Detailed Rationale

CRISIL Ratings has assigned its ‘CRISIL AA-/Stable/CRISIL A1+’ ratings to the bank facilities and non-convertible debentures (NCD) of Sundaram-Clayton Ltd (SCL).

 

The ratings reflect SCL’s diverse customer base across automobile sub-segments and geographies, above average operating efficiency, and adequate financial risk profile. These strengths are partially offset by high revenue dependence on the cyclical commercial vehicle (CV) segment, and on OEMs, which limits pricing power; and exposure to increasing competition. Also, the loss making operations of wholly owned subsidiary, Sundaram Holdings USA Inc (SHUI) are also a limiting factor. SHUI is expected to breakeven at operating profit level by fourth quarter of fiscal 2024 supported by turnaround in operations. 

 

Erstwhile SCL (pre – demerger) held shares in TVS Motor Company Limited (TVSM) and aluminium die-casting operations. SCL executed a composite scheme of arrangement which was approved by National Company Law Tribunal (NCLT) on March 6, 2023. Subsequently, on August 11, 2023,the aluminium die-casting business (manufacturing operations) in erstwhile SCL and its subsidiaries, was demerged into a separate entity, Sundaram Clayton DCD Ltd (SCLDCD). SCLDCD was again renamed as SCL in August 2023, and the erstwhile SCL was renamed as TVS Holdings Limited (THL). THL holds 50.26% stake in TVS Motor Company Ltd, India’s third largest two-wheeler manufacturer, and other group entities. 1 equity share of SCL was issued to the shareholders for every 1 equity share held in THL such that both have mirror shareholding

 

The assets and liabilities which was on the books of the combined entity which are related to manufacturing operations was moved to SCL.

 

In fiscal 2023, standalone SCL’s manufacturing revenues grew by 22% driven by healthy domestic demand in all segments and stable export demand, as well as higher realizations in keeping up increased aluminium prices. Better operating leverage, pass through of input price increases and continuation of past cost rationalization measures have helped SCL sustain the standalone operating margins at 13% compared to 14.3% in fiscal 2022 . At a consolidated level, the revenues registered a growth of 25% driven by incremental contribution from SHUI which became wholly owned subsidiary of SCL from September 2022. Consolidated operating profitability was constrained at ~9.6% due to operational losses at SHUI .

 

Over the medium term, revenue growth is expected to be at 5-8% driven by healthy domestic volumes, amid moderation in realisations in line with aluminium prices, and almost stable export demand. Consolidated operating profitability is expected to remain constrained at 9-10% in fiscal 2024 as well driven by  operational losses at SHUI. The operating profitability will gradually improve to 11-12% in fiscal 2025, supported by turnaround in operations at SHUI which is expected to breakeven at operating profit level by fourth quarter of fiscal 2024.

 

The financial risk profile is  adequate, despite moderating due to losses at SHUI and partly debt funded capital spending. Debt protection metrics are at moderate levels, with gearing of ~1.4 times on March 31, 2023, and interest cover of ~4 times and debt / earnings before interest, depreciation, tax, and amortization (EBITDA) of ~5 times in fiscal 2023. SCL on consolidated basis, will incur capex of Rs.100-120 crore per annum for debottlenecking capacity, and routine repairs and maintenance, and borrow funds for investing in SHUI to fund the latter’s operational losses and debt repayments. Until SHUI turns around and contributes meaningfully to profits, limited improvement in debt metrics is expected over the medium term. However, any additional sizeable debt funded capex, including for expansion, undertaken by SCL can delay the same, and will be a key monitorable.

Analytical Approach

For arriving at the rating, CRISIL Ratings has considered consolidated SCL and SHUI.

 

SCL is also expected to provide managerial, organizational, and financial support to SHUI, which is in similar line of business.

 

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:

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

SCL’s die casting business customer base is diverse, spread across sub-segments of the auto sector, such as two-wheelers, passenger cars, and commercial vehicles (CVs), and across geographies. Healthy demand growth from two-wheeler and domestic CV segment in fiscal 2018, and for most of fiscal 2019, 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 realizations. Higher aluminium prices have supported revenues since 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 continuing since fiscal 2022.

 

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 45% of revenues from fiscal 2021 onwards and share of exports is expected to sustain at ~ 40-45% in the near to medium term.

 

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.

 

• Above average 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. Benefit of these has helped SCL maintain standalone operating margins at 12 - 13% between fiscal 2021-23. While the standalone operating margins will continue to remain healthy at 12-13% over the medium term as well, the consolidated operating margins are expected to be slightly lower at 10-12% over the medium term, though consolidated operating margins will range between 9-10% in fiscal 2024, mainly due to losses at SHUI. SHUI is expected to report operational profits in fiscal 2025.

 

• Adequate financial risk profile and healthy financial flexibility

Financial risk profile is  adequate, despite moderating due to losses at SHUI and partly debt funded capital spending. Debt protection metrics are at moderate levels, with gearing of ~1.5 times at March 31, 2023, and interest cover of ~4 times and debt /EBITDA of ~5 times in fiscal 2023. SCL on consolidated basis, will incur capex of Rs.100-120 crore per annum for debottlenecking capacity, and routine repairs and maintenance, and borrow funds for investing in SHUI to fund the latter’s operational losses and debt repayments. SCL’s plant at Padi, Chennai, is operating at close to optimal capacity, and has limited scope to add material capacity. Given debt metrics are already at moderate levels, any sizeable debt funded capex will limit material improvement in debt metrics, even if SHUI turns around.

 

With the demerger, the stake in TVSM, which was earlier with SCL, has been  retained in the holding company, THL . Nonetheless, due to common promoters and holding structures, CRISIL Ratings expects both companies to benefit from the holding in TVSM.  CRISIL Ratings believes THL is unlikely to dilute its stake materially in TVSM below 50% in the medium term. Any significant dilution in stake in TVSM or material decline in market value of holding, will remain a rating monitorable. 

 

Weakness:

• Significant exposure to cyclical CV segment:

The die-casting business has 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 higher capacity, the die-casting business will be able to manage sudden surge in offtake by customers over the medium term. That said, it remains vulnerable to cyclical offtake mainly by the CV segment, which could affect both revenue and profitability.

 

• Susceptibility to pricing pressure from OEMs

The die-casting business 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.

 

• Higher than anticipated losses in USA Subsidiary, SHUI

SHUI initially was setup as subsidiary of SACL, a wholly owned subsidiary of TVSM with SACL holding 56% and SCL holding 44%. SHUI is primarily involved in die casting business in Delaware, USA, and began operations from fiscal 2021. Over the years, SCL increased its stake to 49%, and then also bought out 51% stake in SHUI from SACL, following which SHUI became the wholly owned subsidiary of SCL.

 

SHUI has been making operational losses for the past 3 fiscals. The ramp up was delayed due to Covid-19 and subsequent moderation in demand from OEMs. While losses were expected to decline materially in fiscal 2024 and the company was expected to turnaround, SHUI is expected to report losses of Rs.60-80 crore at operational level. The ramp up in operations and breakeven at operational level is expected by end of fiscal 2024, or in first half of fiscal 2025, , linked to demand from US based OEMs. Timely ramp up of revenue levels, and turnaround of operations will remain a monitorable.

Liquidity: Strong

Liquidity is strong for SCL largely supported by steady cash accrual (estimated annually at over Rs. 120-140 crore) and adequate headroom in bank lines (Rs.805 crores of sanctioned limits including unsecured limits).  Even though the flexibility due to stake held in TVSM is not available directly post demerger, the flexibility comes from the promoter level who retain the ability to support SCL, if required. Consolidated long term repayment obligations are Rs.168 crore in fiscal 2024 and Rs. 200-210 crores in fiscal 2025, which may require part refinancing. In this respect, SCL enjoys healthy relationship with lenders, and has demonstrated its able to raise funds at attractive coupon rates. 

Outlook: Stable

CRISIL Ratings expects SCL will continue to witness steady improvement in its business performance, supported by healthy off-take especially from domestic automotive original equipment manufacturers for its die-cast components, adequate operating efficiencies, and turnaround of its US operations from next fiscal. Its financial risk profile will  remain average due to capital spending plans, and losses at SHUI.

Rating Sensitivity Factors

Upward factors:

• Steady revenue growth on y-o-y basis driven by increased market share in both domestic and overseas markets and turnaround of SHUI, along with adequate operating profitability of over 13%, leading to healthy cash generation.
• Sustenance of adequate debt metrics (Gross debt/EBITDA below 2 times), supported by monetization of assets, despite sizeable capex plans.

 

Downward factors:

• Sharp decline in revenues, owing to  slowdown in demand from domestic and export markets, or due to delay in ramp up of operations in US subsidiary leading to decline in operating margins to less than 8-9%.
• Large debt funded capex or acquisition or significant stretch in working capital levels further denting key debt metrics.
• Change in stance of support, if required, post movement of stake in TVSM to THL.

About the Company

SCL was incorporated in Chennai in 1962. The company is a leading manufacturer of aluminium die-casting components. It supplies to major automotive OEMs including TVSM, the Cummins group, the Volvo group, Hyundai Motor India Ltd (rated ‘CRISIL AAA/Stable/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. 

 

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).

 

In August 2023, the aluminium diecasting business of erstwhile SCL was demerged into a separate entity, Sundaram- Clayton DCD Limited (SCL DCD) which was further renamed as SCL and erstwhile SCL was renamed as TVS Holdings Limited (THL). THL  retained the investments in TVSM (earlier with SCL) and another promoter entity, Emerald Haven Realty Limited (EHRL). The demerger was done through an elaborate scheme of arrangement.

Key Financial Indicators

As on/for the period ended March 31	Unit	2023*	2022*
Revenue	Rs.Crore	2043	1690
Profit After Tax (PAT)	Rs.Crore	(15)	67
PAT Margin	%	-0.7	4.0
Adjusted debt/adjusted networth	Times	1.41	1.26
Interest coverage	Times	3.75	5.46

*based on provisional restated SCL financials; SHUI is consolidated from September 2022

Any other information: Not applicable