The rating upgrade is driven by Brakes India Ltds demonstrated ability to sustain its competitive position in the domestic automotive braking industry in the face of pressures from both new entrants and industry downturns. This has enabled the company to sustain its financial profile through the downturn in the Indian automobile market and benefit from the current improvement in market conditions. Crisil expects the improvement in the companys financial profile to continue in the medium term.
In addition, the ratings draw comfort from Brakes Indias dominant and diversified presence across all segments of the braking systems market for four-wheel vehicles, its long-standing relationship with all leading domestic four-wheel manufacturers and its strong presence in the export market through its foundry business. These strengths are tempered by Brakes Indias continued dependence on automobile manufacturers for a large part of its domestic revenues and the consequent pricing pressures that limit the upside potential of its operating margins. Crisil believes that the recent change in the ownership of Brakes Indias collaborator, TRW, will not impact the companys business position, in general, and the foundry business in particular, in the medium term.
Strong product and customer diversity complemented by high business shares with customers: Brakes India has a dominant and diversified presence across all segments of the braking systems market for four-wheel vehicles, which has reduced the volatility and vulnerability of its revenues. Brakes India holds strong business shares with all major four-wheel automobile manufacturers in India, which underscores its superior product and service quality. Due to its presence across all major automobile manufacturers in the domestic market, the impact of pricing pressures from any one customer on its margins is reduced.
Sustained market position despite competition: Brakes India has demonstrated its business strengths despite difficult industry conditions and pressure from new entrants.
Over the years, Brakes India has been successful in sustaining the leadership in domestic market in spite of competition from global players. Brakes India is estimated to have a market share of over 50 per cent in the domestic four-wheel braking industry (sales to domestic automobile manufacturers). Moreover, in 2001-02, when most of Brakes Indias end-user markets witnessed a downturn, the company reported a revenue growth of 9 per cent over the previous year. The companys presence across markets and automobile segments enables it to diversify the risk associated with dependence on any one user industry or market.
Strong presence in exports from the foundry business: Brakes India is the only Indian brake manufacturer to have commercialised its foundry operations. This has enabled it to not only diversify its revenues but also access international markets. Foundry exports accounted for 66 per cent of foundry sales and 11 per cent of Brakes Indias total revenues in 2001-02. Brakes Indias collaboration with TRW Inc (USA), a global leader in the development and manufacture of braking systems, has aided it in the export market as is evident from the fact that a large portion of its exports are made either directly to TRW or through TRW to global automobile manufacturers. Crisil expects that the recent change in TRWs ownership will not have a material impact on the growth prospects of Brakes Indias foundry exports.
Improvement in financial risk profile likely to be maintained: Brakes Indias financial risk profile has improved significantly in 2001-02 over previous levels. Crisil expects the company to sustain this improvement in the medium term. The company used its cash flows in 2001-02 to curtail its debt levels, which improved its debt protection parameters. Gearing levels reduced to 0.67 times as at March 31, 2002, from a comparable level of 0.86 times as at March 31, 2001. Its overall interest coverage and debt service coverage ratios also improved significantly over the previous levels. Crisil expects Brakes Indias cash flows to remain strong in the medium term and debt levels to reduce from their 2001-02 levels.
The companys strong performance in the current year bears out this expectation. For the six months ended September 30, 2002, Brakes India reported (unaudited) a profit after tax (PAT) of Rs 160 million (Rs 77.3 million in the previous corresponding period) on net sales of Rs 2.7 billion (Rs 2.2 billion). Over the next three years, Crisil expects Brakes Indias financial risk profile to remain in line with its current rating category.
Dependence on revenues from automobile manufacturers: Brakes Indias continuing revenue dependence on domestic automobile manufacturers (which have accounted for over half its overall sales in the last three years) makes the companys profitability vulnerable to pricing pressures from customers that are original equipment manufacturers (OEM). This is especially true as domestic automobile manufacturers target vendors to reduce their material costs so as to maintain their profitability against sluggish demand conditions. Moreover, Brakes Indias ability to realise higher prices for its products is also limited due to persistent competitive pressures and surplus capacity available with its competitors.
Brakes India manufactures complete hydraulic braking systems, mechanical s-cam brakes, caliper (disc) brakes, rubber seals/hoses, brake fluid and ferrous castings. The company has an installed capacity of 7,50,000 brakes sets per annum and 46,500 tonne per annum (tpa) of ferrous casting spread across five manufacturing locations. These are at Padi in Chennai, Sholingur and Polambakkam (both around 100 kms from Chennai), Nanjangud (near Mysore) and Gurgaon. The main products manufactured at each location are:
The domestic braking industry is characterised by a few players that account for a large portion of the market. The industry is largely organised with the unorganised players mainly dominating the lower-end two and three-wheeler drum brakes. Since braking systems are safety critical products and require intensive testing, an automobile manufacturers selection of a brakes vendor is based on the vendors technological collaborations.
Hence, all major domestic brake manufacturers have technical collaborations with global players. Leveraging on their technical collaborations, domestic brake manufacturers have recently begun to export complete braking systems. Export opportunities in braking components are also favourable as global manufacturers are increasingly outsourcing lower value-added components from developing nations due to the cost advantage. The companys brakes division is likely to report over 10 per cent growth in revenues in the current year.
Domestic sales are expected to increase in line with the recovery in the automobile sector, especially in commercial vehicles (CV). But the growth in OEM sales is likely to be offset by a lower rate of growth in aftermarket and export revenues. Over the medium term (three years), Brakes Indias domestic growth will remain at 5 per cent to 7 per cent since the companys ability to increase its already high business shares with existing customers will be limited. Growth in the replacement market will also be limited as the improving quality of products is resulting in longer product life. Any substantial growth in the brakes division will, therefore, be driven by exports. Realisations are likely to remain under pressure, as the company will be constrained to extend price discounts to existing customers.
Brakes India is likely to benefit from the recent trend of global automotive suppliers outsourcing casting requirements from developing nations because of the cost advantage. Consequently, foundry revenues are expected to increase by over 20 per cent in the current year. Nevertheless, foundry exports depend on offtake from TRW. In the wake of Northrop Grummans decision to hive off TRWs automotive division, the sustainability of these exports will be critical for any long-term growth in Brakes Indias foundry revenues.
Rating Sensitivity Factors
Crisil believes that the recent change in Brakes Indias collaborator, TRWs ownership, will not impact the companys business position in general, and the foundry business in particular, in the medium term.
Brakes Indias ability to maintain realisations in the face of pricing pressures from domestic automobile manufacturers will be critical to its future profitability.
Crisil expects that over the next three years, Brakes India will use its cash flows to reduce its overall debt levels and, thereby, maintain its currently comfortable financial risk profile.