Rating Rationale
April 29, 2020 | Mumbai
TVS Srichakra Limited
Rating Reaffirmed 
 
Rating Action
Rs.300 Crore Commercial Paper CRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has reaffirmed its rating on the commercial paper programme of TVS Srichakra Limited (TVS Srichakra) at 'CRISIL A1+'.
 
Amidst a wider consumption slowdown, liquidity crunch and transition to stringent BS-VI emission norms, fiscal 2020 was a challenging year for the Indian automobile year. The situation was further aggravated due to the spread of Coronavirus (N-Covid 19) in the last quarter of the fiscal. TVS Srichakra's revenues declined by 9% during nine-month period of fiscal 2020 over the corresponding previous period due to lower offtake from original equipment manufacturers (OEM), though partially mitigated by steady volumes in the replacement market.  Operating profitability during this period, however was maintained at ~11% as the intensifying competition especially in the replacement market was offset by internal cost optimization measures.
 
While demand in fiscal 2021 is also expected to remain subdued due to the on-going lockdown situation and challenging business environment, TVS Srichakra remains well placed to sustain its market position in the domestic two-and-three wheeler tyres segment, supported by its established brands and distribution network, and a diversified revenue mix with presence across OEM clients, in aftermarket and in overseas markets. Sharper than expected decline in volumes leading to larger impact on profitability and accruals would however remain a key rating monitorable.
 
The rating continue to reflect the company's healthy market position, sound operating efficiencies, prudent working capital management, and healthy financial metrics. These rating strengths are partially offset by a modest product portfolio compared with other domestic peers, and susceptibility of profitability to volatility in raw material prices and to intense competition.

Analytical Approach

For arriving at its rating, CRISIL 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, operate with significant operational and financial linkages. The consolidated entities include TVS Srichakra Investments Limited and TVS Sensing Solutions Limited ('CRISIL BBB+/Stable') CRISIL considers these entities as being strategic to TVS Srichakra in view of their strong integration with TVS Srichakra's operations.
 
TVS Srichakra entered into a non-cancellable sale and lease-back agreement for assets of Rs.52.8 crore in fiscal 2013. CRISIL has considered the transaction as a financial lease, and capitalised the present value of future lease rental obligations as fixed assets. This has led to increase in long-term debt. The lease rental payable annually has been bifurcated into interest and depreciation for analysing the yearly financials.

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/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. Furthermore, the company has strengthened its presence in the domestic two-wheeler bias tyres aftermarket segment, where it is the third largest player supported by its network of over 3000 dealers and healthy product range. The company also has a contract manufacturing agreement with French tyre major, Michelin, to make two-wheeler bias tyres under the Michelin brand, for the aftermarket. Exports, through the 'TVS Eurogrip' brand are mainly to European, North American, African and Middle East countries, and include supplies of off-the road tyres for agricultural, mining and industrial use.

* Strong operating efficiencies: Operating efficiencies have improved significantly over the past five years, mainly driven by cost control measures, upgrading its manufacturing facilities and prudent working capital management. Production efficiencies have been enhanced over the years through total productive maintenance (TPM) initiatives. This coupled with focus on enhancing sales to the more profitable aftermarket & export segments and softer trend in rubber prices, operating profitability steadily improved to 15.5% and 15.9% in fiscal 2016 and 2017 respectively, from levels of about 7% in fiscal 2013. However, operating profitability moderated to about 10.8% in fiscal 2019, due to increase in prices of crude based raw materials, higher competitive intensity in the market due to entry of new players as well as reduced exposure to after market segment.

* Prudent working capital management: Working capital cycle has also witnessed a healthy improvement over the years supported by initiatives to transform the aftermarket business to a predominantly cash-and-carry model; resulting in lower collection cycle. The gross current asset days has increased to 136 days in fiscal 2019 (compared to 110 days in fiscal 2018) as the company had stocked up natural rubber prior to increase in prices, as well as extended period to customers owing to demand slowdown in the end market. Company also imports some of its raw material requirements to ensure stable supply for operations. During fiscal 2020, TVS Srichakra has reduced its share of imports due to rupee depreciation, thereby leading to lower inventory stocking compared to fiscal 2019.  Working capital management is expected to remain efficient over the medium term.

* Healthy financial risk profile: TVS Srichakra's financial risk profile is healthy with comfortable gearing and healthy debt protection metrics. Gearing of the company is expected to be comfortable at below 0.50 times as on 31st March 2020, compared to 0.61 times as on 31st March 2019 due to lower working capital requirements mainly inventory. Interest coverage and net cash accruals to total debt are expected to remain healthy at over 6.50 times and over 0.40 times respectively for fiscal 2020. TVS Srichakra will defer its large capital expenditure (capex) plans and maintain maintenance capex of about Rs 50-60 crore annually until steady improvement in end market demand. Healthy cash generation, prudent use of debt and control over working capital, is expected to ensure the credit metrics remain healthy levels. Any sizeable debt funded acquisition or greenfield expansion, however, would be a rating monitorable.

Weaknesses:
* Lack of diversity in revenue profile: While TVS Srichakra has a strong market position in the two-wheeler bias tyres segment, its product portfolio is however lacks the diversity of its well established peers such as MRF Ltd, JK Tyres Ltd and Apollo Tyres Ltd ('CRISIL AA+/ Stable/ CRISIL A1+'). These peers have a more rounded product portfolio also catering to passenger vehicles and commercial vehicles. This also results in lower revenues for the company compared to these larger peers; this differential is expected is expected to continue in future too, as the company is unlikely to diversify into these segments. Additionally, the share of replacement market is relatively lower which further increases the vulnerability of revenues during periods of decline in OEM volumes (like in fiscal 2020).

* Susceptibility of operating margins to volatility in raw material prices and intense competition: Intense competition and sharp volatility in rubber prices lead to a certain degree of volatility in operating profitability, as also for its peers. Additionally, the volatility in crude prices and forex movements has also led to an increase in other key raw material costs. While rubber price changes are passed through to OEMs, the company has some flexibility to hold on to prices in the more profitable aftermarket segment. However, TVS Srichakra's peers too are adding capacity (including entry of new players), including for the aftermarket segment, which could intensify competitive pressures, and lead to a moderation in profitability over the medium term.
Liquidity Adequate

TVS Srichakra has adequate liquidity driven by expected cash accruals of more than Rs. 100 crore per annum over the medium term and access to adequate bank limits of Rs 370 crore (including commercial paper for Rs 300 crore), utilized to the tune of 85% on an average over the 12 months ended February 2020. The company has low repayment obligations around Rs. 10-15 crore per annum in fiscal 2020 and fiscal 2021. CRISIL believes the company has sufficient accruals to meet its repayment obligations, moderate maintenance capex as well as investment requirements in subsidiaries. With a moderate gearing of about 0.5 times expected as of March 31, 2020, TVS Srichakra has sufficient gearing headroom, to raise additional debt for short-term exigencies due to the shutdown in operations.

Rating Sensitivity factors
Downward factors
* Sustained decline in profitability below 8% due to increase in competitive pressures in the industry or rise in raw material prices
* Significant increase in working capital requirements as marked by gross current asset days above 175 days.
* Any future large debt funded acquisitions resulting in net debt to EBITDA ratio rising to above 2.5 times
About the Company

TVS Srichakra, incorporated in 1982, is part of the TVS automotive-ancillary group and is one of the leading domestic manufacturers of two and three-wheeler bias tyres and has manufacturing facilities at Madurai and Rudrapur. The promoters, from the TVS family, hold 45 per cent stake in the company both directly and through various holding companies, and the rest is held by various institutional players, bodies corporate, and the public.

During the first nine months of fiscal 2020, TVS Srichakra (on a standalone basis) reported profit after tax of Rs. 60 crore (Rs. 87 crore for corresponding period of fiscal 2019) on net sales of Rs. 1,635 crore (Rs. 1,802 crore).

Key Financial Indicators
As on/for the period ended March 31 Unit 2019 2018
Revenue Rs Crores 2431 2152
Profit After Tax (PAT) Rs Crores 103 117
PAT Margins % 4.2 5.5
Adjusted debt/adjusted networth Times 0.59 0.53
Interest coverage Times 7.3 8.2
Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL 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)
ISIN Name of Instrument Date of Allotment Coupon Rate (%) Maturity Date Issue Size (Rs.Cr) Rating Assigned with Outlook
NA Commercial Paper NA NA 7-365 days 300 CRISIL A1+
 
Annexure - List of entities consolidated
Sr.No Name of entities Extent of consolidation Rationale for Consolidation
1 TVS Sensing Solutions Private Limited 100% Subsidiaries, common management and financial linkages
2 TVS Srichakra Investments Limited 100% Subsidiaries, common management and financial linkages
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
Commercial Paper  ST  300.00  CRISIL A1+      27-12-19  CRISIL A1+  19-12-18  CRISIL A1+  09-08-17  CRISIL A1+  CRISIL A1+ 
                12-01-18  CRISIL A1+  12-07-17  CRISIL A1+   
Vendor Financing  ST    --    --    --  12-01-18  Withdrawn 09-08-17  CRISIL A1+  CRISIL A1+ 
                    12-07-17  CRISIL A1+   
Fund-based Bank Facilities  LT/ST    --    --    --  12-01-18  Withdrawn/ Withdrawn  09-08-17  CRISIL AA-/Stable/ CRISIL A1+  CRISIL AA-/Stable/ CRISIL A1+ 
                    12-07-17  CRISIL AA-/Stable/ CRISIL A1+   
Non Fund-based Bank Facilities  LT/ST    --    --    --  12-01-18  Withdrawn  09-08-17  CRISIL A1+  CRISIL A1+ 
                    12-07-17  CRISIL A1+   
All amounts are in Rs.Cr.
 
Links to related criteria
CRISILs Approach to Financial Ratios
Rating criteria for manufaturing and service sector companies
Rating Criteria for Auto Component Suppliers
CRISILs Criteria for Consolidation
CRISILs Criteria for rating short term debt

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