Rating Rationale
May 28, 2021 | Mumbai
Sundram Fasteners Limited
Rating Reaffirmed
 
Rating Action
Rs.25 Crore Short Term DebtCRISIL A1+ (Reaffirmed)
Rs.100 Crore Commercial PaperCRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to Annexure for Details of Instruments & Bank Facilities

Detailed Rationale

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

 

After a weak first quarter in the fiscal 2021 due to pandemic related disruptions, SFL’s performance has picked up in the subsequent quarters. Consequently, decline in revenues was restricted to 2% in fiscal 2021 over previous fiscal. Strong pent up demand from both domestic automobile OEMs, and healthy growth in exports and the aftermarket segment helped limit the revenue decline. Healthy business levels, coupled with cost optimization initiatives resulted in operating margins reverting back to over 18% in fiscal 2021, from 16% in fiscal 2020.

 

SFL’s performance is expected to improve in fiscal 2022 driven by better domestic and export demand, supported by the company’s strong market position and diverse presence across geographies and vehicle segments. Disruption in domestic demand due to the second covid wave could moderate performance in the first quarter of fiscal 2022; albeit revenues will still be higher than in the corresponding quarter of fiscal 2021. Operating margins are also expected to be maintained at 16-18% over the medium term as benefits of cost saving initiatives, and improving operating efficiencies are expected to continue.

 

Financial risk profile continues to be strong with healthy accruals of over Rs 400 crore, more than sufficient to meet capex and repayment obligations. Capex spend for next two fiscals is also estimated at around Rs 250-300 crore each and will largely be for new products at existing plants, and to a small extent at subsidiaries. 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 has combined the business and financial risk profiles of SFL and its subsidiaries:

 

Overseas subsidiaries

Domestic subsidiaries

  • Cramlington Precision Forge Ltd, Northumberland, United Kingdom
  • Sundram Fasteners (Zhejiang) Ltd, Zhejiang Peoples Republic of China
  • Sundram International Inc, USA
  • TVS Next Inc. (subsidiary of TVS Next Ltd)
  • Sundram International Ltd, United Kingdom
  • Sundram Fasteners Investments Ltd, Chennai
  • TVS Upasana Ltd, Chennai
  • Sundram Non-Conventional Energy Systems Ltd, Chennai
  • TVS Next Ltd
  • TVS Engineering Limited
  • Sunfast TVS Limited

 

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

  • Leading market position in the fasteners segment, diverse product portfolio, and wide geographical reach: 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 ~64% in fiscal 2021, and exports bringing in ~33% (including subsidiary operations) and the remaining ~3% from services and other operating income. 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.  

 

  • 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, 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. Additionally, the shift in product mix towards more profitable products like hubs and shafts, compared with traditional fasteners, is expected to support profitability.

 

  • Strong financial risk profile: 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 2300 crore as on March 31, 2021 and 0.3 time respectively.

 

Capex was moderate at around Rs.150-200 crore in fiscal 2021 and funded through accruals as company had already incurred significant capex (of over Rs 850 crore) in previous two fiscals. Supported by healthy cash generation and progressive debt repayment, debt metrics continued to remain comfortable – interest cover was over 25 times in fiscal 2021.

 

Capex is expected to be higher at around Rs 250-300 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

  • Working capital-intensive operations: 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 import and increasing export (longer lead time) also contribute to high working capital needs. Consequently, gross current assets were 130 days as on March 31, 2020, and are expected to have risen moderately in fiscal 2021, due to higher inventory levels.

 

  • Modest, albeit improving, performance of subsidiaries: 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. 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. 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 expected to be over Rs 425 crore in fiscals 2022 and 2023 which shall be sufficient to meet repayment obligations of ~Rs 90 crore in each of these fiscals, and capex requirements. The company also has adequate cushion in bank limits of around Rs 1700 crore, utilized to the tune of ~25% on an average over the 12 months ended March 2021.  

Rating Sensitivity factors

Downward Factors

  • Steep decline in revenues by over 15-20% on a sustained basis along with deterioration in profitability to ~10-12%
  • Large debt-funded capex/acquisition leading to a marked deterioration in the financial risk profile; gearing deteriorating to over 1-1.2 time

About the Company

SFL, part of the TVS group (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)

As on/for the period ended March 31

 Unit

2021

2020

Revenue

Rs.Crore

3644

3723

Profit After Tax (PAT)

Rs.Crore

363

327

PAT Margin

%

10.0

8.8

Adjusted debt/adjusted networth

Times

0.29

0.45

Interest coverage

Times

27.7

10.7

 

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)

ISIN

Name of Instrument

Date of Allotment

Coupon Rate (%)

Maturity Date

Issue Size (Rs.Cr)

Complexity levels

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+

Annexure – List of Entities Consolidated

Name of entity

Extent of consolidation

Reasons

Sundram Fasteners Investments Ltd, Chennai

Full

Subsidiary; business linkages and common management

TVS Upasana Ltd, Chennai

Full

Subsidiary; business linkages and common management

Sundram Non-Conventional Energy Systems Ltd, Chennai

Full

Subsidiary; business linkages and common management

TVS Next Ltd

Full

Subsidiary; business linkages and common management

TVS Engineering Limited

Full

Subsidiary; business linkages and common management

Cramlington Precision Forge Ltd, Northumberland, United Kingdom

Full

Subsidiary; business linkages and common management

Sundram Fasteners (Zhejiang) Ltd, Zhejiang Peoples Republic of China

Full

Subsidiary; business linkages and common management

Sundram International Inc, USA

Full

Subsidiary; business linkages and common management

TVS Next Inc. (subsidiary of TVS Next Ltd)

Full

Subsidiary; business linkages and common management

Sundram International Ltd, United Kingdom

Full

Subsidiary; business linkages and common management

Sunfast TVS Limited

Full

Subsidiary; business linkages and common management

 

Annexure - Rating History for last 3 Years
  Current 2021 (History) 2020  2019  2018  Start of 2018
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Commercial Paper ST 100.0 CRISIL A1+   -- 05-05-20 CRISIL A1+ 02-04-19 CRISIL A1+ 05-09-18 CRISIL A1+ CRISIL A1+
      --   -- 22-04-20 CRISIL A1+   -- 28-06-18 CRISIL A1+ --
      --   --   --   -- 12-02-18 CRISIL A1+ --
Short Term Debt ST 25.0 CRISIL A1+   -- 05-05-20 CRISIL A1+ 02-04-19 CRISIL A1+ 05-09-18 CRISIL A1+ CRISIL A1+
      --   -- 22-04-20 CRISIL A1+   -- 28-06-18 CRISIL A1+ --
      --   --   --   -- 12-02-18 CRISIL A1+ --
Short Term Debt (Including Commercial Paper) ST   --   --   --   --   -- CRISIL A1+
All amounts are in Rs.Cr.
 
 

  

Criteria Details
Links to related criteria
CRISILs Approach to Financial Ratios
Rating criteria for manufaturing and service sector companies
Rating Criteria for Auto Component Suppliers
CRISILs Criteria for rating short term debt
CRISILs Criteria for Consolidation

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