Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL A1+’ rating of Rs.300 Crore on the commercial paper programme of TVS Srichakra Ltd (TVS Srichakra).

 

TVS Srichakra achieved a 23% growth in operating income during the nine months of fiscal 2023 over the corresponding previous period, amidst healthy demand for tyres from two and three-wheeler original equipment manufacturers, and steady aftermarket and export demand. CRISIL Ratings expects the company to register 18-20% growth in revenues on-year in fiscal 2023. Despite healthy revenue growth, operating margins are estimated at ~7-8% in fiscal 2023, primary due to higher natural rubber prices for most part of the year, and intensifying pricing competition in the aftermarket. Over the medium term, the company is expected to register revenue growth of 10-15% per annum on the back of continued steady demand from the two-wheeler segment and ramp up of exports with the commencement of additional capacity for off-highway tyres (OHT) from December 2022. Despite higher spend on brand building spend, moderating rubber prices and increased sale of higher margin OHT should help a gradual improvement in operating margins to ~8-10% over the medium term.

 

TVS Srichakra is implementing a project pertaining to establishment of Off-highway tyres (OHT) plant in Madurai (Tamil Nadu) at a total cost of Rs 340 crore in two phases. As part of phase 1, the company incurred Rs.260 crore for OHT expansion in fiscal 2023 which was funded by debt of Rs.240 crore. The phase 1 with capacity of 25 Tonnes /day which was completed in December 2022 is expected to achieve optimal utilization in next two fiscals. The company is also implementing Phase-II of OHT expansion, expected to be implanted by fiscal 2024, which will increase capacity further by  17 Tonnes/day. The OHT expansion project has an additional revenue potential of Rs ~500 crore per annum at optimal utilization and 100% of output shall cater to export markets.

 

TVS Srichakra’s financial profile continues to be adequate, supported by healthy cash generating ability. Despite the planned capex by the company for OHT and also to enhance two-three-wheeler tyre capacity, which will involve part debt funding, gearing is expected to stay below 0.70-0.80 times. Interest cover also continues to remain at healthy levels. Liquidity continues to be adequate supported by sufficient annual accruals of over Rs. 200 crores and only moderately utilised bank limits.

 

The rating continues to be supported by TVS Srichakra’s healthy market position in the domestic two- and three-wheeler tyres segment, supported by established brands and extensive distribution network. The ratings are also supported by the company’s adequate financial risk profile, and health cash generating ability. These strengths are partially offset by a modest product portfolio compared with domestic peers, and susceptibility of profitability to volatility in raw material prices and intense competition.

Analytical Approach

For arriving at its rating, CRISIL Ratings has combined the business and financial risk profiles of TVS Srichakra and all its subsidiaries, held directly or indirectly, as the entities share a common management, and operate with significant operational and financial linkages. The list of entities consolidated is given at Annexure.

 

Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

• Established position in the domestic two and three-wheeler tyres industry: TVS Srichakra is one of the leading domestic manufacturers of two- and three-wheeler bias tyres and has emerged as the largest supplier to all established domestic automobile OEMs including Bajaj Auto Ltd (‘CRISIL AAA/Stable/CRISIL A1+’), Hero MotoCorp Ltd (‘CRISIL AAA/Stable /CRISIL A1+’), Honda Motorcycle & Scooter India Ltd, Suzuki Motorcycles India Ltd, TVS Motor Co Ltd and Yamaha Motor India. The company is the third-largest player in the domestic two-wheeler bias tyres aftermarket segment, supported by its network of over 3,000 dealers and healthy product range. Exports through the TVS Eurogrip brand (off-the road tyres for agricultural, mining and industrial use) are mainly to European, North American, African and Middle East countries. Capacity expansion in the two-wheeler and three-wheeler tyre segment will further support its market position in the medium term.

 

For fiscal 2023, the OEM segment contributed ~46-48% of the total revenue, aftermarket ~37% and 13-14% from exports, with balance from contract manufacturing, reflecting diversified revenue streams.

 

• Strong operating efficiency: Cost-control measures, upgrading of manufacturing facilities and prudent working capital management have significantly helped to maintain its operating efficiency. Production efficiency has enhanced over the years through total productive maintenance initiatives. With increasing share of exports from the recently commenced capex, and stabilizing natural rubber prices, the company is expected to gradually enhance its operating margins to 8-10% over the medium term.

 

• Adequate financial risk profile: The financial risk profile is adequate, supported by healthy annual cash accruals. Gearing is comfortable at 0.66 times (estimated at March 31, 2023), and is expected to be under 0.8 times over the medium term despite partly debt funded capex plans Interest cover is also adequate at over 6 times (estimated in fiscal 2023), despite moderation in operating profitability and higher debt levels. This is because the company has swapped interest portion of expansion related debt in Euros and has benefitted from lost cost. The company is expected to incur capex of ~Rs.200-250 crores in fiscal 2024 for phase II of OHT expansion, two and three-wheeler tyre expansion and routine modernization. Capex is expected to be under Rs.200 crore p.a. thereafter. Further, the bank limit utilization is at moderate levels of ~65-70% providing adequate cushion for incremental working capital borrowings, as revenue levels are stepped up.

 

Weakness:

• Limited diversity in revenue profile: Despite a strong market position in two-wheeler tyres, TVS Srichakra has limited product diversification, compared with its established peers such as MRF Ltd, JK Tyres Ltd and Apollo Tyres Ltd (’CRISIL AA+/Stable/CRISIL A1+’), who also cater to both passenger and commercial vehicles. This makes its operations dependent on prospects of two-wheeler OEMs. A gradual step up in  demand from European region for OHT products could help derisk revenue dependence on two-wheeler tyres, adding to revenue diversity for TVS Srichakra.

 

• Susceptibility of operating margin to volatility in raw material prices: Intense competition and sharp fluctuations in raw material prices lead to volatile operating profitability. In view of increasing competition and to gain market share, all tyre manufacturers, including TVS Srichakra, have undertaken price cuts in the aftermarket segment, which has exerted pricing pressure in the second half of fiscal 2023, and may also continue in fiscal 2024. However, in the OEM segment, input price arrangements have a upward/ downward passthrough clause with a quarterly lag. Continued heavy spend on branding to push products shall continue limit significant improvement in operating margins, despite a step up in higher margin OHT sales over the medium term.

Liquidity: Adequate

Expected annual cash accrual of Rs.200-220 crore over the medium term will be sufficient to meet debt obligation of around ~Rs.44 crore and ~Rs.51 crore in fiscals 2024 and 2025, respectively. Debt obligations may increase in fiscal 2025, depending on loan drawdown for its capacity expansion plans. Further adequate headroom is available in the form of bank limits (including commercial paper of Rs 300 crore) which is moderately  utilized at close to 70% to meet incremental working capital needs, as business levels are stepped up. Capex is expected to be met with a combination of debt and accruals.

Rating Sensitivity factors

Downward factors

• Sustained decline in operating profitability below 7% due to increase in competitive pressures, higher branding spend or spike in raw material prices
• Addition debt funded capex and elongation of working capital cycle, materially impacting debt protection metrics

About the Company

Incorporated in 1982, TVS Srichakra is a part of the TVS Mobility group and is one of the leading domestic manufacturer of two-wheelers and three wheelers, and OHT bias tyres. It serves leading OEMs as well as its group company, TVS Motors. The domestic aftermarket supply is backed by strong dealer base of 2400 dealers and 34 warehouses in India to help them with the domestic after-market business. The company also exports to the USA, Europe, Africa, South America and Southeast Asia. TVSSL has a design centre in Milan, Italy with a supporting R&D centre in Madurai. The company currently has two manufacturing facilities, viz., Madurai (Tamil Nadu) and Rudrapur (Uttarakhand).

 

For 9 months of fiscal 2023, TVS Srichakra (consolidated) reported operating income of Rs. 2302 crore and PAT of Rs. 55 crores (Operating Income of Rs. 1872 crores and PAT of Rs. 35 crores in corresponding period of fiscal 2022).

Any other information: Not applicable