Case Study 2: Auto Components Supplier

  • Company Profile: Tier-II auto components maker, ₹300 crore revenues.
  • Initial Shadow Rating: BB+ (just below investment grade).
  • Reduced largest customer share to 48%.
Company turnover
₹ 0 Cr
Reduction in borrowing cost
~ 0 %

Background

A Tier-II auto components manufacturer supplying precision parts to major OEMs in India had revenues of ₹300 crore. The company was profitable but highly dependent on a single large automobile manufacturer, which contributed nearly 70% of its sales. The promoters wanted to raise term loans for capacity expansion and approached us for a shadow rating to assess their preparedness before a formal credit rating exercise.

Challenge

The shadow rating placed the company at BB+, just below investment grade. The key reasons were:

  • High customer concentration risk – over-reliance on one client exposed the company to revenue volatility if orders reduced.
  • Moderate profitability margins (EBITDA margin ~8%), limiting internal accruals.
  • Weak financial flexibility – Company had limited banking relationships and lacked diversity in lenders.
  • Working capital intensity – receivables cycle stretched at ~100 days due to slow OEM payments.

 

If the company directly underwent a formal rating, there was a high chance the rating would remain non-investment grade, thereby making debt expensive and expansion difficult.

Interventions

We entered into an 12-month retainership arrangement to address these structural issues:

Customer Diversification

Assisted management in bidding for new contracts with two additional OEMs and one Tier-I supplier. Within a year, the largest customer’s share reduced from 70% to 48%.

Profitability Improvement

Guided on cost rationalization and productivity enhancement, including bulk procurement of raw materials and lean production processes. EBITDA margin improved to 10.5%.

Banking Relations

Helped the company expand its banking pool from 2 lenders to 5, improving financial flexibility.

Receivable Management

Introduced invoice discounting mechanisms and renegotiated credit terms with OEMs, bringing receivable days down to 75.

Disclosures

Implemented quarterly MIS and board reporting framework to align governance practices with rating agency expectations.

Outcome

At the end of the engagement, the company’s credit metrics were stronger:

  • Debt/Equity improved to 1.3x from 1.8x.
  • EBITDA margins expanded by nearly 250 basis points.
  • Customer concentration reduced significantly, mitigating key rating risk.

 
During the formal rating process, the company achieved an BBB+ rating, two notches higher than the shadow rating. This allowed them to secure term loans at competitive rates, saving ~1.5% on borrowing costs.

Key Takeaway

For auto ancillary businesses, dependence on a single OEM is a major rating constraint. Shadow ratings help flag such risks early, and with structured diversification and financial planning under retainership, companies can achieve investment grade or even higher ratings, enabling long-term sustainable growth.

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