| TVS Srichakra Limited | ||
| Rating reaffirmed at 'CRISIL A1+' | ||
| Rating Action | ||
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| 1 crore = 10 million | ||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has reaffirmed its ‘CRISIL A1+’ rating on the commercial paper programme of TVS Srichakra Limited (TVS Srichakra).
TVS Srichakra achieved a 17% growth in volumes during the nine months of fiscal 2022 over the corresponding previous period, amidst the slow-down in two-wheeler tyre industry. This was achieved through increased focus on exports and increase in share of business with existing two wheeler original equipment manufacturers (OEMs). Revenue growth was significantly higher at 40% during the nine months of fiscal 2022 due to price increase following the significant increase in raw material cost. The partial pass on of increase in material cost along with normalization of Selling and General Administrative (SGA) expenses (pertaining to sales promotion, advertisement and publicity, travelling and conveyance) that had decreased in fiscal 2021 on account of Covid-19, had resulted in operating margins declining to 7.1% in the nine months of fiscal 2022 from 11.3% in the same period of fiscal 2021.
Over the medium term, the company is expected to register revenue growth of 10-15% per annum on the back of expected improvement in 2W offtake driven by continued demand for personal mobility and improving income sentiments. Operating profitability is likely to be 10-11%, aided by increase in the share of exports, aftermarket and increase in scale of operations.
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 320 crore. Phase 1 of the capex will be completed by the first quarter of fiscal 2023. The OHT expansion project has an additional revenue potential of Rs 200-250 crore per annum, subsequent to ramp-up and stabilization of the plant in three years with 100% of output catering to the EU agriculture market. The entry of the company into the OHT market will enable it to diversify the revenue streams and improve profitability over the medium term as OHT fetches higher operating margin.
The rating also factors in the healthy financial risk profile marked by comfortable debt protection metrics. With reduction in debt levels in FY 2021, Gearing was less than 0.3 times and will stay comfortable despite moderating to ~0.6 times over the medium term as the OHT capex is majorly funded by debt. Liquidity will continue to be adequate over the medium term, supported by sufficient accruals to meet term debt obligation of Rs 45-55 crore per annum over the medium term and prudent working capital management.
The rating continues to reflect the robust market position of TVS Srichakra in the domestic two- and three-wheeler tyres segment, supported by established brands and extensive distribution network. 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 consolidated entities include TVS Srichakra Investments Ltd and TVS Sensing Solutions Ltd (‘CRISIL BBB+/Positive).
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:
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/FAAA/Stable/CRISIL A1+’), Hero MotoCorp Ltd (‘CRISIL AAA/Stable/FAAA/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 will further support its market position in the medium term.
Cost-control measures, upgrading of manufacturing facilities and prudent working capital management have significantly improved operating efficiency in the past five fiscals. Production efficiency has enhanced over the years through total productive maintenance initiatives. Despite declining volumes in fiscal 2021, operating profitability improved to 11.9% from 10.6% during fiscal 2020 due to softer prices of natural rubber and crude-linked raw materials which was absorbed by the company as well as due to higher share of replacement and export markets in overall revenue.
The financial risk profile is marked by healthy debt protection metrics; Gearing is comfortable and improved to 0.26 time as on March 31, 2021, from 0.48 time in the previous fiscal. Despite the ongoing debt-funded capex, gearing is expected to remain below 0.70 times over the medium term driven by healthy cash generation and prudent working capital management. However, any sizeable, debt-funded acquisition or larger-than-expected greenfield expansion would be a rating monitorable.
Weaknesses:
Despite a strong market position, product portfolio lacks the diversity of the more rounded portfolios of established peers such as MRF Ltd, JK Tyres Ltd and Apollo Tyres Ltd (’CRISIL AA+/Stable/CRISIL A1+’), which cater to both passenger and commercial vehicles.
Intense competition and sharp fluctuations in raw material prices lead to volatile operating profitability. While any change in input prices is passed on to OEMs with a lag, the company has some flexibility to hold on to prices in the more profitable aftermarket segment. However, since the peers of TVS Srichakra are adding capacity, including for the aftermarket segment, competition could intensify further and lead to moderation in profitability over the medium term. |
Liquidity: Adequate Expected annual cash accrual of Rs 150-200 crore over the medium term will be sufficient to meet debt obligation of around Rs 54 crore and Rs 44 crore in fiscals 2023 and 2024, respectively. Further adequate headroom is available in the form of Bank limit of Rs 370 crore (including commercial paper of Rs 300 crore) which is utilized to the tune of 54% over the 6 months through February 2022. The company enjoys financial flexibility on account of being a part of the TVS group. |
Rating Sensitivity factors Downward factors
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About the Company Incorporated in 1982, TVS Srichakra is a part of the TVS group and is one of the leading domestic manufacturers of two- and three-wheeler bias tyres. It serves leading OEMs as well as group company, TVS Motors. TVS Srichakra also exports to the USA, Europe, Africa, South America and Southeast Asia. Its two manufacturing facilities are in Madurai (Tamil Nadu) and Rudrapur (Uttarakhand).
During the nine months of fiscal 2022, TVS Srichakra reported a profit after tax (PAT) of Rs 35 crore (Rs 39 crore for the corresponding period previous fiscal) on net sales of Rs 1,862 crore (Rs 1,337 crore). |
Key Financial Indicators
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Any other information: Not applicable |
| Note on complexity levels of the rated instrument: CRISIL Ratings' complexity levels are assigned to various types of financial instruments. The CRISIL Ratings' complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL Ratings' complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments. |
Annexure - Details of Instrument(s)
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Annexure – List of entities consolidated
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| Annexure - Rating History for last 3 Years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Criteria Details
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