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Samvardhana Motherson Automotive Systems Group BV (SMRP BV, BB/Stable) and parent Samvardhana Motherson International Ltd’s (SAMIL) plan to acquire non-automotive businesses will not affect SMRP BV’s rating headroom, considering the minimal increase in financial leverage, says Fitch Ratings. “We believe the recently announced small acquisitions underscore the company’s measured approach amid its aim to expand in the non-automotive segments,” it said in a note.
The Netherlands-based SMRP BV is acquiring France-based AD Industries (ADI), a provider of components for aircraft engines and medical devices, with revenue of EUR129 million and reported EBITDA of EUR9.5 million in 2022, for an enterprise valuation of up to EUR147 million. SAMIL is also acquiring controlling stakes in two smaller entities focused on the aerospace and healthcare segments, for an aggregate enterprise value of up to Rs 100 crore. The transactions are scheduled to be completed by the financial year ending March 2024 (FY24), subject to regulatory approvals.
“We rate SMRP BV based on the consolidated profile of its stronger parent, SAMIL, under our Parent and Subsidiary Linkage Rating Criteria. The acquisitions’ small size will limit the impact on SAMIL’s financial leverage, despite our expectation of the company making additional investments to enhance production capability and improve profitability,” the rater added.
Fitch Ratings said it expects SAMIL’s consolidated net debt/ EBITDA, pro forma for the full FY24 contribution from the acquisitions, will reach 2.8x, against our previous expectation of 2.7x and negative rating sensitivity of 3.0x. The leverage headroom will widen after FY24, as we expect further improvement in SAMIL’s profitability on easing supply-chain constraints and cost pressures, after a significant y-o-y profitability increase in 1QFY24.
The acquisitions do not change our assessment of SAMIL’s business risk in light of the small size. Nonetheless, the ADI acquisition marks SAMIL’s first significant investment towards its strategic goal of diversifying its end-market exposure away from autos.
“We believe ADI’s presence across a range of aircraft platforms and engine components, and its longstanding customer relationships - underscored by a sizeable order book of EUR850 million - will extend SAMIL’s end-market diversification and value-addition capability. We think the retention of ADI’s management, favourable demand prospects in the aerospace sector, and SAMIL’s strong record in integrating acquisitions mitigate the risks of entering a new sector,” according to Fitch.
SAMIL may evaluate further opportunities after announcing a number of transactions since September 2022. “We believe the company’s focus on identifying targets that fit its strategy and adherence to prudent funding practices mitigate the risks, although a large debt-funded acquisition may pressure SMRP BV’s ratings,” it further added
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