| Sundram Fasteners Limited | ||||
| Rating reaffirmed at 'CRISIL A1+ ' | ||||
| Rating Action | ||||
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| 1 crore = 10 million | ||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has reaffirmed its 'CRISIL A1+' rating on the short-term debt and commercial paper programme of Sundram Fasteners Limited (SFL).
SFL’s performance was healthy in fiscal 2022 with revenue growth of 36% compared to previous fiscal driven by healthy offtake from domestic automobile original equipment manufacturers (OEMs) across segments, robust exports demand and healthy replacement demand. Consolidated operating profitability declined to 17% in fiscal 2022, from 18.4% in fiscal 2021 driven by higher raw material costs and cost of logistics.
SFL’s performance is expected to improve in fiscal 2023 driven by better domestic and export demand, supported by the company’s strong market position and diverse presence across geographies and vehicle segments. Operating profitability may be slightly impacted due to prevailing higher input costs. Input prices are expected to soften in second half of fiscal 2023 which will mitigate the impact on profitability. Over the medium term, operating margins are expected to be maintained at 16-18% driven by healthy business levels, healthy contribution of exports and improving operating efficiencies.
Financial risk profile continues to be strong with healthy accruals of over Rs 600 crore, more than sufficient to meet capex and repayment obligations. Capex spends for next two fiscals is also estimated at around Rs 350-400 crore each and will largely be met through cash accruals. Hence, SFL’s debt metrics will continue to remain at comfortable levels.
The ratings continue to reflect SFL's leading market position in the fasteners industry, revenue diversity, healthy operating efficiency, and strong financial risk profile. These rating strengths are partially offset by working capital-intensive operations, and moderate, albeit improving profitability of overseas subsidiaries. |
Analytical Approach For arriving at its rating, 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 operate with significant operational and financial linkages.
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:
SFL dominates the domestic fasteners market accounting for a sizeable market share. Revenue mix is healthy, with domestic sales (including OEMs and aftermarket) accounting for ~65% in fiscal 2022, and exports bringing in ~35% (including subsidiary operations) Product portfolio broadly comprises fasteners, metal forms, radiator caps, and automotive pumps and assemblies. Established relationship across commercial vehicles, passenger vehicles, tractors and two-wheeler original equipment manufacturers (OEM) lends stability to revenues. SFL is also slowly diversifying its customer base by manufacturing of industrial fasteners to reduce dependence on the cyclical auto sector.
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, other internal automation measures, improve operating efficiencies and help products meet the rigorous standards of the clients. Having manufacturing units abroad, and established supply chain logistics enables the company to cater to customers on 'just-in-time' basis. Operating margins have averaged between 16% to 18% over fiscals 2018-2021. Additionally, the shift in product mix towards more profitable products like hubs and shafts, compared with traditional fasteners, is expected to support profitability.
Financial risk profile has strengthened over time, supported by healthy cash accrual, prudent funding of capex and notwithstanding high working capital intensity. Networth and gearing was healthy estimated at ~Rs 2600 crore as on March 31, 2022 and 0.29 time respectively.
Capex was moderate at around Rs.146 crore in fiscal 2022 and funded through accruals. Supported by healthy cash generation and progressive debt repayment, debt metrics continued to remain comfortable – interest cover was over 29 times in fiscal 2022.
Capex is expected to be higher at around Rs 350-400 crore each for next 2 fiscals on a consolidated basis as company looks to expand new products at existing facilities. These products are expected to further improve diversity in revenues. Nonetheless, healthy cash generation should help fund the capex and incremental working capital needs, keeping debt metrics at comfortable levels.
Weaknesses:
Due to the large number and different sizes of products manufactured, inventory levels are higher, relative to its peers in the automotive component space. Besides, raw material imports and increasing export (longer lead time) also contribute to high working capital needs. Consequently, gross current assets were 141 days as on March 31, 2022, and are expected to continue at the same levels over the medium term.
Even as SFL's standalone performance had been continuously improving till fiscal 2019, its overall performance was partially tempered by modest contribution of its subsidiaries, especially those overseas. The subsidiaries contributed ~15% to the consolidated revenues in fiscal 2022; however, the contribution of the subsidiaries to the consolidated profitability was at ~9% in fiscal 2022.
In fiscal 2018, for example, the UK subsidiary's performance witnessed some headwinds due to volatile demand conditions in its home markets, which is now improving. SFL's initiatives have helped improve performance of its Chinese subsidiary and domestically based TVS Upasana, especially since fiscal 2019. However, in fiscal 2022 performance in Chinese subsidiary was impacted due to power crisis in China & performance of TVS Upasana was impacted due to exposure to 2W segment which degrew in the past fiscal. Subsidiaries on a whole are expected to continue to remain profitable albeit contribution is expected to be moderate. |
Liquidity: Strong SFL has strong liquidity with accruals of over Rs 600 crore over the medium term which shall be sufficient to meet repayment obligations of ~Rs 75-90 crore and capex requirements. The company also has adequate cushion in bank limits of around Rs 1800 crore, utilized to the tune of ~15% on an average over the 12 months ended March 2022. |
Rating Sensitivity factors Downside Factors:
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About the Company SFL led by Mr Suresh Krishna, is a leading automotive component 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 one operating subsidiary in India, and one each, in China and the UK. |
Key Financial Indicators (consolidated)
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Any other information: Not applicable |
| Note on complexity levels of the rated instrument: CRISIL Ratings' complexity levels are assigned to various types of financial instruments. The CRISIL Ratings' complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL Ratings' 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)
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Annexure – List of entities consolidated
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| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Criteria Details
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