Detailed Rationale

CRISIL Ratings has reaffirmed its 'CRISIL AA-/Stable/CRISIL A1+’ rating on the bank facilities and debt programmes of Sundaram-Clayton Limited (SCL). 

 

After a weak first quarter in the fiscal 2021, operations recovered in subsequent quarters as strong pent up demand from domestic and export original equipment manufacturers (OEM’s). Overall revenue decline was therefore limited to 11% in fiscal 2021 over previous fiscal. Strict cost control measures resulted in operating margins improving to ~13% in fiscal 2021 compared to ~11% in fiscal 2020. Consequently the operating profits for fiscal 2021 was 5% higher than that in fiscal 2020 despite the pandemic induced disturbances.

 

Domestic business performance will once again face some moderation in the first quarter of fiscal 2022, due to localized lockdowns and OEM’s preponing maintenance shutdowns, even as exports remain healthy. Nonetheless, CRISIL expects SCL’s overall business performance to be better in fiscal 2022 in line with demand from OEM’s in the domestic and export markets, coupled with additional business from new clients. Cost cutting initiatives are expected to continue to bear result, and better revenue growth, result in operating margins sustaining at 11-13%.

 

SCL’s financial risk profile and liquidity are expected to remain healthy, despite moderation in cash accruals, owing to planned capital expenditure and prudent working capital management.

 

CRISIL's ratings continue to reflect the company’s diverse customer base across automobile sub-segments and geographies, and adequate operating efficiency. These strengths are partially offset by high revenue dependence on the cyclical CV segment, and on OEMs, which limits pricing power; and exposure to increasing competition.

Analytical Approach

For arriving at its rating, CRISIL has considered SCL’s standalone business and financial risk profiles, and has not combined the business and financial risk profiles of TVS Motor and other investment subsidiaries as they are in different business lines. Need-based financial support has been factored in case of investment subsidiaries. Also, financial flexibility arising from sizeable value of stake in TVS Motor Co. Ltd (TVS Motor) has been factored into the rating assessment of SCL.

 

In fiscal 2013, SCL entered into a non-cancellable sale and lease-back agreement for assets of Rs. 840 million. The assets comprise customised machinery. CRISIL has, therefore, considered the transaction as a financial lease, and capitalised the present value of SCL’s future lease rental obligations as fixed assets. Accordingly, the lease rental payable every year has been bifurcated into interest and depreciation for analysing SCL’s financials.

Key Rating Drivers & Detailed Description

Strengths

* Diverse customer base, spread across automotive sub-segments and geographies

SCL’s customer base is diverse, spread across sub-segments of the auto sector, such as two-wheelers, passenger cars, and CVs, and across geographies. Healthy demand growth from two-wheeler and domestic CV segment in fiscal 2018, and for most of fiscal 2019, has enabled good growth in domestic volumes for SCL, besides offsetting impact of sluggish demand from passenger vehicle OEMs. Albeit, moderation in aluminium prices in the recent past (which is a pass through) impacted realisations. Higher aluminium prices supported revenues in fiscal 2021. The company has enhanced its production capacity, including for passenger OEM customers, which has enabled it to increase market share during the recovery in fiscal 2021, and benefit of same is expected to continue in fiscal 2022 also.

 

Healthy share of exports also enhances SCL’s revenue and geographic diversity. While the company’s share of export revenue declined to 35-37% in fiscals 2017 and 2018, from over 40% in fiscal 2016 due to sluggish demand from European customers, better demand from US markets helped exports recover to over 40% of revenues in fiscal 2019 which has continued in fiscals 2020 and 2021 also. Exports have picked post the first quarter of fiscal 2021, with pick-up in demand for commercial vehicles in the North American markets.

 

Presence across sub-segments and geographies, partially offsets the impact of cyclicality inherent in the business. The diverse customer base and increased demand from export as well as domestic customers, and increased contribution from recently expanded capacities should support revenue growth over the medium term.

 

* Adequate operating efficiencies

Operating profitability has been largely stable at 10-13% since fiscal 2014 (except a temporary blip in fiscal 2018), backed by ability to pass on changes in raw material prices onto end customers. Implementation of industry-wide best practices, such as Total Quality Management, enterprise resource planning and other internal automation measures, help products meet the rigorous standards of the top global auto manufacturers. Despite limited technological collaboration, SCL has maintained steady business with most customers, on the back of its adequate operating capabilities. During fiscal 2020, SCL has implemented proactive cost optimization measures in low cost automations, employee consolidation, recycling of materials etc. which has facilitated better cost management during the downturn and weather the impact of pandemic related disruptions.

 

* Adequate financial risk profile and healthy financial flexibility

SCL’s financial risk profile is adequate marked by healthy net worth (estimated at over Rs 700 crore in fiscal 2021), comfortable capital structure and debt protection metrics. SCL had undertaken large capital expenditure in fiscals 2018 and 2019 which was partly funded through debt. This in turn led to moderation in capital structure with gearing increasing to 1.06 times as of March 31, 2019. However, with completion of the large capex in fiscal 2019 and only nominal capital spends expected over the next two fiscals, gearing should remain less than 1 time over the medium term, also supported by progressive repayment of debt obligations. Debt protection metrics like interest cover and net cash accruals to total debt (NCATD) ratios should also sustain at over 4-5 times and 0.15-0.20 times respectively over the medium term (as against estimation of to 5.5 times and 0.15times respectively in fiscal 2021). Besides, strong re-financing capabilities arising from SCL’s investment in TVS Motor (market value of over Rs 17,300 crore as on May 18, 2021) enhance its financial flexibility, while steady dividend flows from TVS Motor support SCL’s cash accruals, besides partially mitigating impact of volatile business cash flows.

 

SCL has also infused funds in its US based step-down subsidiary, Sundaram Holding USA Inc (SHUI) during the fiscal 2021 to support operations and meet debt obligations. SHUI had negligible operations during the year due to pandemic related disruptions in the US market. However, operations are expected to start in the first quarter of fiscal 2022, and is expected to break even by the next fiscal. SCL is expected to support the company in fiscal 2022 also by infusing moderate equity to meet debt repayments.

 

Weaknesses

* Significant exposure to cyclical CV segment:

SCL has a high exposure to the CV segment given that it almost derives its entire export revenues from the CV segment, although the domestic customer base is spread across automotive industry sub-segments. Any cut in production schedules by key CV customers could result in a decline in capacity utilisation, and return on capital employed (RoCE), especially with specific lines being devoted to key customers.

 

While SCL has enhanced its production capacity and hence will be able to manage sudden surge in offtake by customers over the medium term, it remains vulnerable to cyclical offtake mainly by the CV segment, which could affect both revenue and profitability.

 

* Susceptibility to pricing pressure from OEMs

SCL is highly dependent on offtake by Tier-I auto component suppliers as well as OEMs, in both the domestic and export markets. High exposure to OEMs exposes the company to significant pricing pressure. While SCL is able to pass on key raw materials costs to its customers, it has limited flexibility in passing on increase in conversion costs like power costs, employee costs etc., although the continuous cost control measures and process improvements over the years have partly mitigated the impact.

Liquidity: Strong

Liquidity is strong largely supported by steady cash accrual (estimated annually at over Rs. 125-140 crore) and adequate headroom in bank lines (average utilization of about 25% on sanctioned bank limits of Rs 861 crore over the last 12 months ended March 2021). SCL is the majority stakeholder in India’s third-largest motorcycle manufacturer, TVS Motor; with market value of SCL’s investments in TVS Motor (about Rs 17,300 crore as on May 18, 2021) substantially enhancing financial flexibility.

 

Accruals in fiscal 2022 may be tightly matched with repayment obligations of ~Rs 130 crore and will require part refinancing. Refinancing risk, however, is low as demonstrated earlier as well CRISIL Ratings believes SCL is unlikely to dilute its stake in TVS Motor; the market value of the stake will continue to underpin SCL’s financial flexibility, in addition to providing steady dividend income. However, this enhances its fund raising ability.

Outlook: Stable

CRISIL Ratings believes that despite temporary business challenges which are expected to continue in fiscal 2022, SCL’s credit risk profile will continue to remain supported by its diversified business risk profile and improving financial risk profile. Moreover, its financial flexibility remains strong, supported by material market value of its holdings in TVS Motor.

Rating Sensitivity Factors

Upward Factors:

• Revenue growth of 10-12% on y-o-y basis driven by increased market share in both domestic and overseas markets, and adequate profitability, leading to healthy cash generation.
• Prudent capital spending and working capital management, which along with routine debt repayment and better cash accruals would strengthen debt  metrics gearing below 0.7-0.8 times

 

Downward Factors:

• Further deterioration in revenues by over 10-15% owing to continued slowdown in demand from domestic and export markets, and decline in operating margins to less than 6-8% owing to sub-optimal capacity utilization and higher overheads
• Large debt funded capex or acquisition or significant stretch in working capital levels denting capital structure; for instance, gearing deteriorating to over 1.6-1.8 times
• Sizeable reduction in shareholding in TVS Motor, affecting financial flexibility

About the Company

SCL was incorporated in Chennai in 1962 and is part of the TVS group led by Mr. Venu Srinivasan. The company is a leading manufacturer of aluminium die-casting components. It supplies to major automotive OEMs including TVS Motor, the Cummins group, the Volvo group, Hyundai Motor India Ltd (rated ‘CRISIL A1+), Ford Motors, the Daimler group, and to component suppliers such as Wabco India Ltd and the Visteon group. SCL was set up by the TVS group and the UK-based Clayton Dewandre Holdings Ltd. The TVS group holds 75% stake in SCL, with the balance held by mutual funds (12%), public, and others.

 

Until fiscal 2007, SCL’s financials included the CV brakes business. With effect from March 28, 2008, the Madras High Court approved the de-merger of the brakes business into a separate company, Wabco India Ltd. The non-brakes business (aluminium die-casting) and investments in the TVS group entities remained with SCL. The company has its main die-casting component production facilities at Padi, Mahindra City, and Oragadam in Chennai, and Belagondapalli at Hosur, in Tamil Nadu. During fiscal 2012, SCL restructured its businesses, hiving off the non-automotive businesses into its erstwhile subsidiary, Sundaram Investments Ltd (SIL).

 

For the fiscal 2021, SCL’s profit after tax (PAT) was Rs. 77 crore on net sales of Rs. 1,177 crore, against PAT of Rs. 69 crore on net sales of Rs. 1,324 crore for the corresponding period of previous fiscal.

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of Instrument	Date of Allotment	Coupon Rate (%)	Maturity Date	Issue Size (Rs.Cr)	Complexity Level	Rating Assigned with Outlook
INE105A08014	Non Convertible Debenture	18-Aug-2020	7.65%	18-Aug-25	100	Simple	CRISIL AA-/Stable
NA	Bank Guarantee	NA	NA	NA	6	NA	CRISIL A1+
NA	Cash Credit#	NA	NA	NA	210	NA	CRISIL AA-/Stable
NA	External Commercial Borrowings	NA	NA	Feb-2024	172.56	NA	CRISIL AA-/Stable
NA	FCNR (B) Long Term Loan	NA	NA	Sep-2022	78.52	NA	CRISIL AA-/Stable
NA	Letter of Credit	NA	NA	NA	75.00	NA	CRISIL A1+
NA	FCNR (B) Long Term Loan	NA	NA	Dec-2027	140.00	NA	CRISIL AA-/Stable
NA	Rupee Term Loan	NA	NA	Dec-2022	100	NA	CRISIL AA-/Stable
NA	Commercial Paper	NA	NA	7-365 days	100	Simple	CRISIL A1+

#Interchangeable with packing credit in foreign currency (PCFC)/Bills Discounting/Short Term Loans