By Pallavi Bhati

India Ratings and Research (Ind-Ra) has affirmed Minda Corporation Limited’s (MCL) Long-Term Issuer Rating at ‘IND AA-’. The Outlook is Stable. The instrument-wise rating actions are given below:

Instrument Type

Date of Issuance

Coupon Rate

Maturity Date

Size of Issue (million)

Rating/Outlook

Rating Action

Term loan

FY27

INR1,764 (reduced from INR2,260)

IND AA-/Stable

Affirmed

Fund based working capital limits

INR2,045 (increased from INR1,165)

IND AA-/Stable/IND A1+

Affirmed

Non-fund based working capital limit

INR595 (reduced from INR1,024)

IND AA-/Stable/IND A1+

Affirmed

Commercial paper (CP)*

Up to 365 days

INR500

IND A1+

Affirmed

*Carved out from fund-based limits

Ind-Ra continues to take a consolidated view of MCL and its wholly-owned subsidiaries as they have similar business profiles and operate in the same industry. Ind-Ra has treated MCL’s joint ventures (JV) and associates – Minda Stoneridge Instruments Ltd (MSIL; 51% owned by MCL), Minda VAST Access Systems Ltd (50%), Minda Infac Pvt Ltd (51%), and Furukawa Minda Electric Pvt Ltd (25%) as per Ind-AS.

KEY RATING DRIVERS

Diversified Operations: MCL’s consolidated revenue stream is diversified across geographies, industry segments, products and customers. MCL supplies to South East Asian, European and North American markets. Its top customers, Bajaj Auto Ltd, Mahindra & Mahindra Ltd (‘IND AAA’/Stable), Honda Motorcycle & Scooter India Pvt Ltd, and TVS Motor Company Ltd, together contributed to about 45% of the total revenue in FY21 (FY20: 48%). MCL has also entered into new technological licensing agreements over the past few years. Ind-Ra believes entry into new JVs, organic and inorganic expansions, or tie-ups which improve MCL’s presence in emerging technologies and technologically advanced products, will help the company further enhance its business profile diversification. A sizeable contribution from these emerging areas will remain a key monitorable. 

MCL remains exposed to the risks associated with the cyclical auto industry; however, Ind-Ra believes the company’s diversified operations partially mitigate this risk (1HFY22: two-/three-wheelers (2W/3W): 50%, commercial vehicles (CV): 22%, passenger vehicles (PV): 14%, aftermarket: 15%). 

Sustained Market Position: MCL commands a strong market share in 2W lock sets, and wiring harness for 2W, 3W, tractors and CV. MCL’s ability to forge technological tie-ups, continue product innovations in existing categories, enter into related product categories and maintain cost efficiency would determine the retention of the market share. The company has technology tie-ups with Stoneridge, Inc. (US), Vehicle Access Systems Technology LLC (US), Furukawa of Japan, INFAC Elecs Co. Ltd (South Korea), Ride Vision Ltd (Israel), and EVQPOINT Solutions Pvt Ltd (India). 

Healthy Credit Metrics: MCL had a consolidated net cash position of INR0.1 billion at end-1HFY22 with a negative net leverage (net debt/EBITDA) in FY21 (FY20: 0.2x, FY19: 1.1x). The improvement in the leverage position was on the back of the proceeds of INR3.1 billion from a qualified institutional placement (QIP) in May 2018, proceeds of INR0.8 billion from preferential allotment of equity shares in December 2020, sustained profitability margins as well as a shorter working capital cycle. The deconsolidation of Minda KTSN Plastic Solutions GmbH and Co KG (KTSN) in FY21 also aided the reduction in MCL’s gross debt to INR4.1 billion during 1HFY22 from INR6.8 billion in FY19.

The consolidated gross interest coverage (EBITDA/interest expense) remained healthy at 7.2x in 1HFY22 (FY21: 5.7x, FY20: 5.9x, FY19: 5.8x); also, accounting for the interest generated on the cash balances, the net interest coverage was robust at 46.2x (18.2x, 20.5x, 9.9x). With no major debt-funded capex plans and focus on working capital tightening, Ind-Ra expects MCL’s consolidated credit metrics to remain comfortable over FY22-FY23. MCL’s acquisition of the remaining 49% stake in its JV, MSIL, for INR1.6 billion (to be paid in 2HFY22) is not likely to have any significant adverse impact on its credit metrics as MSIL is debt free with unencumbered cash and bank balances of INR0.8 billion at FYE21. However, in case of a further large acquisition, the net leverage could exceed 1x. 

Healthy Revenue Growth Although Margins to Remain Muted in FY22: MCL’s consolidated revenue increased 6.5% to INR23.7 billion in FY21 (FY20: down 28.1% yoy as KTSN’s operations were reclassified as discontinued) on account of growth in the aftermarket segment (up 23% yoy) in which the company has been taking steps to increase its market share, as welI as in the information and connected systems (ICS) segment (up 7.5% yoy) due to an increase in input content in wiring harness post the transition to Bharat Stage VI. However, EBITDA margins declined to 9.3% in FY21 (FY20: 11.1%, FY19: 9.5%) on account of a) weaker operating leverage in 1QFY21, b) an increase in raw material prices from 2HFY21 that are passed on to original equipment manufacturers (OEMs) with a lag of three-to-six months, c) lower labour productivity in the wiring harness division due to a reverse labour migration of part of the skilled labour force; and d) lower industry volumes across auto segments.

During 1HFY22, MCL recorded a revenue of INR12.9 billion (1HFY21: INR8.3 billion, 1HFY20: INR11.4 billion) due to demand pick-up across domestic segments and healthy exports, along with higher realisations on account of the raw material price pass through. The EBITDA margin recovered to 10.6% in 2QFY22 (1QFY22: 5.5%, 4QFY21: 11.2%, 3QFY21: 11.1%) as profitability in the ICS segment is gradually recovering with copper price passthrough to customers and increasing sales volumes.

In FY22, Ind-Ra expects MCL’s consolidated revenues to increase 15%-18% yoy, on account of an increase in OEM sales volumes, focus on increasing the share from aftermarket and exports, as well as higher realisations due to elevated raw material prices. However, MCL's margins could remain flattish in FY22 at 9%-9.5%, impacted by the increased raw material prices which are passed on to customers with a lag. Ind-Ra believes over the medium term, MCL’s scale of operations and profitability will benefit from a strong order book position, focus on aftermarket and exports, diversified product and segment profile, and introduction of new products. A sustained improvement in these metrics remains a key rating driver. 

Liquidity Indicator – Adequate: MCL’s free cash flow turned negative at INR0.6 billion in FY21 (FY20: INR2.9 billion, FY19: INR0.4 billion), due to lower EBITDA and working capital absorption. Although the company has taken measures to reduce working capital requirements, the net cash cycle lengthened to 54 days in FY21 (FY20: 45 days, FY19: 69 days), primarily due to an increase in the receivables at the standalone level due to higher sales during 4QFY21. Nevertheless, the company generated positive free cash flow of INR0.4 billion during 1HFY22, due to positive working capital contribution from receivables normalisation. MCL’s capex remained moderate at 5%-7% of the revenue over FY20-FY21, and is likely to be stable over the medium term. The month-end utilisation of the working capital facilities remained moderate at about 54% for the 12 months ended October 2021. 

MCL has debt repayments of INR1.4 billion over FY22-FY24, which will be comfortably met through internal accruals. The liquidity is supported by cash and equivalents of INR4.6 billion at end-1HFY22 (FYE21: INR4.8 billion, FYE20: INR4.7 billion, FYE19: INR3.6 billion). The company plans to use the proceeds from QIP for inorganic expansion. The management has been exploring acquisitions since FY19, and in November 2021, the board approved the acquisition of the balance stake in MSIL totalling INR1.6 billion from these funds. However, the remaining cash balances will continue to have a negative carry. Ind-Ra will continue to monitor the use of the cash balances. 

Losses at JV and Associate: Minda VAST Access Systems’ revenue (FY21: INR1.4 billion, FY20: INR1.6 billion, FY19: INR2.2 billion) and EBITDA margin (negative 1.8%, negative 3.9%, 3%) have remained subdued on account of a smaller order book and lower operating leverage than earlier. During 1HFY22, however, its EBITDA profitability improved to mid-to-high single digits as scale improved yoy. Also, while Furukawa Minda Electric returned to profitability in FY19 on account of improved control on raw material sourcing and new order addition, its profitability was hit over FY21-1HFY22 as it is also engaged in wiring harness production. On the other hand, MSIL continues to generate healthy EBITDA margins (FY21: 11.7%, FY20: 11.1%, FY19: 12.4%). 

While the management does not envisage financial support to these entities over the near term, a delay in a turnaround in operations for a sustained period could result in support requirements from MCL. However, a support of INR50 million-60 million is likely for a recently set up 51% JV, Minda Infac, as it ramps up operations over the next two-to-three years. A turnaround and a sustained improvement in the operating performance at these entities remains a monitorable for the agency. 

Standalone Financials: MCL recorded a revenue of INR22.9 billion in FY21 (FY20: INR21.3 billion), EBITDA margin of 9.2% (11.3%), net leverage of 0.2x (negative 0.3x) and interest coverage of 5.5x (5.9x).


RATING SENSITIVITIES

Positive: A sustained increase in the EBITDA, backed by a higher contribution from all segments, an  improvement in the working capital cycle, resulting in the net leverage staying below 1.0x, along with new JV tie-ups and entry into new technologies enabling scale in emerging areas, all on a sustained and consolidated basis, could result in a positive rating action. 

Negative: A significant reduction in the EBITDA margin, an elongation of the working capital cycle, and/or any major debt-led capex or acquisition, resulting in the net leverage exceeding 2.0x, on a sustained and consolidated basis, could result in a negative rating action.


COMPANY PROFILE

MCL, a part of Spark Minda Group, is a leading manufacturer of diversified auto components such as lock sets, wiring harness, plastics and interior products and supplies them to OEMs in the 2/3W, CV, PV and off the road segments, as well as in the aftermarket. Its production base is spread across 33 plants in India and abroad.

FINANCIAL SUMMARY (Consolidated)

 Particulars

FY21

FY20 (Restated)*

 FY20**

Revenue (INR billion)

23.7

22.2

28.1

EBITDA (INR billion)

2.2

2.5

2.5

EBITDA margin (%)

9.3

11.1

9.0

Interest coverage (x)

5.7

6.0

4.7

Net leverage (x)

-0.0

0.3

0.2

Source: Company, Ind-Ra

*KTSN reclassified as discontinued operations
**KTSN accounted as continued operations


RATING HISTORY

Instrument Type

Current Rating/Outlook

Historical Rating/Outlook

Rating Type

Rated Limits (million)

Rating

4 December 2020

6 December 2019

29 October 2018

3 May 2018

Issuer rating

Long-term

-

IND AA-/Stable

IND AA-/Stable

IND AA-/Stable

IND AA-/Stable

IND A+/Positive

Term loan

Long-term

INR1,764

IND AA-/Stable

IND AA-/Stable

IND AA-/Stable

IND AA-/Stable

IND A+/Positive

Fund-based working capital limits

Long-term/Short-term

INR2,045

IND AA-/Stable/IND A1+

IND AA-/Stable/IND A1+

IND AA-/Stable/IND A1+

IND AA-/Stable/IND A1+

IND A+/Positive/IND A1+

Non-fund-based working capital limits

Long-term/Short-term

INR595

IND AA-/Stable/IND A1+

IND AA-/Stable/IND A1+

IND AA-/Stable/IND A1+

IND AA-/Stable/IND A1+

IND A+/Positive/IND A1+

CP

Short-term

INR500

IND A1+

IND A1+

IND A1+

IND A1+

IND A1+


COMPLEXITY LEVEL OF INSTRUMENTS

Instrument Type

Complexity Indicator

Term loan

Low

CP

Low

Fund-based limits

Low

Non-fund-based limits

Low

 

 

For details on the complexity levels of the instruments, please visit https://www.indiaratings.co.in/complexity-indicators.

 

SOLICITATION DISCLOSURES

Additional information is available at www.indiaratings.co.in. The ratings above were solicited by, or on behalf of, the issuer, and therefore, India Ratings has been compensated for the provision of the ratings. 

Ratings are not a recommendation or suggestion, directly or indirectly, to you or any other person, to buy, sell, make or hold any investment, loan or security or to undertake any investment strategy with respect to any investment, loan or security or any issuer.

ABOUT INDIA RATINGS AND RESEARCH

About India Ratings and Research: India Ratings and Research (Ind-Ra) is India's most respected credit rating agency committed to providing India's credit markets accurate, timely and prospective credit opinions. Built on a foundation of independent thinking, rigorous analytics, and an open and balanced approach towards credit research, Ind-Ra has grown rapidly during the past decade, gaining significant market presence in India's fixed income market. 

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Analyst Names

  • Primary Analyst

    Pallavi Bhati

    Senior Analyst
    India Ratings and Research Pvt Ltd DLF Epitome, Level 16, Building No. 5, Tower B DLF Cyber City, Gurugram Haryana - 122002
    0124 6687256

    Media Relation

    Ankur Dahiya

    Manager – Corporate Communication
    +91 22 40356121