| Sundaram-Clayton Limited | ||||||
| Rated amount enhanced | ||||||
| Rating Action | ||||||
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| 1 crore = 10 million | ||||||
| Refer to annexure for Details of Instruments & Bank Facilities | ||||||
| Detailed Rationale |
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CRISIL has reaffirmed its ratings on the bank facilities of Sundaram-Clayton Limited (SCL) at 'CRISIL AA-/Stable/CRISIL A1+'. |
| Analytical Approach |
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For arriving at the 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 and manufacturing subsidiaries as no material distress support is expected to be provided to subsidiaries. Need-based investment in subsidiaries to extent of holding has been factored into the rating assessment. |
| Key Rating Drivers & Detailed Description |
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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, a moderation in aluminium prices in recent months (which is a pass through) has impacted realisations. The company has recently enhanced its production capacity, including for passenger OEM customers, which should contribute to revenues from fiscal 2020. Albeit, some temporary volatility in domestic revenues is possible in the last quarter of fiscal 2020 and first quarter of fiscal 2021, due to migration of vehicles to BS VI norms, which will increase costs to consumers. Healthy share of exports also enhance 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. However, export growth in fiscal 2020 is expected to be moderate due to a gradual moderation in CV growth rates in the USA, and continued muted demand from Europe. 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 9-11.5% since fiscal 2010 (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. * Moderate, though improving financial risk profile, and healthy financial flexibility The company's financial risk profile moderated in fiscal 2018, due to , material air-freight costs. While operations normalised in fiscal 2019, impact of the large and partly debt funded capex on since fiscal 2018, impacted key credit metrics in fiscal 2019 also. For instance, gearing and ratio of net cash accrual to total debt are estimated at 1.0 time and 0.2 times respectively in fiscal 2019, compared with 0.5 times and 0.3 times respectively in fiscal 2017. These metrics are expected to gradually improve over the medium term, supported by steady cash generation, prudent capex and working capital management, besides repayment of ~Rs.200 crore of long term debt in fiscals 2020 and 2021. Strong re-financing capabilities arising from SCL's investment in TVS Motor 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. Weakness * 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 |
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Liquidity is adequate post restoration of operations, largely supported by steady cash accrual (estimated annually at over Rs.180 crores) and large unutilized bank lines. Accruals, supported by steady dividend flows from TVS Motor, will remain adequate for servicing the debt obligations of ~Rs 200 crore in fiscals 2020 and 2021. Fund-based bank limit of Rs 802.5 crore was utilized at an average of 44% over the 12 months through November 2018, providing significant headroom to meet short-term needs. |
| Outlook: Stable |
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CRISIL believes SCL's business risk profile will benefit from the expected increase in revenues from expanded capacities, which will help offset a possible moderation in export growth from fiscal 2020 onwards. The company's moderate financial risk profile is also expected to gradually recover, due to steady cash accruals, progressive debt repayment, and moderation in fund requirement for capex and working capital. |
| About the Company |
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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. |
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Any other information: Not applicable |
| Note on complexity levels of the rated instrument: CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments. |
| Annexure - Details of Instrument(s) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
* Interchangeable with cash credit |
| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| All amounts are in Rs.Cr. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annexure - Details of various bank facilities | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
* Interchangeable with cash credit | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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