Deltronix India rated 'Fitch BBB(ind)'/ stable

Fitch Ratings has assigned Deltronix India Limited (DIL) a National Long-Term rating of 'Fitch BBB(ind)'. The Outlook is Stable.

Fitch Ratings-New Delhi/Singapore-21 September 2011: Fitch Ratings has assigned Deltronix India Limited (DIL) a National Long-Term rating of 'Fitch BBB(ind)'. The Outlook is Stable.

The rating reflects the stable performance of DIL's existing Indian operations and the strong relationship of its 100% subsidiary - Francaise De Roues (F2R, France's largest alloy wheel manufacturer) - with key automobile companies including Peugeot SA ('BB+'/Positive), Nissan Motor Co., Ltd. ('BBB-'/Positive) and Renault SA ('BB+'/Stable).

The ratings also factor in DIL's plans to start a new one million units per annum alloy wheel manufacturing facility in Tamil Nadu (India) by February 2012. The company has access to technology through F2R and a technical know-how agreement with a key alloy wheel manufacturing company in Korea. DIL already has orders of over 60% of its proposed capacity addition for alloy wheels from Maruti Suzuki India Limited (MSIL) and key customers of F2R. Fitch, however, notes that the company has limited experience in the alloy wheel business and also in executing a project of this scale.

The ratings are, however, constrained by DIL's high exposure to uncertain European markets and the associated regulatory risk, given that the company's alloy wheel business strongly depends on the automobile industry in Europe. In the six months ended June 2011, F2R generated 99% of its revenue from its top three customers - Peugeot, Nissan and Renault.

DIL's consolidated revenue increased to INR3,503m in FY11 from INR349m in FY10 on account of the F2R acquisition, while overall EBITDA margins fell to 4.8% from 19.1% due to the latter's low margins. Fitch expects overall margins to improve in the medium term as the new alloy wheel manufacturing facility starts production and F2R's cost rationalization plans come into effect.

Positive rating guidelines include new large orders for the alloy wheel business and better-than-expected sales and profit resulting in improved financial leverage (adjusted net debt/EBITDAR) on a sustained basis. Negative rating guidelines include lower-than-expected sales and profits from the alloy wheel business resulting in high financial leverage on a sustained basis.

DIL, a closely held company, started its operations in 1993. It is India's largest manufacturer of evaporative emission activated carbon canisters and one of the leading manufacturers of ignition wires, fluid reservoirs and ignition rubber components in the country. The company's well-diversified customer base includes MSIL, Hyundai Motors India Limited, Tata Motors Ltd ('BB'/Stable), Ford India Private Limited and Fiat India Automobiles Private Limited. DIL branched into alloy wheels manufacturing after acquiring F2R in June 2010.

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