The ratings reflect the sustainable way that Tupy has been increasing its cash flow from operations, with relatively stable margins, combined with a conservative capital structure and healthy liquidity policy. The ratings also factor in the high exposure of Tupy's business to the North American market and to large automakers, as well as the competitive environment, cyclicality and capital intensive characteristics of the automotive industry. The ratings also take into account the company's small scale when compared to the largest auto-parts players worldwide.
The ratings further contemplate Tupy's leading position in the casted engine blocks and cylinder heads markets in the
Fitch believes that in the next few years Tupy will continue to preserve conservative leverage, as measured by the net debt/EBITDA ratio below 2.0x. The company's business growth and profitability should remain sufficiently strong to preserve its current credit profile. The Stable Outlook contemplates the absence of relevant debt-financed acquisitions, which could materially impact Tupy's major credit indicators.
Key Rating Drivers
Increasing Cash Generation Sustained by Highly Added Value Products
In the recent years, Tupy has shown satisfactory capacity to increase its cash flow from operations (CFFO). The company's CFFO generation has benefited from a combination of increasing volumes, stable costs and focus on higher added value products. During the last 12 month-period (LTM) ended in
Tupy's CFFO generation has benefited from moderate working capital needs in recent years. As of March (LTM), the company reported CFFO of
Fitch believes that Tupy's FCF will be moderately pressured in 2014, on the back of high investments in modernization and automation, estimated at
Conservative Capital Structure
Tupy has historically reported conservative capital structure. The company has prudently managed low leverage, adequate balance between short and long-term funds and relatively lengthened debt amortization profile. In
Debt structure is compatible with the company's business profile and cash generation. At the end of
Robust Liquidity Supports Industry Volatilities
Tupy's liquidity is robust. The company has a well-defined strategy to keep hefty cash position over its short-term debt obligations, prudently managing the exposure of its cash generation to the volatility inherent to the cyclical automotive industry and to the fluctuations of raw material costs characteristic of this sector. The company's cash reserves totaled
Higher Diversification Stemming from Acquisitions
During the last years, Tupy has demonstrated good capacity to reduce its exposure to local market, which growth perspectives for the next years remains under pressure. The company accelerated its internationalization in the end of 2012, when it acquired major operations in
Fitch believes that Tupy will continue to pursue higher geographic diversification and scale gains in the next few years, with the aim of strengthening its presence in the global casted engine blocks and cylinder heads markets. Despite Tupy's acquisitive track record, Fitch does not expect the company to make relevant acquisitions exclusively financed with debt which could materially change its main credit indicators.
Strong Competitive Position Despite the Low Operating Scale
Tupy is currently one of the main global suppliers of casted engine blocks and cylinder heads. The company has a market participation of 43% in
The company also has high revenue concentration in a few strategic clients, including large global OEMs (Original Equipment Manufacturers), through which it has being able to leverage its revenues in recent years due to the supply of multiple products categories in different regions. As the global supply needs of these OEMs become more complex and migrate to other regions, Tupy will have the challenge to keep its competitive position in the sector without damage its cost structure and margins.
Although not expected in the short to medium term, positive rating actions should occur if case Tupy strengthens its FCF generation, resulting in net adjusted debt/EBITDA ratio below 1.0x on a sustainable basis, with the maintenance of robust liquidity. An increase in Tupy's scale, combined with higher geographic and product diversification will also be positive, in Fitch's view.
Negative rating actions could occur in case of a relevant deterioration in Tupy's FCF generation, resulting in a deterioration of its main credit indicators, with adjusted net debt/EBITDA ratio above 2.5x, without expectation of improvement, and cash/short-term debt below 1.5x.
Additional information available at 'www.fitchratings.com' or 'www.fitchratings.com.br'.
--'Corporate Rating Methodoloty - Including Short-Term Ratings and Links Between Holding and Subsidiaries' (
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage
Fitch Ratings Brasil Ltda.
Source: Fitch Ratings
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