Rating Rationale
October 08, 2020 | Mumbai
Innovative Tyres and Tubes Limited
Ratings Reaffirmed
 
Rating Action
Total Bank Loan Facilities Rated Rs.40.62 Crore
Long Term Rating CRISIL BB/Stable (Reaffirmed)
Short Term Rating CRISIL A4+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has reaffirmed its 'CRISIL BB/Stable/CRISIL A4+' ratings on the bank facilities of Innovative Tyres and Tubes Limited (ITTL).
 
The ratings reflect ITTL's moderate capital structure and benefits from the extensive experience of its promoters and longstanding relationships with diverse customers. These strengths are partially offset by working capital intensive operations, weakening margin and debt protection measures, exposure to intense competition in the tyre industry and susceptibility to volatility in raw material prices.
 
Earlier, CRISIL had downgraded the ratings to CRISIL BB/Stable/CRISIL A4+ from CRISIL BBB-/Stable/CRISIL A3 through its release dated September 18, 2020. The downgrade reflects CRISIL's belief that ITTL's business profile shall be restrained over medium term driven by lower profitability and high working capital intensity. During fiscal 2020, ITTL's operating margin came down further to around 1% compared to around 5% and 10% in the prior two years. This has been driven by high raw material costs, and the company's inability to fully pass it on to customers, which are large, established players. Further, increased overheads on account of completed capital expansion as against moderation in turnover meant additional bottomline pressure. Also, while the capital structure remains moderate, liquidity has been constrained driven by cash losses and high working capital intensity leading to highly drawn bank limits.

Key Rating Drivers & Detailed Description
Strengths
* Moderate capital structure
The company had a moderate capital structure reflected in networth and gearing of Rs 69 crore and 0.3 time, respectively, as on March 31, 2020. ITTL's debt protection measures were however constrained by sharp dip in operating margin to around 1% leading to cash loss of around Rs.1.5 cr in fiscal 2020. Over medium term while debt protection measures are expected to recover same shall remain much constrained compared to previous levels.
 
* Promoters' extensive experience in the tyre industry and diverse customer base
The promoters Mr Mukesh Desai and Mr Pradeep Kothari have experience of more than 20 years in the tyre industry, which will continue to drive growth.
 
ITTL supplies tyres to major players such as Apollo International Ltd, Eastman Industries Ltd, and Tionale Pte Ltd. Also, ITTL has been doing jobwork for CEAT Ltd since 1996. The company enjoys geographical diversification with export contributing almost equally as the domestic business to revenue. The company also generates around a fifth of revenue through sales from its own outlets.
 
Weaknesses
* Working capital intensive operations
ITTL's operations entail large working capital requirements, as reflected in its high gross current assets (GCAs) of over 5 months as on March 2020. The company's has a wide range of tyres leading to high inventory levels of over 3 months. Also, receivables are moderately high, at around 45 days, as on March 31, 2020.
 
* Exposure to intense competition in tyres industry
The tyre industry in India is dominated by a few large players. This exposes ITTL to intense competition and pricing pressures. Being a supplier to some of these players, ITTL can grow with these players, but has limited bargaining power. Despite widespread presence across domestic and overseas markets, ITTL's scale of operations has remained modest, as reflected in revenue of Rs 151 crore in fiscal 2020.
 
* Susceptibility of the operating margin to volatility in raw material prices
ITTL's profitability is vulnerable to movements in the price of key raw materials, rubber and carbon black, which account for 65-70% of the total cost structure of the company and have volatile prices. This is partly reflected in the decline in margin over last couple of years. CRISIL believes ITTL's profitability will remain susceptible to fluctuations in raw material prices.
Liquidity Stretched

ITTL has stretched liquidity driven by high working capital requirements and cash losses in fiscal 2020. ITTL had high GCA of over 5 months leading to almost fully drawn bank limits. The interchangeability from non-fund based limits to fund based limits, and moratorium on interest, installments provided support to ITTL, during 5 months to August 2020. The continued pressure on business, margin shall restrain ITTL's margin, liquidity in fiscal 2021 though partially being offset by disbursal of Rs. 4.27 cr Guaranteed Emergency Credit Limit and Rs. 1.6 cr COVID-19 enhancement limits.

Outlook: Stable

CRISIL believes ITTL's business risk profile will remain stable over the medium term supported by its promoters' experience and its diversified customer base.
 
Rating sensitivity factors
Upward factors
* Sustained increase in revenue by 20% and recovery in operating margin to the historical level
* Improvement in working capital cycle or liquidity

Downward factors
* Stretch in working capital cycle with gross current assets rising to over 6 months
* Continued pressure on the topline or margin

About the Company

ITTL manufactures and exports bias tyres. It offers a wide range of products in the truck/bus, agricultural and OTR, and motorcycle/three-wheeler segments. In addition to presence in Gujarat, Maharashtra, Delhi, and Punjab, ITTL exports to more than 40 countries across 5 continents. Its manufacturing plants are at Halol in Gujarat.

Key Financial Indicators
As on / for the period ended March 31   2020 2019
Operating income Rs crore 151 172
Reported profit after tax Rs crore -9.8 1
PAT margin % -6.5 0.6
Adjusted debt/adjusted networth Times 0.3 0.3
Interest coverage Times 0.65 4.56

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments and are included (where applicable) in the Annexure -- Details of Instrument in this Rating Rationale. For more details on the CRISIL complexity levels, please visit www.crisil.com/complexity-levels.
Annexure - Details of Instrument(s)
ISIN Name of Instrument Date of Allotment Coupon
Rate (%)
Maturity Date Issue Size
(Rs Cr)
Complexity Level Rating Assigned with Outlook
NA Bank Guarantee NA NA NA 1 NA CRISIL A4+
NA Cash Credit NA NA NA 15 NA CRISIL BB/Stable
NA Foreign Exchange Forward NA NA NA 1 NA CRISIL A4+
NA Letter of Credit NA NA NA 14 NA CRISIL A4+
NA Working Capital Facility NA NA NA 2.32 NA CRISIL BB/Stable
NA Standby Line of Credit NA NA NA 1 NA CRISIL BB/Stable
NA Term Loan NA NA Nov-2023 6.3 NA CRISIL BB/Stable
Annexure - Rating History for last 3 Years
  Current 2020 (History) 2019  2018  2017  Start of 2017
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund-based Bank Facilities  LT/ST  25.62 CRISIL BB/Stable/ CRISIL A4+  18-09-20  CRISIL BB/Stable/ CRISIL A4+  19-11-19  CRISIL BBB-/Stable/ CRISIL A3  15-10-18  CRISIL BBB+/Stable/ CRISIL A2    --  -- 
                29-09-18  CRISIL BBB+/Stable       
Non Fund-based Bank Facilities  LT/ST  15.00 CRISIL A4+  18-09-20  CRISIL BB/Stable/ CRISIL A4+  19-11-19  CRISIL BBB-/Stable/ CRISIL A3  15-10-18  CRISIL BBB+/Stable/ CRISIL A2    --  -- 
All amounts are in Rs.Cr.
 
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Bank Guarantee 1 CRISIL A4+ Bank Guarantee 1 CRISIL A4+
Cash Credit 15 CRISIL BB/Stable Cash Credit 15 CRISIL BB/Stable
Foreign Exchange Forward 1 CRISIL A4+ Foreign Exchange Forward 1 CRISIL A4+
Letter of Credit 14 CRISIL A4+ Letter of Credit 11.5 CRISIL A4+
Standby Line of Credit 1 CRISIL BB/Stable Letter of Credit 2.5 CRISIL BB/Stable
Term Loan 6.3 CRISIL BB/Stable Standby Line of Credit 1 CRISIL BB/Stable
Working Capital Facility 2.32 CRISIL BB/Stable Term Loan 8.62 CRISIL BB/Stable
Total 40.62 -- Total 40.62 --
Links to related criteria
CRISILs Approach to Financial Ratios
Rating criteria for manufaturing and service sector companies
Rating Criteria for Auto Component Suppliers
CRISILs Bank Loan Ratings
CRISILs Criteria for rating short term debt

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