Detailed Rationale

CRISIL Ratings has reaffirmed its 'CRISIL A1+' rating on the short-term debt and commercial paper programme of Sundram Fasteners Limited (SFL).

 

The company’s revenue is expected to remain flattish at ~Rs 5,700 crore in fiscal 2024 — after growing 16% year-on-year in fiscal 2023 — largely due to lower exports following temporary disruptions in operations of some of its major automotive (auto) original equipment manufacturer (OEM) customers in North America. Domestic sales (~two-thirds of revenue) were also temporarily impacted due to plant closure for a few days following the floods in Chennai in December 2023. With recovery in overseas demand and healthy domestic demand for fasteners and other auto components, revenue is expected to grow 6-8% over the medium term. The company has obtained an order for supply of electric vehicle (EV) components from multiple OEMs in North America. The contract value increased from $250 million to $400 million during fiscal 2024, and it will be completed over six years. Supplies will commence from the second half of fiscal 2025, supporting revenue growth.

 

SFL’s operating profitability remained healthy at 15.5% in fiscal 2023, but slipped from 16.7% in fiscal 2022, largely because of higher raw material cost (mostly, steel and freight). In the nine months through December 2023, operating profitability improved to 15.7% driven by lower-cost steel inventory and tight control over fixed costs. Improved, performance of the overseas subsidiaries also supported profitability. The operating profitability is expected to remain healthy at 15-16% over the medium term.

 

SFL is likely to sustain its strong financial risk profile supported by the moderate debt on its balance sheet and its strong cash generating ability. The company expected to have undertaken capital expenditure (capex) of approximately Rs 230-250 crore in fiscal 2024 and is likely to take up annual capex of ~Rs 350 crore over the medium term for expansion and modernisation. The capex is expected to be funded through internal accruals, keeping debt metrics comfortable. Interest coverage is expected above 25 times and gearing at 0.2-0.3 time over the medium term.

 

The rating continues to reflect the leading market position of SFL in the fasteners industry, its diverse product portfolio and geographic diversity, healthy operating efficiency, and strong financial risk profile. These strengths are partially offset by working capital-intensive operations, and moderate, albeit improving, performance of the overseas subsidiaries.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of SFL and its subsidiaries held directly or indirectly, as the entities share a common management and have significant operational and financial linkages.

 

Please refer to Annexure - List of entities consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

Leading market position in the fasteners segment, diverse product portfolio and wide geographical reach: SFL continues to dominate the domestic fasteners market. It has a healthy revenue mix, with domestic sales (including OEMs and aftermarket) accounting for 65-67% in fiscal 2024 and exports for 30-32% (including subsidiaries). The product portfolio broadly comprises fasteners, metal forms, radiator caps, and automotive pumps and assemblies that find application across various industries such as automotive, wind energy, aerospace, defence, farm equipment and industrial. Established relationships across commercial vehicle (CV), passenger vehicle (PV), tractor and two-wheeler OEMs lend stability to the revenue. Supplies to CV and PV OEMs account for 65-70% of sales, with the balance coming from tractor, two-wheeler and wind energy equipment manufacturers. SFL is gradually diversifying its customer base by enhancing manufacturing of industrial fasteners, including for wind equipment, to reduce dependence on the cyclical auto sector. However, the auto industry will continue to contribute close to 70% of the consolidated revenue of SFL over the medium term, given the company’s strong presence in the segment.

 

Healthy operating efficiency: SFL has maintained strong focus on processes, quality improvement and cost reduction, apart from continuously improving productivity. Implementation of industry-wide best practices, such as Total Quality Management, and internal automation measures have helped improve operating efficiency and meet the rigorous standards of clients. Overseas manufacturing units and established supply chain logistics enable the company to cater to customers on just-in-time basis. Operating profitability was between 16% and 18% during fiscals 2019-2022, and moderated to 15.5% in fiscal 2023 on steep increase in costs. Operating profitability recovered to 15.7% in the first nine months of fiscal 2024. Shift in the product mix towards more profitable products such as hubs and shafts and EV components which comprise critical components for vehicles, compared with traditional fasteners, improving contribution from subsidiaries and stable raw material, energy and freight cost will keep operating profitability at 15-16% over the medium term.

 

Strong financial risk profile: SFL’s financial risk profile is expected to remain strong, supported by healthy cash accrual and prudent funding of capex, even as working capital intensity remains high. Net worth is estimated be over Rs 3,300 crore in the near term, with gearing expected to be less than 0.2 times. Interest coverage estimated to be over 25 times in the near term. 

 

Capex of approximately Rs 230-250 crore in the near term, is estimated to have been funded mainly through internal accrual. SFL is likely to undertake capex of close to Rs 1,400 crore between fiscals 2025 and 2028 (about Rs 350 crore per annum) and has signed a memorandum of understanding with the Tamil Nadu government. The company plans to enhance its new product development, especially on the EV side, and add capacity across existing lines. These new age products are expected to improve revenue diversity and lend more stability to profitability. Given the expected healthy annual cash accrual of over Rs 550 crore over the medium term, the capex needs will largely be funded through accrual, with debt likely to increase on account of rising working capital needs. Debt metrics will remain comfortable, with gearing unlikely to cross 0.3 time. Any sizeable debt-funded acquisition, materially impacting the debt metrics, will be monitorable.

 

Weaknesses:

Working capital-intensive operations: Due to the variety and different sizes of products manufactured, SFL maintains large inventory compared with peers in the auto components space. Raw material imports and increasing exports (which have a longer lead time) add to the working capital needs. Consequently, gross current assets are estimated at 130-140 days as on March 31, 2024, and are expected at similar levels over the medium term.

 

Modest, albeit improving, performance of subsidiaries: While the standalone performance of SFL has improved steadily since fiscal 2019, its overall performance was tempered by modest contribution of its subsidiaries, especially those overseas. However, the performance of the subsidiaries has improved since fiscal 2023. The subsidiaries are expected to contribute 13-14% to the consolidated revenue in fiscal 2024, and 10-12% to consolidated operating profit (7-8% in fiscal 2023).

 

Performance of the Chinese subsidiary, which was under pressure in the first half of fiscal 2023 due to severe Covid restrictions, has recovered from the second half of fiscal 2023 and in fiscal 2024. Performance of the UK subsidiary, Cramlington Precision Forge Ltd, which was also impacted in fiscal 2022, recovered in fiscal 2023 and remained stable in fiscal 2024. Performance of TVS Upasana, the domestic subsidiary, also stabilised in fiscal 2024 and should improve in fiscal 2025.

Liquidity: Strong

SFL has strong liquidity with healthy annual cash generation of over Rs 550 crore per annum, sufficient to meet annual debt obligation of Rs 70-94 crore through fiscal 2026 as well as annual capex of close to Rs 350 crore expected over the next four fiscals. The company has adequate cushion in bank limits of around Rs 1,850 crore, as they were utilised only 15% on average over the 12 months ended March 31, 2024. Cash surplus is expected to be moderate, at Rs 80-100 crore.

Rating Sensitivity Factors

Downward Factors

• Steady decline in revenue and in operating profitability to below 11-12%, also impacting the cash generation.
• Large, debt-funded capex/acquisition or stretch in the working capital cycle, impacting the financial risk profile and debt metrics.

 

ESG Profile of SFL:

CRISIL Ratings believes that the Environment, Social, and Governance (ESG) profile of SFL supports its already strong credit risk profile.

 

The auto components sector has a moderate impact on the environment owing to moderate emissions, water consumption and waste generation. The sector’s social impact is also moderate considering the impact of operations on employees.

 

SFL is focusing on mitigating the environmental and social risks.

 

Key ESG highlights:

• The company has maintained focus on conservation of energy. It sets targets for sourcing mix and cost every year and makes action plans.
• Share of energy from renewable sources improved to 39% in fiscal 2023. Further addition to roof-top solar power capacity is planned in fiscal 2025.
• Gender diversity has been improving and women accounted for 6.5% of the workforce in fiscal 2023.
• No fatal accidents were observed by the company during fiscal 2023, which demonstrates its focus on employee health and safety.
• The governance structure is characterised by 50% of the board comprising independent directors and split in the chairman and CEO positions. The company has a committee at the board level to address investor grievances and put out extensive disclosures.

 

There is growing importance of ESG among investors and lenders. The commitment of SFL to ESG principles will play a key role in enhancing stakeholder confidence, given the share of market borrowing in its overall debt and access to domestic and foreign capital markets.

About the Company

SFL, led by Mr Suresh Krishna, is a leading auto components supplier with seven manufacturing facilities in Tamil Nadu, one in Puducherry, one at Sri City in Andhra Pradesh and one each at Medak in Telangana and Pantnagar in Uttarakhand. The company has key operating subsidiaries in India, China and the UK. Its product range comprises fasteners, powertrain components, sintered metal products, iron powder, cold extruded parts, radiator caps, water pumps, oil pumps, hot forged and machined parts, cold forged and machined parts and wind energy components. Key overseas customers include OEMs in China, the US, Germany, the UK, Brazil, Italy and France in Europe.

 

As on April 24, 2024, the promoter and promoter-held investment companies held 48.51% stake in SFL, mutual funds 14.58%, insurance companies 3.87% and foreign portfolio investors 12.38%, with the balance held by public and others.

 

For the nine months ended December 31, 2023, SFL reported a consolidated profit after tax (PAT) of Rs 391 crore (Rs 373 crore in the corresponding period of fiscal 2023), on net revenue of Rs 4,200 crore (Rs 4,215 crore).

Any other information: Not Applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs.Crore)	Complexity level	Rating assigned with outlook
NA	Short Term Debt	NA	NA	7-365 days	25	Simple	CRISIL A1+
NA	Commercial Paper	NA	NA	7-365 days	100	Simple	CRISIL A1+