Motherson Sumi Systems Limited -- Moody's changes Motherson's outlook to stable; affirms Ba1 CFR

Rating Action: Moody's changes Motherson's outlook to stable; affirms Ba1 CFRGlobal Credit Research - 12 Apr 2021Singapore, April 12, 2021 -- Moody's Investors Service has today affirmed the Ba1 corporate family rating (CFR) on Motherson Sumi Systems Limited. Concurrently, the rating outlook has been changed to stable from negative."The rating affirmation and outlook change to stable reflect the sustainable recovery in Motherson's revenue and profitability from the trough during the coronavirus pandemic in the first quarter of the fiscal year ending March 2021. We expect the company to sustain the recovery over the upcoming 12 to 18 months, strengthening its credit metrics, in particular debt/EBITDA leverage tracking below 3.0x," says Kaustubh Chaubal a Moody's Vice President and Senior Credit Officer.RATINGS RATIONALEToday's rating action reflects Moody's view that Motherson's revenue will grow by around 8%-10% during fiscal 2022, following almost a 12% decline in the prior year because of the pandemic. The company's strong business profile based on its long-standing relationships with leading automotive original equipment manufacturers (OEMs), as well as good geographic and product diversification, will aid the recovery.The rebound in operations, which has also occurred in recent quarters, mirrors a continued recovery in global vehicle sales from the second half of 2020, which underpins Moody's stable outlook on the global automotive manufacturing industry. Moody's expects global auto unit sales to grow by 7% in 2021 and around 6% in 2022, following a steep fall of around 14% in 2020 amid the pandemic.Meanwhile, the turnaround of the company's previously loss-making greenfield operations will accelerate the improvement in profitability, earnings and operating metrics, supported by a better operating environment. Moody's expects Motherson's EBITA margin to increase to the mid-single-digit percentage during fiscal 2022; a 100-basis point (bps) increase over the prior year, but weaker than the 8% levels in fiscal 2017.Due to the negative impact of the coronavirus outbreak, Moody's estimates Motherson's leverage to have increased to around 3.5x at March 2021, before gradually de-levering to below 3.0x by March 2022. Higher earnings will also support sustained positive free cash flow generation.Motherson's 2025 vision aims at achieving a quarter of its revenues from non-automotive divisions to somewhat insulate the company from the inherently volatile automotive industry. The company is working towards further diversifying its business profile such that no customer, component or country will account for more than 10% of its revenues. And the company intends to achieve US$36 billion in annual revenues by 2025.Moody's favorably views the company's diversification strategy given it will somewhat derisk its credit profile. In addition, Moody's expects Motherson to continue a measured and disciplined approach in evaluating acquisitions and executing only those that fit not only the company's quantitative criteria but also other qualitative criteria. These include synergies such as vertical integration, access to technology and stipulated financial guidelines such as a return on capital of 40% on a steady-state basis and net reported leverage correcting to less than 2.5x within 12-15 months of any acquisition.Motherson is transitioning into a cashless reorganization, where it will split its Indian wiring harness operations to form a new entity. The reorganization also entails a merger of Motherson with its 33% shareholder, Samvardhana Motherson International Limited (SAMIL). Since SAMIL currently holds the balance 49% shareholding in Motherson's 51% owned subsidiary, Samvardhana Motherson Automotive Systems Group B.V. (SMRP), the reorganization will result in Motherson emerging as SMRP's sole shareholder. The transaction currently awaits regulatory approvals and is likely to be completed by September 2021.The reorganization will only marginally increase Motherson's leverage by an estimated 0.2x. As such, the business benefits -- such as a 100% shareholding in SMRP and operational synergies with SAMIL -- should outweigh the marginal increase in leverage.Motherson's Ba1 CFR reflects the company's: (1) strong business profile, stemming from long-standing relationships with leading automotive OEMs; (2) demonstrated track record of financial discipline; and (3) improving operations underscoring the strengthening credit metrics.On balance, the CFR is constrained by Motherson's: (1) exposure to the inherently cyclical global automotive industry, as well as pricing pressures that auto suppliers face from large, influential OEM customers; and (2) significant concentration in Europe.OUTLOOKThe stable outlook reflects Moody's expectation that Motherson will continue to gradually recover from the materially negative impact of the global coronavirus outbreak on credit metrics in fiscal 2021. Against previous expectations, Moody's now anticipates in its base case that Motherson's key credit metrics will recover close to expectations for the Ba1 CFR with leverage tracking below 3.0x and an adjusted EBITA margin in the mid-single digits.LIQUDITYMotherson has very good liquidity.Cash and cash equivalents totaling INR50.9 billion (US$700 million) as of December 2020 along with likely cash flow from operations of around INR70 billion (US$950 million) over the 18 months until June 2022 should be more than sufficient to meet the company's INR80 billion (US$1 billion) cash needs over the same period towards capital expenditure, debt repayments (including short term) and dividends.Further supplementing the company's liquidity are the multi-year revolving credit facilities of E350 million at SMRP and a factoring limit of E775 million (E380 million drawn at December 2020). In India, Motherson has INR5.3 billion (US$70 million) 364 day working capital facilities that are renewable annually -- although given their short-term nature, Moody's does not consider these in its liquidity analysis.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGGiven the current market situation, Moody's does not anticipate any immediate upward rating pressure.However, upward rating pressure could build if Motherson's adjusted EBITA margin improves to at least 7%, leverage stays comfortably below 3.0x and positive free cash flows are maintained; all over a sustained period.Moody's would consider a rating downgrade if Motherson's EBITA margin falls below 5.0%; or if leverage stays above 3.5x or free cash flows stay negative for a sustained period.Execution risks associated with a timely and smooth integration of an acquisition could also pressure the Ba1 CFR. Downward pressure could also build if the company undertakes a large debt-financed acquisition without an immediate and meaningful counterbalancing effect on earnings, materially skewing its financial profile.PRINCIPAL METHODOLOGYThe principal methodology used in this rating was Automotive Supplier Methodology published in January 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1170606. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.COMPANY PROFILEHeadquartered in Delhi, Motherson Sumi Systems Limited is the flagship entity of the Samvardhana Motherson Group (SMG), with global operations. Motherson was formed in 1986 through a technical and financial collaboration with Sumitomo Wiring Systems, Japan, a wholly owned subsidiary of Sumitomo Electric Industries, Ltd. (A2 stable).As of December 2020, Sumitomo Wiring held a 25.1% stake in Motherson, while the founding Sehgal family held a 3.4% direct stake and a 33.4% indirect stake through their investment vehicle, Samvardhana Motherson International Limited (SAMIL).The wiring harness business is housed under Motherson and PKC Group (PKC), a Finnish company that Motherson acquired in 2017. Its rearview mirror business is held at Samvardhana Motherson Reflectec (SMR). Meanwhile, the polymers operations are undertaken by Samvardhana Motherson Peguform (SMP) and Samvardhana Motherson Reydel Company (SMRC). The SMR, SMP and SMRC businesses are collectively known as SMRP operations.REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. 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Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating. Kaustubh Chaubal VP - Senior Credit Officer Corporate Finance Group Moody's Investors Service Singapore Pte. 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