Moody’s withdraws Motherson Sumi Systems’ Baa3 rating3 min read . Updated: 27 Mar 2020, 08:05 PM IST
Moody’s assigns Ba1 corporate family rating to the leading auto component manufacturer
MUMBAI : Moody’s Investor Service has assigned Ba1 corporate family rating (CFR) to the leading auto component manufacturer Motherson Sumi Systems Ltd (MSSL) and has withdrawn the company’s Baa3 issuer rating on Friday.
But at the same time, the credit rating agency said that it has placed MSSL’s Ba1 CFR under review for further downgrade while revising the outlook for the company from negative to rating under review.
"The downgrade is driven by Motherson's already weak positioning in the Baa3 rating category before the current market stress, with financial metrics below our expectation for a Baa3 rating," said Kaustubh Chaubal, vice president and senior credit officer at Moody’s.
He added that the rapid spread of the coronavirus outbreak globally is creating a severe and extensive credit shock for the auto parts supplier.
Moody’s note released on Friday said that the automotive including the auto ancillary sector is one of the most significantly affected industries due to its sensitivity to consumer demand and sentiment.
The credit rating agency said it regards the covid-19 outbreak as a social risk under its environmental, social and governance or ESG framework.
“The weaknesses in Motherson's credit profile, including its exposure to final consumer demand for automobiles, has left it vulnerable to shifts in market sentiment in these unprecedented operating conditions and Motherson remains vulnerable to the outbreak continuing to spread," it said in the note.
Moody's estimates Motherson's consolidated adjusted debt/EBITDA and adjusted EBITA margin to be close to its downgrade triggers of 3.0x and 5%, respectively.
It said that the review for further downgrade of the currently assigned Ba1 CFR would evaluate the impact of the virus outbreak on MSSL’s production activities, consumer demand for vehicles and on the government support and company-specific counter-measures.
The outbreak of China virus has triggered shutdown of operations by the automakers and their supplier globally as a preventive step to contain the epidemic. Moody's said it could downgrade the rating if MSSL fails to restore any meaningful operating profits thereby containing the cash burn by H2 CY2020.
The rating agency, which expects to conclude the review of MSSL within 90 days, added that the downgrade would also depend upon the prolonged demand slump resulting in the company’s balance sheet deterioration.
MSSL had reported significant exposure and dependency on its European operations, where Europe and Volkswagen Group contributed more than 40% and 28% of consolidated revenues in FY2019, respectively.
The company’s consolidated sales in FY2019 stood at ₹625.7 billion that included ₹551 billion from overseas businesses and ₹74 billion from domestic operations. It’s net debt has also seen a significant rise over the past years, increasing from ₹32 billion in FY2015 to almost ₹80 billion in FY2019.
The company has set up more than 30 new manufacturing plants globally including India in the last five years thereby adding enormous fixed costs. It’s past annual reports point out that its unamortized expenses have increased by ₹6.7 billion to ₹7.3 billion over the last two financial years.
The company management had earlier attributed this to the cost of acquiring new projects and development of new products.
Earlier in January, MSSL had disclosed its plan of demerging its domestic wiring harness business into a newly formed legal entity with mirror shareholding, which shall also be listed.
The promoters of MSSL, Sumitomo Wiring Systems (Japan), which hold 25.1% stake in the company, had a long-standing request to keep their participation focused on the wiring harness business in the fast expanding scheme of things for the supplier.
Vivek Chand Sehgal and family along with their investment vehicle Samvardhana Motherson International Limited (SMIL) hold 36.33% stake in MSSL’ shareholding.