Rating Rationale
December 19, 2018 | 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 Ltd (TVS Srichakra) at 'CRISIL A1+'.

The ratings continue to reflect the company's healthy market position in the domestic two- and three-wheeler tyres segment, supported by established brands and distribution network, and a diversified revenue mix because of a presence across automobile original equipment manufacturer (OEM), aftermarket, and export sub-segments. The rating also factors in the company's 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 A2') 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 - Details of Consolidation, 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/FAAA/Stable/CRISIL A1+'), Hero MotoCorp Ltd ('CRISIL AAA/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% in 15.9% in fiscal 2016 and 2017 respectively, from levels of about 7% in fiscal 2013. However operating profitability moderated to about 12.5% in fiscal 2018, due to increase in prices of crude based raw materials (while rubber prices also remained high in first half of fiscal 2018) 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 have improved to 110 days in fiscal 2018 (vs. higher base of 126 days in fiscal 2017) as the company had stocked up natural rubber during fiscal 2017, owing to uncertainty surrounding goods and services tax bill. Company also imports some of its raw material requirements to ensure stable supply for operations.  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 continues to be comfortable at 0.53 times as on March 2018, although part debt funding of the planned capex is expected to increase the long term debt over the medium term. Interest coverage and net cash accruals to total debt are also healthy at 8.16 times and 0.45 times respectively for fiscal 2018. TVS Srichakra will undertake capital expenditure (capex) of about Rs.150-200 crore annually, over the next three years, to augment capacity and enhance level of automation at its facilities. Nevertheless, 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.

Weakness
* 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.

* 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 for the aftermarket segment, which could intensify competitive pressures, and lead to a moderation in profitability over the medium term.

Liquidity
TVS Srichakra has adequate liquidity driven by expected cash accruals of more than Rs. 170 crore per annum over the medium term and access to adequate bank limits of Rs 320 crore (including commercial paper for Rs 300 crore), utilized to the tune of 76% on an average over the 12 months ended November 2018. Company has further enhanced its limits to Rs 370 crore in December 2018. The company has low repayment obligations around Rs. 10 crore each in FY19 and FY20. CRISIL believes the company has sufficient accruals to meet its repayment obligations, part-fund its capex as well as investment requirements in subsidiaries. With a moderate gearing of 0.53 times as of March 31, 2018, TVS Srichakra has sufficient gearing headroom, to raise additional debt for its capex requirements of RS 150-200 crore per annum.
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.

For H1 fiscal 2019, company reported profit after tax of Rs. 64 crore (Rs. 58 crore for H1 fiscal 2018) on net sales of Rs. 1,220 crore (Rs. 1,107 crore).

Key Financial Indicators
As on/for the period ended March 31 Unit 2018 2017
Revenue Rs Crores 2152 1961
Profit After Tax (PAT) Rs Crores 117 148
PAT Margins % 5.5 7.5
Adjusted debt/adjusted networth Times 0.53 0.63
Interest coverage Times 8.2 11.6

Any other information: Not applicable

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 300.0 CRISIL A1+
 
Annexure - Details of Consolidation
The consolidated entities include TVS Srichakra Investments Limited and TVS Sensing Solutions Limited.
Annexure - Rating History for last 3 Years
  Current 2018 (History) 2017  2016  2015  Start of 2015
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Commercial Paper  ST  300.00  CRISIL A1+  12-01-18  CRISIL A1+  09-08-17  CRISIL A1+  04-08-16  CRISIL A1+    --  -- 
            12-07-17  CRISIL A1+  21-03-16  CRISIL A1+       
Vendor Financing  ST    --  12-01-18  Withdrawal  09-08-17  CRISIL A1+  04-08-16  CRISIL A1+    --  -- 
            12-07-17  CRISIL A1+           
Fund-based Bank Facilities  LT/ST     -- 12-01-18  Withdrawal/ Withdrawal  09-08-17  CRISIL AA-/Stable/ CRISIL A1+  04-08-16  CRISIL AA-/Stable/ CRISIL A1+    --  -- 
            12-07-17  CRISIL AA-/Stable/ CRISIL A1+           
Non Fund-based Bank Facilities  LT/ST    --  12-01-18  Withdrawal  09-08-17  CRISIL A1+  04-08-16  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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