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Fitch Rates SMRP BV First-Time 'BB+'/Positive; Secured Bonds 'BBB-'
June 16, 2017 / 1:39 AM / 3 months ago

Fitch Rates SMRP BV First-Time 'BB+'/Positive; Secured Bonds 'BBB-'

(The following statement was released by the rating agency) SINGAPORE/MUMBAI, June 15 (Fitch) Fitch Ratings has assigned Netherlands-based Samvardhana Motherson Automotive Systems Group BV (SMRP BV) a Long-Term Foreign-Currency Issuer Default Rating (IDR) of 'BB+'. The Outlook is Positive. Fitch has also assigned the 'BBB-' rating on SMRP BV's existing senior secured bonds. A full list of rating action is at the end of this commentary. SMRP BV's rating reflects strong linkages with its shareholders, Motherson Sumi Systems Limited (MSSL) and Samvardhana Motherson International Limited (SMIL). SMRP BV is a leading global supplier of rear-view vision systems and interior and exterior modules to the automotive industry. It has long-standing customer relationships with financially strong original equipment manufacturers (OEMs) and its global operations are located close to the OEMs. This helps the company achieve above-market growth and shield profitability from sector-specific risks arising from high dependence on large OEM customers. Our rating also reflects MSSL's disciplined and de-risked approach to expansion, which has helped it grow with sustained improvement in profitability while limiting financial leverage. The Positive Outlook reflects Fitch's expectations that SMRP BV's financial profile will improve over the next two years, based on a strong order book and completion of its expansion capex. The notes are rated one notch above the IDR as they are secured against assets in key subsidiaries within the SMRP BV group. KEY RATING DRIVERS Linkages to Samvardhana Motherson Group: Fitch analyses MSSL, its largest shareholder SMIL and their 51:49 joint venture, SMRP BV, as a single economic entity because SMIL effectively controls more than 50% of economic interest in the MSSL group and because of the companies' senior management overlap. Fitch assesses the operating, financial and strategic linkages between SMRP BV and SMIL as strong and has based SMRP BV's IDR on SMIL's consolidated financial profile, which has been adjusted to include 100% of the businesses of MSSL and SMRP BV to take into account the sizeable minority shareholders in MSSL. Leading Player with Integrated Capabilities: MSSL's business in India supplies wiring harnesses for a dominant share of the passenger vehicles manufactured in the country. The company's acquisition of PKC Group Plc in March 2017 has given MSSL leading positions in commercial-vehicle wiring harness markets across North America, Europe, South America and China. SMRP BV's mirror business under Samvardhana Motherson Reflectec (SMR) is one of the top suppliers of exterior mirrors globally with a 24% market share by sales. Samvardhana Motherson Peguform (SMP), the polymer business, accounts for 20% of global bumper sales, 11% of dashboards and 28% of door panels in the premium segment. MSSL's market shares have grown over the last several years, supported by its ability to provide a full spectrum of solutions (including R&D, tooling, manufacturing and assembly) in meeting customers' complex supply chain needs with high quality and reliability. Well-Diversified Business Profile: MSSL's businesses serve more than 750 vehicle programmes across more than 50 OEMs globally. Each business is diversified across OEM customers, vehicle programmes within an OEM and different geographies for each programme. This is an important business strength given the cyclical and competitive nature of the automotive industry. MSSL has a balanced geographic presence: 20.7% of sales came from the Americas, 53.7% from Europe and 25.7% from Asia-Pacific and Africa in the financial year ended March 2017 (FY17), including full year revenue from PKC. Customer diversification has improved, with the top-five customers making up 47% of sales in FY17 (including PKC), compared with 53% in FY14. Strong Relationship with OEMs: SMRP BV has decades-long relationships with 14 of the top-15 global OEMs, which underscores its consistent quality and R&D record. This is important, as global OEMs are increasingly dependent on external auto-component providers and retain only high value-added parts to optimise capital. The company's solid customer relationships are a key business strength and help SMRP BV mitigate sector-specific risks, such as competition and weak negotiating power against large OEMs in pricing and pass-through of volatility in raw material prices. Strong Order Book: SMRP BV had an order book of about EUR12.8 billion at FYE17 (EUR7.7 billion at FYE14), which in Fitch's view, supports revenue visibility in excess of 90% over the next three to four years, including 60%-70% that comes from models already in production. The order book is diversified across OEMs and vehicle programmes, which mitigates uncertainty over the market reception of a new launch. Moreover, the association with top OEMs reduces this risk, as the manufacturers typically try to improvise and relaunch new platforms - which require significant upfront investment - rather than writing-off the initial investment altogether. Low-Risk Growth Strategy: SMRP BV has achieved strong, profitable growth over the years through successful integration of attractively priced acquisitions and a low-risk organic expansion strategy. The company has been able to improve profitability at SMR and SMP by focusing on cost efficiency and investing to expand in-house manufacturing capabilities. SMRP BV's expansion plans benefit from orders already secured from customers, which reduces risks. MSSL is likely to pursue sizeable acquisitions in line with its strategic vision, but Fitch expects the company to adhere to its announced long-term leverage target. Improving Financial Profile: MSSL has maintained reasonable financial leverage, with an adjusted net debt to operating EBITDAR ratio of 2.6x in FY14-FY16, while achieving healthy growth and steady improvement in margins. This highlights its disciplined approach in evaluating investment opportunities. The company has low maintenance capex requirements (INR6 billion-7 billion annually) and a dividend policy that pays less than 40% of net income. FCF generation has been negative due to the organic expansion of the SMR and SMP businesses, but Fitch expects FCF generation to improve once capex normalises over FY18-FY19. Fitch expects MSSL's robust order book to support continued increases in EBITDA, which should lead to lower financial leverage that will be commensurate with a low investment-grade rating over the next two to three years. Solid Financial Flexibility: MSSL benefits from a robust liquidity profile, fairly long-dated debt maturities as well as diversified access to banks and capital markets. MSSL's strong financial flexibility allows it to support customers when they set up production facilities in new markets as well as get involved in the early design and development work. DERIVATION SUMMARY MSSL's sizeable scale, leading market position in its product categories as well as good degree of diversification across OEM customers, geographies and products, positions it well with respect to peers such as Metalsa, S.A. de C.V. (BBB-/Stable), Nemak, S.A.B. de C.V.(BB+/Positive) and Faurecia S.A. (BB/Stable). MSSL appears more leveraged than its peers because of its expansion capex, but Fitch's forecasts for the company's FCF profitability and leverage profile in the post-expansion years (FY20 onwards) compare well against that for its peers. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - High single-digit revenue growth (except FY18 when full-year consolidation of PKC will lead to around 21% growth) supported by a strong order book. - Gradual improvement in EBITDA margin to 10%-11% over the next two to three years driven by increasing scale and investments to further improve in-house value addition. - Capex intensity (measured as percentage of sales) to remain high at around 5.5%-6.0% through to FY18 before declining to around 4.0% in FY19. - MSSL dividend payout to remain at below 40% of net income. RATING SENSITIVITIES Future developments that may, individually or collectively, lead to positive rating action include: - MSSL consolidated adjusted net leverage (defined as total adjusted net debt to operating EBITDAR, after Fitch's adjustment for minorities and factored receivables and suppliers' acceptances) improving to below 2.0x on a sustained basis. - MSSL consolidated FCF margin improving to greater than 1.0% on a sustained basis. - MSSL maintaining or improving its business diversification. Future developments that may, individually or collectively, lead to the Outlook being revised to Stable: - Inability to achieve the positive guidelines above. LIQUIDITY MSSL has a robust liquidity position with no significant debt maturities before FY22. At 31 March 2017, MSSL had INR49.9 billion of unrestricted cash and INR32.9 billion of available committed bank facilities (MSSL: INR8.9 billion; SMRP BV: INR24 billion), which were more than sufficient to meet INR10.6 billion in near-term debt maturities and the modest level of FCF deficit through to FY18. The liquidity profile is strengthened by Fitch's expectation of positive FCF from FY19 and SMRP BV's access to both bank and international debt capital markets. FULL LIST OF RATING ACTIONS Samvardhana Motherson Automotive Systems Group BV -- Long-Term IDR assigned at 'BB+'; Outlook Positive -- Rating on USD400 million 4.875% senior secured notes due 2021 assigned at 'BBB-' -- Rating on EUR500 million 4.125% senior secured notes due 2021 assigned at 'BBB-' -- Rating on EUR100 million 3.7% senior secured notes due 2025 assigned at 'BBB-' Contact: Primary Analyst Hasira De Silva, CFA Director +65 6796 7240 Fitch Ratings Singapore Pte Ltd One Raffles Quay South Tower #22-11 Singapore 048583 Secondary Analyst Snehdeep Bohra Associate Director +91 22 4000 1732 Committee Chairperson Vicky Melbourne Senior Director +612 8256 0325 Date of Relevant Rating Committee: 14 June 2017 Media Relations: Bindu Menon, Mumbai, Tel: +91 22 4000 1727, Email: bindu.menon@fitchratings.com; Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com. 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