exposure to cyclicality in demand in global automobile industry. |
Analytical Approach For arriving at its ratings, CRISIL has combined the business and financial risk profiles of SAMIL and its subsidiaries, including Samvardhana Motherson Automotive Systems Group B.V (SMRP BV), together referred to as the Motherson group due to the operational and financial linkages among the entities.
Goodwill generated on acquisition of PKC was amortised over a period of 5 years (from April 2017 to March 2022). From FY2023, entire goodwill has been knocked off from net worth.
Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation. |
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. Moreover, 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. Recent completed and announced acquisitions such as SAS Autosystemtechnik GmbH, Yachiyo Industry and Dr Schneider are likely to strengthen its position in modules and polymer segments globally.
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 Motherson group in establishing a global presence across key product segments.
Further, SAMIL’s customer and geographic diversity has been improving with its focus being 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 34% in FY2023 from 51% in fiscal 2018 and exposure to Asia Pacific, North America and South America has simultaneously increased. Integration of SMRC has further driven the improvement in geographic and customer diversity. Product diversity has also continued to improve with contribution from wiring harness increasing to around 29% in FY2023 from 16% in FY2016 and concurrently, revenues from modules and polymer products have reduced to around 46% in FY2023 from 56% in FY2016.
Global light vehicle sales growth is expected to remain subdued between 4-6% in 2023 and 2024 due to sticky inflation in Europe and interest rate hike across all major economies. However, Indian auto component industry is expected to grow by 9-11% in current fiscal driven by healthy demand from OEMs. This is also expected to lead to similar revenue growth at SAMIL which derived around 34% of its revenues from Europe, 18% in USA, 17% in India while remaining from the rest of the world in FY2023. Furthermore, SAMIL plans to increase share of non-auto business over next five years in identified segments such as lighting and electronics, aerospace, logistics, health & medical and technological & 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 relationships with major global OEMs, on account of its focus on quality and delivery. The group benefits from a sustained inflow of new orders from OEMs, primarily in its major operating subsidiaries, Samvardhana Motherson Peguform (SMP) and SMR. The holding company of the major international operations of the group, SMRP BV’s (rated BB/Stable, by S&P Global Ratings) order book stood at EUR 19.7 billion on March 31, 2023.
SAMIL has a well-diversified global client base in the passenger 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+/Stable' by S&P Global Ratings), Maruti Suzuki India Ltd (rated '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' by S&P Global Ratings), Paccar Inc (rated 'A+/Stable/A1' by S&P Global Ratings), Ford Motor Company (rated 'BB+/Positive' 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 37 acquisitions (completed and announced) 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. PKC has also demonstrated improvement in operating performance since acquisition in March 2017.
Over medium term, overall operating profitability is expected at 9-10%, compared with around 8% in FY2023, owing to revenue growth, cooling off of commodity prices and pass on of previously higher input prices.
Healthy financial risk profile by well-spaced out repayment obligations, and strong liquidity While SAMIL group has funded its acquisitions through a combination of debt, equity and accruals, 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 three years.
The company’s long term repayment obligations stand at around Rs 2,100-3,500 crore per year in the medium term which are expected to either refinanced or be met out of cash accruals expected at more than Rs 5,800 crore per year in the medium term.
Debt protection metrics remain strong with interest coverage estimated at around 8 times in FY2023 as against around 8.8 times in FY2022 on account of higher interest cost due to global increase in benchmark rates. Net debt to EBITDA has reduced to 1.2 times in FY2023 with improvement in profitability. This was owing to controlled organic capex, efficient working capital management as well as cash balances of more than Rs 4000 crore maintained by SAMIL. With improvement in revenues and profitability, the credit metrics are expected to improve over medium term, such as net debt to EBITDA remaining below 1.5 times in the medium term barring any significant debt funded acquisition or capex.
Weakness: 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, more so as it has undertaken significant capex to cater to OEMs through greenfield plants in USA as well as Hungary. Delay in earlier envisaged ramp up of these plants impacted the overall operating profitability in fiscal 2019 and first nine months of fiscal 2020.
Aggressive acquisition-led growth strategy SAMIL has demonstrated high growth through number of acquisitions since 2002. SAMIL is estimated to achieve revenues over Rs 95000 crore in FY2023. However, enhancement of RoCE is expected to be the main criteria for acquisitions. While SAMIL may continue with its aggressive growth strategy over medium term, demonstration of management intent to prioritise sustenance of RoCE at healthy levels over revenue targets will be critical. Though RoCE has remained suppressed in the past 4 fiscals due to moderation in operating margins, capex undertaken for new plants and Covid, it is started to improve from FY2023 and is expected to improve further going forward with expected improvement in profitability.
Moderate, albeit reducing, revenue concentration towards VWG SAMIL's long-term strategy is to ensure that no single customer, country or component contributes more than 10% to the turnover. However, while the customer diversity is improving, VWG remains SAMIL's largest customer. The share of revenues from VWG has reduced to around 21% in FY2023 as against around 33% in FY2018. The share of VWG is expected to reduce with further diversification. Though acquisition of SAS may temporarily increase the share of Volkswagen group in FY2024 and FY2025, it is expected to reduce subsequently. |
Liquidity: Strong Cash and cash equivalents stood at around Rs 4235 crore on June 30, 2023 at consolidated level (mainly in overseas subsidiaries). Fund based working capital limits of Rs 1647 crore remain more than 60% unutilized as on August 31, 2023.
The company’s long term repayment obligations stand at around Rs 2100-3500 crore per year over the medium term. The company has a track record of refinancing of higher cost debt at lower rates in the past. Over medium term, company’s cash accruals is expected to remain above Rs 5800 crore which is expected to be sufficient for repayments. Material acquisitions and funding philosophy will continue to remain as key monitorables. |
Outlook: Positive CRISIL Ratings believes that SAMIL's credit profile may improve driven by improving business risk with increase in scale and continued diversification of revenue profile. Financial risk profile will continue to remain strong driven by substantial networth and strong liquidity profile. |
Rating Sensitivity factors Upward factors:
Downward factors:
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About the Company Samvardhana Motherson International Limited (SAMIL; formerly Motherson Sumi Systems Limited (erstwhile MSSL)), the flagship company of the Samvardhana Motherson group, was incorporated as a JV between erstwhile Samvardhana Motherson International Ltd (erstwhile SAMIL) and SWS in 1986.
On July 02, 2020, board of directors of erstwhile MSSL and erstwhile SAMIL have approved reorganization of business which entails demerger of the domestic wiring harness business from erstwhile MSSL into a new company, with similar shareholding structure as that of MSSL and subsequent merger of erstwhile SAMIL into erstwhile MSSL with the merged entity renamed as SAMIL. SAMIL now holds 100% stake in Samvardhana Motherson Automotive Systems Group BV ('SMRP BV, rated 'BB/Stable' by S&P Global Ratings'). Besides, SAMIL also holds 33.4% stake in the demerged DWH business housed under newly created entity Motherson Sumi Wiring Harness Limited (MSWIL) subsequent to completion of the transaction.
For the three months ended June 30, 2023, SAMIL (consolidated) reported operating income of Rs 22462 crore and a net profit of Rs 648 crore as against operating income of Rs 17654 crore and a net profit of Rs 182 crore for the corresponding period of the previous year. |
Key Financial Indicators (CRISIL Ratings adjusted financials)
*Government grants and subsidies not considered in income |
Any other information: Not applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
% Interchangeable with CC/WCL/CP %% Interchangeable with CC/BG and CEL Limits *Yet to be placed |
Annexure – List of Entities Consolidated
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| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Annexure - Details of Bank Lenders & Facilities | ||||||||||||
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%Interchangeable with CC/WCL/CP
%%Interchangeable with CC/BG and CEL Limits
Criteria Details
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