TEXT-Fitch revises Motherson Advanced Tooling's outlook to negative; affirms 'Fitch BBB-(ind)'

(The following statement was released by the rating agency)

June 08 - Fitch Ratings has revised India-based Motherson Advanced Tooling Solutions Limited's (MATSL) Outlook to Negative from Stable. Its National Long-Term rating has been affirmed at 'Fitch BBB-(ind)'. A list of additional rating actions is provided at the end of this commentary.

The Outlook revision reflects Fitch's expectation of a further increase in MATSL's financial leverage (net adjusted debt / EBIDTAR) in FY13 (year end March) and thus deleveraging to be delayed till FY14 as against the earlier estimated FY13. This is based on its higher than earlier projected debt-funded capex plans and weak financial performance as per provisional results for the financial year ended March 2012 (FY12); operating profit margin declined to 5.5% (FY11: 10.4%) and financial leverage increased to 17.3x (FY11: 9.3x), and revenue grew only 2.5% yoy to INR360m. Fitch notes that MATSL is undertaking an INR375m capex plan for setting up a new facility at Noida, which has already been delayed by about one year.

The ratings factor in MATSL's established brand in the domestic cutting tools business and limited competition from other companies due to high entry barriers. The ratings also benefit from the 35-year-long experience and business relationships of MATSL's sponsor, the Samvardhana Motherson Group (SMG), in the automotive sector. Fitch derives additional comfort from SMG's consolidated financial profile and its ability to support MATSL's financial commitments, in case of the need. The sponsors infused into MATSL equity of INR23m in FY11 and INR89m in FY12.

The ratings are, however, constrained by MATSL's small size of operations and its inability to ramp up operations since acquisition of Dagger Forst Tool Limited's (DFTL) assets in June 2009. The company had taken significant term loans for the acquisition which, combined with weak profitability, contributed towards high financial leverage in FY12. MATSL is focusing on improving operational efficiencies through re-organising production facilities and strengthening its customer base post the acquisition, which added to its weak profitability in FY12.

The ratings may be downgraded upon any further time or cost overruns on MATSL's capex or a weak operating performance resulting in net adjusted debt / EBIDTAR remaining above 7x post FY13, or any weakening of linkages with SMG. However, successful completion of the capex within time and cost estimates resulting in deleveraging from FY14 onwards as envisaged could cause the Outlook to be revised back to Stable.

In January 2009, MATSL entered into a business transfer agreement (BTA) with DFTL for the transfer of the latter's business for INR461m. As part of this BTA, MATSL has acquired DFTL's production facilities, along with the rights to use the Dagger Forst brand with effect from June 2009. This acquisition was funded through an equity infusion of INR200m by Samvardhana Motherson Finance Limited and term loans of INR300m.

Rating actions on MATSL's bank loans:

- INR252.5m long-term loans (reduced from INR280m): affirmed at 'Fitch BBB-(ind)'

- INR90m fund-based limits: affirmed at 'Fitch BBB-(ind)'/'Fitch A3(ind)'

- INR20m non-fund-based limits: affirmed at 'Fitch BBB-(ind)'/'Fitch A3(ind)'