Fitch affirms SMRP BV at 'BB+'; Outlook stability

Fitch Ratings has affirmed Netherlands-based Samvardhana Motherson Automotive Systems Group BV's (SMRP BV) Long-Term Issuer Default Rating (IDR) at 'BB+'. The Outlook is Stable. Fitch has also affirmed SMRP BV's senior secured bonds at 'BBB-'.

The ratings reflect SMRP BV's strong linkages with its shareholders, Motherson Sumi Systems Limited (MSSL) and Samvardhana Motherson International Limited (SMIL), given the aligned economic interests. Fitch rates SMRP BV based on SMIL's consolidated financial profile.

The Stable Outlook reflects Fitch's view that deterioration in MSSL's profitability due to a slower-than-anticipated ramp-up at SMRP BV's newly commissioned plants - which will increase leverage, as measured by adjusted net debt/operating EBITDAR, above Fitch's previous expectation of 2.8x for the financial year ending March 2020 (FY20) - is temporary. We now forecast MSSL's consolidated leverage at 3.3x in FY20 - a level that exceeds the 3.0x threshold above which we may consider negative rating action. However, leverage should fall to 2.6x in FY21, as gradual production ramp-up and steps to improve efficiencies should reduce losses at the new plants. A prudent approach to capex and recovery of tooling-related receivables from original equipment manufacturers (OEM) should also support free cash generation. 

SMRP BV's ratings continue to factor in the company's long-standing customer relationships with financially strong OEMs, which support its position as a leading supplier of rear-view vision systems and interior and exterior modules to the global automotive industry. The ratings also take into consideration the group's disciplined approach to expansion, which has improved business diversification while limiting financial leverage. We believe these factors help to mitigate sector-specific risks, including the cyclical nature of automotive sales and dependence on large OEM customers.

Key Rating Drivers
Profitability to Normalise: Fitch expects MSSL's consolidated EBITDA margin to improve to 8.7% in FY21 (FY20 estimate: 7.1%), as steps to improve efficiencies amid volume ramp-up at OEM customers will help the company reduce losses at new plants, including at large plants in the US and Hungary that were commissioned in FY19. In particular, SMRP BV has made progress in addressing issues around skilled labour availability at the US plant, which accounted for the majority of start-up losses in 1HFY20. The US plant has also seen a gradual ramp of volume after initial delays in volume ramp-up at the OEM customer.

We expect MSSL to generate positive free cash flow in FY20, as its prudent approach to capex in view of a muted outlook for global auto sales will help to counterbalance lower operating cash flow. Free cash generation will improve further in FY21 on higher profitability, while capex should remain moderate following the completion of new facilities in FY19 and soft industry conditions.

Fitch believes MSSL's selective approach to acquisitions, including identifying attractively priced targets that are a suitable strategic fit, and adherence to prudent funding practices mitigate risks from the company's publicly stated target of nearly doubling its FY19 revenue by 2020. Nonetheless, any large debt-funded acquisition may pressure SMRP BV's rating.

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