Fiat India Automobiles Private Limited: Ratings Reaffirmed; Outlook Revised to Negative

August 23, 2019

Fiat India Automobiles Private Limited: Ratings reaffirmed; Outlook revised to negative

Summary of rated instruments Previous Rated Amount Current Rated Amount Instrument* Rating Action (Rs. crore) (Rs. crore) Commercial Paper 625.0 625.0 [ICRA]A1+ Reaffirmed Fund-based – Cash Credit 500.0 625.0 [ICRA]AA- Reaffirmed; Outlook revised to Negative from Stable Fund-based – Term Loan 1,490.0 1,365.0 [ICRA]AA- Reaffirmed; Outlook revised to Negative from Stable [ICRA]AA- Reaffirmed; Outlook Non Fund-Based 10.0 10.0 revised to Negative from Stable [ICRA]A1+ Reaffirmed Total 2,625.0 2,625.0 *Instrument details are provided in Annexure-1

Rationale The long-term outlook revision primarily reflects moderation in credit profile of Tata Motors Limited1 (TML, rated [ICRA]AA- (Negative) and [ICRA]A1+), which is the key counterparty as well as the promoter entity for Fiat India Automobiles Private Limited (FIAPL).

ICRA notes the firm’s strategic importance for the promoter group (as sole manufacturer of JEEP and Fiat branded vehicles in India as well as Nexon compact utility vehicle for TML) and assured profits under take-or-pay agreement. FIAPL is a 50:50 JV between TML and FCA Italy SpA (FCA)2 and it is a manufacturer of vehicles and engine for its shareholders. As per the take-or-pay (ToP) agreement, FIAPL’s fixed cost as well as agreed fixed returns are ensured by its principal customers and shareholders, which mitigates demand related risks to a large extent. Thanks to the take-or- pay arrangement, even in case of minimal capacity utilisation, FIAPL is expected to report EBITDA3 of more than Rs. 850 crore, which provides stability to overall cash flows. Consequently, the credit profile of the counterparties in the ToP arrangement remain a key sensitivity for FIAPL’s credit profile.

Over the next three year, FIAPL will is expected to invest Rs. 1,500 crore; out of which, about Rs 800 crore will be invested in FY2020 itself. These capex excludes investment towards assembly line for new models by shareholders, as financing plans for the same are not yet finalised. To fund its ongoing capex program, FIAPL will avail additional long- term loans of Rs 500 crore in FY2020, which is likely to moderate leverage as well as coverage indicators over the medium term. Nevertheless, ICRA expects coverage indicators like TD/OPBIDTA and gearing to remain below 2.50x and 0.7x, respectively, over the next three years.

1 ICRA has revised long term rating of TML to [ICRA]AA- (Negative) from [ICRA]AA (Negative) as per its release dated August 05, 2019 2 A step-down subsidiary of Fiat Chrysler Automotive N.V. (FCA NV, rated Ba1 (Stable) by Moody’s) 3 Earning before interest, tax, depreciation and amortization

The rating strengths are partially offset by the weak position of FIAPL’s principal customers in the Indian passenger vehicle (PV) market and sub-par coverage and return indicators as compared to ‘ICRA AA’ category medians. Moreover, stretched subsidy receivables from the Government of Maharashtra (GoM) has resulted in reliance on external debt to finance incremental working capital requirements. FIAPL is eligible for subsidy from the GoM under the Industrial Promotion Scheme (IPS), wherein it is eligible to recover 150% of its investment in the form of SGST refund. While the subsidy provides support to overall cash flows and profitability, payments from Government authorities are generally delayed by 18-24 months, resulting in substantial build-up of receivable and stretched working capital cycle in the interim. Consequently, the company’s dependence on external borrowings to fund its working capital requirement shoots up over the aforesaid period. As of Mar-2019, FIAPL had subsidy outstanding of Rs 598 crore from GoM and management is hopeful of recovery of over Rs 150 crore by Mar-2020. Going forward, timely recovery of the subsidy remains crucial for the company’s liquidity position and for funding its incremental working capital as well as capex requirements.

Outlook: Negative The credit risk profile of counterparties under the ToP arrangement will continue to remain a key sensitivity factor. FIAPL’s negative outlook reflects ICRA’s expectation that credit profile of its key counterparty under ToP arrangement i.e TML could weaken further over the near to medium term. Any revision in ToP arrangement, which could materially impacted cash flows also remain a key rating sensitivity.

Key rating drivers

Credit strengths Strong operational, financial and managerial support from promoter group, i.e., TML and FCA NV – FIAPL holds strategic importance for the promoter group as the sole manufacturing unit for all FIAT and JEEP branded vehicles in India as well as TML’s Nexon compact utility vehicle. Moreover, FIAPL also manufactures diesel engines for the Indian market, which provides support to its overall revenues. As per the management, FIAPL is the sole supplier of JEEP Compass for right-hand4 drive markets globally.

Take-or-pay arrangement with TML and FCA US LLC protects profitability from demand-related risks – FIAPL’s take-or- pay arrangement for its manufacturing capacity allows an assured fixed return on assets, over and above its fixed cost recovery. Furthermore, overall profitability is supported by the sales tax incentive earned on the cars and engine manufactured by it. FIAPL’s earlier take-or-pay arrangement for FCA’s share of the manufacturing capacity with FCA India Automobiles Private Limited (a step-down subsidiary of FCA NV) has been replaced by FCA US LLC jointly and severely with FCA SpA Italy. FCA US LLC is one of the strongest entities in the FCA Group, globally.

Credit challenges Stiff competition faced by FCA India and TML in Indian PV market – FIAPL’s primary customers, TML and FCA India, are relatively small players in the Indian passenger vehicle industry, with market share of 6.8% and 0.5%, respectively, during FY2019. Nevertheless, the success of TML Nexon and Jeep Compass has helped their respective OEMs in augmenting their market share apart from the much-needed boost of the capacity utilisation of FIAPL’s manufacturing unit. Given

4 For e.g., ASEAN, ANZ and SAARC nations, Japan and South African countries are right-hand drive markets

headwinds in domestic PV industry during FY2020, overall revenue could witness pressure in the near term. Nevertheless, company is expected to report EBIDTA more than Rs 800 crore in current fiscal as well.

Delay in subsidy receivable from Government resulting in stretched working capital cycle - FIAPL is eligible for the IPS subsidy from the GoM, wherein it is eligible to recover 150% of its investment in the form of SGST refund. While the subsidy provides support to its overall cash flows and profitability, payments from Government authorities are generally delayed by 18-24 months, resulting in substantial build-up of receivable and stretched working capital cycle in the interim. Consequently, the company’s dependence on external borrowings to fund its working capital requirement shoots up over the aforesaid period. As of Mar-2019, FIAPL had subsidy outstanding of Rs 585 crore from GoM and management is hopeful of recovery of over Rs 150 crore by Mar-2020. Going forward, timely recovery of the same remains crucial for the company to maintain its liquidity position and fund incremental working capital as well as capex requirement.

Liquidity Position: FIAPL’s liquidity profile remain strong, supported by sizeable undrawn bank lines as well as unencumbered cash of Rs 121 crore as on March 2019. Out of the sanctioned Rs 625 crore bank lines, Rs 215 crore worth of bank lines are unsecured and available for drawdown irrespective of drawing power requirement, lending support to the overall liquidity profile. With cash profits of over Rs 600 crore annually, overall liquidity profile of FIAPL is likely to remain comfortable despite sizeable capex & investments plans over the medium term.

Analytical approach:

Analytical Approach Comments Corporate Credit Ratings: A Note on Methodology Applicable Rating Methodologies Passenger Vehicle Manufacturers ICRA’s Approach for Rating Commercial Papers Parent/Group Support Not applicable Consolidation / Standalone Standalone

About the company: FIAPL is a 50:50 JV between TML and FCA Italy Spa. FIAPL’s manufacturing unit in Ranjangaon (Pune), has an annual production capacity of 300,000 engines and 170,000 passenger vehicles. FIAPL is currently the sole manufacturing unit for TML’s Nexon compact utility vehicles, and FCA’s Fiat, JEEP and Abarth models in India. In addition, FIAPL is the sole manufacturer of the right-hand drive Jeep Compass model for FCA’s global requirement. FIAPL’s board of directors comprise of 8 people, with equal participation from TML and FCA.

Key financial indicators (audited) FY2018 FY2019

Operating Income (Rs. crore) 6,903 7,218 PAT (Rs. crore) 367 190 OPBDIT/ OI (%) 13.2% 12.4% RoCE (%) 13.6% 7.9%

Total Debt/ TNW (times) 0.6x 0.4x Total Debt/ OPBDIT (times) 2.1x 1.6x Interest coverage (times) 8.0x 6.2x

Status of non-cooperation with previous CRA: Not applicable

Any other information: None

Rating history for last three years:

Chronology of Rating History for Current Rating (FY2020) the past 3 years Date & Date & Date & Amount Amount Date & Rating in Rating in Rating in Rated Outstanding Rating FY2019 FY2018 FY2018 Instrument Type (Rs. crore) (Rs. crore)* Aug 2019 Sep 2018 Mar 2018 Jul 2017 1 Cash Credit Long Term 625.0 100.0 [ICRA]AA- [ICRA]AA- [ICRA]AA- [ICRA]A+ (Negative) (Stable) (Stable) (Stable) 2 Term Loan Long Term 1,365.0 908.9 [ICRA]AA- [ICRA]AA- [ICRA]AA- [ICRA]A+ (Negative) (Stable) (Stable) (Stable) 3 Non Fund Based Long 10.0 2.45 [ICRA]AA- [ICRA]AA- [ICRA]AA- [ICRA]A+ Term/Short (Negative) / (Stable) / (Stable) / (Stable) / Term [ICRA]A1+ [ICRA]A1+ [ICRA]A1+ [ICRA]A1+ 4 Commercial Short Term 625.0 - [ICRA]A1+ [ICRA]A1+ [ICRA]A1+ [ICRA]A1+ Paper Source: FIAT India Automobiles Private Limited; *: As on August 15, 2019

Complexity level of the rated instrument: ICRA has classified various instruments based on their complexity as "Simple", "Complex" and "Highly Complex". The classification of instruments according to their complexity levels is available on the website www.icra.in

Annexure-1: Instrument Details ISIN No Instrument Name Date of Coupon Rate Maturity Amount Current Rating Issuance / Date Rated and Outlook Sanction (Rs. crore) NA Cash Credit NA NA NA 625.0 [ICRA]AA- (Negative) NA Term Loan 1 FY2016 1m LIBOR + FY2024 252.5 [ICRA]AA- 163 bps (Negative) NA Term Loan 2 FY2016 1m LIBOR + FY2024 504.9 [ICRA]AA- 163 bps (Negative) NA Term Loan 3 FY2016 1m LIBOR + FY2024 151.5 [ICRA]AA- 163 bps (Negative) NA Term Loan NA NA NA 456.1 [ICRA]AA- (Proposed) (Negative) NA Non Fund Based NA NA NA 10.0 [ICRA]AA- (Negative) / [ICRA]A1+ NA Commercial Paper NA NA 7-365 days 625.0 ICRA]A1+ Source: FIAT India Automobiles Private Limited; NA: Not Applicable

ANALYST CONTACTS Subrata Ray Ashish Modani +91 22 6114 3408 +91 20 6606 9912 [email protected] [email protected]

Pavan Agrawal +91 20 66069916 [email protected]

RELATIONSHIP CONTACT L Shivakumar +91 20 6169 3300 [email protected]

MEDIA AND PUBLIC RELATIONS CONTACT

Ms. Naznin Prodhani Tel: +91 124 4545 860 [email protected]

Helpline for business queries:

+91-9354738909 (open Monday to Friday, from 9:30 am to 6 pm) [email protected]

About ICRA Limited:

ICRA Limited was set up in 1991 by leading financial/investment institutions, commercial banks and financial services companies as an independent and professional investment Information and Credit Rating Agency.

Today, ICRA and its subsidiaries together form the ICRA Group of Companies (Group ICRA). ICRA is a Public Limited Company, with its shares listed on the Bombay Stock Exchange and the National Stock Exchange. The international Credit Rating Agency Moody’s Investors Service is ICRA’s largest shareholder.

For more information, visit www.icra.in

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