Moody's reaffirms Motherson Sumi's corporate family rating; revises outlook to stable

Moody's Investors Service has revised the company's rating outlook to 'Stable' from 'Negative' while affirming the Ba1 corporate family rating to Motherson Sumi Systems.

"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.

The 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. The proposed re-organisation of the group, will incrementally boost cash flows and strengthen the quality of earnings further and thus outweigh the minor increase in leverage.

The 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.

Motherson Sumi Systems is one of the world's leading specialised automotive component manufacturing companies for original equipment manufacturers.

The company's consolidated net profit surged 194% to Rs 798 crore on 15% rise in revenue from operations to Rs 17,923 crore in Q3 FY21 over Q3 FY20.

The scrip jumped 5.46% to close at Rs 211.50 on the BSE on Tuesday.

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