Press Release Sundaram Auto Components Limited March 11, 2021 Ratings Amount Facilities Rating1 Rating Action (Rs. crore) 166.99 CARE A+; Stable Long Term Bank Facilities Reaffirmed (Reduced from 210.00) (Single A Plus; Outlook: Stable) CARE A+; Stable / CARE A1+ Long Term / Short Term Bank 43.01 (Single A Plus; Outlook: Stable / Reaffirmed Facilities (Enhanced from 20.00) A One Plus) 85.00 CARE A1+ Short Term Bank Facilities Reaffirmed (Enhanced from 65.00) (A One Plus) 295.00 Total Facilities (Rs. Two Hundred Ninety-Five Crore Only) Details of instruments/facilities in Annexure-1 Detailed Rationale & Key Rating Drivers The ratings assigned to the bank facilities of Sundaram Auto Components Limited (SACL) continue to draw strength from SACL being a part of the TVS group & wholly owned subsidiary of TVS Motor Company Limited (TVSM; rated CARE AA+; Stable/ CARE A1+). SACL’s experienced management team, synergies of operations with its parent, established track record of SACL as a supplier to Original Equipment Manufacturers (OEMs) and Tier-I suppliers in the domestic automobile market also adds to the strength of the credit profile of company. Company’s scale of operations was impacted in FY20 due to slowdown in automobile sector in FY20. Covid-19 led lockdown further impacted company’s business in H1FY21 but has shown recovery during Q3FY21 with sales returning to pre-Covid levels. However, the profitability for FY21 may come under pressure. Apart from weak sales in Q1FY21 and similar fixed expenses, increase in RM prices during H2FY21 which the company would be able to pass on to its customers with 1 quarter lag, is likely to affect profitability. Nevertheless, company derives benefit from being part of TVS group which enables it to raise additional funding from banks, if required. With addition of several new customers during the year and repeated order from existing clients is expected to translate into improved business potential, going forward.. These ratings strengths are partially offset by SACL’s dependence on TVSM for majority of its business though declining over the years. Company’s return indicators are also weak due to investments made in its US subsidiary which is yet to generate returns for SACL. The ratings are also constrained by vulnerability of volumes to cyclicality associated with the automobile industry and consequent impact on the profitability parameters. Company has several capital expenditure plans in place and SACL’s ability to reap benefits out of it as envisaged would be key to its credit profile. Rating Sensitivities Positive Rating sensitivity- Factors that could lead to positive rating action/ upgrade Significant improvement in sales and cash profits of the company and improvement in overall gearing to below 0.20x Negative Rating sensitivity- Factors that could lead to negative rating action/ downgrade Sharp deterioration in credit profile of parent Significant increase in Investments to the group companies/subsidiaries funded through debt or internal accruals. Detailed description of the key rating drivers Key Rating Strengths Wholly-owned subsidiary of TVSM, part of TVS Group: SACL is a wholly-owned subsidiary of TVSM which is one of the leading two-wheeler manufacturers in the country and belongs to the TVS group of companies. TVS Group is a diversified automotive conglomerate with a presence in the manufacturing of two/three wheelers, auto components, high tensile fasteners, die casting products, brakes, wheels, tyres, axles, seating systems, fuel injection components, electronic and electrical components, with interests in the areas of finance and information technology. In FY20, TVSM reported PAT of Rs.592 crore on total operating income of Rs. 16,452 crore. In the past, TVSM has exhibited support by bringing in funds as equity share capital/ unsecured loans. Also, the SACL has been able to manage the slowdown in automotive industry, on the back of steady orders from TVSM and addition of new customers. 1Complete definitions of the ratings assigned are available at www.careratings.com and in other CARE publications. 1 CARE Ratings Limited Press Release Long operational track record and strong management team: SACL has a track record of operations spanning for more than 20 years and is headed by Mr Lakshmanan, Chairman, who has over 60 years of experience in the industry. TVSM and SACL are both under the same management with a few common directors. Hence, SACL benefits from the vast experience of the TVS group management. Mr. Lakshmanan is on the Board of various companies in the TVS Group including TVSM. The day-to-day affairs of the company are managed by well- experienced professionals. Synergies of operations with the parent company: The manufacturing facilities of SACL are in close proximity to TVSM’s facilities and the majority requirement of plastic moulded components used in two-wheelers and three-wheelers of TVSM is sourced from SACL. The design engineers from SACL work in close coordination with TVSM right from the design stage of new vehicle launches, as there is a high level of importance associated with safeguarding the product design knowledge. A large part of the sale (~51% in FY20) of SACL’s products is being made to its parent (TVSM). Satisfactory performance during FY20 SACL has reported total operating income of Rs.525.94 crore in FY20, decline of 12.32% YoY. Slowdown in the automobile sector accentuated by Covid19 pandemic impacted the company’s income. Company reported marginally better PBILDT Margin of 7.64% for FY19 (PY: 7.57%). GCA was Rs. 28.2 crore as against Rs. 30.5 crore. For 9MFY21, SACL registered income of Rs. 310.5 crore with PBDIT margin of 4.40% (8.69% in 9MFY20) and earned GCA of Rs. 7.8 crore (Rs. 24.3 cr in 9MFY20) Besides the impact of pandemic led lockdown which resulted in loss of production in Q1FY21 and muted demand from auto industry till Sep’20 due to overall economic uncertainty and weak consumer sentiment, profitability and cash accruals during the 9MFY21 period was impacted by rise in one of the key raw material cost. Comfortable financial risk profile With no major debt addition FY20, leverage indicators for the company stands improved. Long term debt equity ratio was at 0.36x (PY: 0.49x) and overall gearing was at 0.48x (PY: 0.62x) as on March 31, 2020. Interest coverage ratio deteriorated but remained comfortable at 2.64x as on March 31, 2020 (3.71x as on March 31, 2019). Key rating weaknesses High customer concentration risk with majority sales to TVSM but declining with additional of several new customers In addition to the performance of the automobile industry, performance of TVSM assumes greater significance for SACL as TVSM continues to be the single largest OEM contributing to ~51% of the company’s net sales in FY20 (PY: 62%) and 50% for 9MFY21. This has resulted in the company’s fortunes being largely linked to that of TVSM. Company is operating from its 5 facilities viz. Hosur (which sells 60% to TVSM and contributes 50% of overall sales), Mysuru (which sells 100% to TVSM and contributes 15% of overall sales), Chennai (entire sales to non-TVSM and contributes 18% of overall sales), Nalagarh in HP (entire sales to TVSM and contributes 15% of overall sales). Newly commissioned Bhiwadi plant caters 100% to non-TVSM clients and contributes to less than 5% of overall sales. Over the past few years, the company is trying to diversify by adding new customers and thus reducing the dependence on TVSM. SACL caters to several other OEMs through Tier I suppliers in the 4W/ HCV segment and is constantly striving to diversify its customer base. The plastic products manufactured by SACL also find application in the non-automotive segments such as white goods; however, the contribution of the same is negligible in SACL’s overall income. Capex and investments With increase in scale of operations of TVSM and other OEMs, SACL has been incurring capex pertaining to capacity expansion and process improvement. The company has incurred total capex along with capital advance of Rs.130 crore in FY18 mainly for automated paint shop at existing Hosur facility and land bought in SriCity industrial corridor near Chennai. The capex was mainly funded through debt of Rs.65 crore and remaining through internal accruals and capital infusion from TVSM. During FY18, TVSM has infused around Rs. 170.0 crore in SACL of which Rs 130 crore was used by SACL to invest in its newly formed subsidiary Sundaram holdings, USA (SACL holds around 75% in Sundaram Holdings, USA(SHU) and rest held by Sundaram Clayton Limited- ultimate holding company of TVS Motor Company Limited). SACL has invested around Rs.130 crore in Sundaram holdings, U.S.A in FY18. SACL has invested Rs.100 crore in Sundaram Holdings, USA in FY19. For the same the company has got sanction for Term loan of Rs.100 crore. During FY20, capex of Rs. 23.4 cr has been undertaken from internal accruals for refurbishment of its existing facilities. SACL invested Rs. 42.8 crore in its subsidiary Sundaram US in FY20 and further invested Rs. 23 cr during 9MFY21 funded from the Rs. 60 cr received from TVSM against proceed from issuance of shares and Rs. 24.9 cr invested as equity in 9MFY21. Sundaram Holdings, USA is mainly involved in die castings products. Sundaram Holdings, USA will mainly cater to Cummins- existing customer of Sundaram Clayton Limited (SCL) to whom SCL currently exports. The new plant will mainly help to 2 CARE Ratings Limited Press Release reduce logistic and other cost and time. The company has started commercial operations during FY20 and any further investments in the Sundaram US is likely to be met through equity infusion from TVSM.