Rating Rationale
September 01, 2023 | Mumbai
Tafe Motors and Tractors Limited
Rating outlook revised to 'Positive'; Ratings reaffirmed
 
Rating Action
Total Bank Loan Facilities RatedRs.21 Crore
Long Term RatingCRISIL AA+/Positive (Outlook Revised from ‘Stable’; Rating Reaffirmed)
Short Term RatingCRISIL A1+ (Reaffirmed)
Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings.
1 crore = 10 million
Refer to Annexure for Details of Instruments & Bank Facilities

Detailed rationale

CRISIL Ratings has revised its outlook on the long-term bank facilities of Tafe Motors and Tractors Limited (TMTL) to ‘Positive’ from ‘Stable’ and reaffirmed its ratings at ‘CRISIL AA+’. The short-term rating has been reaffirmed at ‘CRISIL A1+’.

 

The revision in outlook for TMTL is driven by rating action for parent Tractors and Farm Equipment Ltd (TAFE), where rating outlook on long term ratings has been revised to ‘Positive’ from ‘Stable’, while ratings have been reaffirmed at ‘CRISIL AA+/CRISIL A1+’. Revision in outlook for TAFE factors in the strong business risk profile supported by its established market position as the second largest tractor manufacturer in India with a steady market share of 18-19%, adequate operating efficiencies and robust distribution network both in domestic and export markets. Besides, the company continues to maintain a robust financial risk profile and solid liquidity.

 

TMTL’s ratings benefit from strong parentage of TAFE, and TMTL’s well established business risks profile, as well as robust financial risk profile with a debt free balance sheet as on March 31, 2023. Further, TMTL has strategic investments in AGCO Corporation, USA with a market value of over ~Rs 3,500 crore as of August 2023. These strengths are partially offset by susceptibility of business performance to intense competition and cyclical nature of the tractor sector.

 

In fiscal 2023, TMTL registered a revenue growth of 14% with an operating profitability of 8.7%. Healthy growth in previous fiscal was driven by strong domestic volume growth supported by improved farm sentiments on the back of healthy crop prices, above normal monsoon, higher minimum support price (MSP) announcement and increased rabi acreage. However, on export side, the company witnessed moderation in volumes due to weak macro-economic conditions in key export markets. During the first quarter of fiscal 2024, TMTL achieved a revenue growth of 8% while profitability has improved significantly by 370 bps to 11.3% from 7.6% in the first quarter of fiscal 2023 on account of moderation in key input costs, and effects of multiple price hikes undertaken by the company.

 

TMTL is expected to register revenue growth of 4-6% over the medium term, supported by higher realisations, and a modest increase in tractor volumes (on a high base of fiscal 2023) in the domestic market. Export volumes will remain under pressure due to demand headwinds in key overseas markets. The company is also expected to sustain its operating profitability at 11-12%, supported by moderation in input prices, balancing its product mix and cost optimization measures, ensuring strong cash generation. Besides, TMTL does not have significant capital spending plans, and is hence expected to sustain its robust financial risk profile, and solid liquidity position, over the medium term.

Analytical Approach:
CRISIL Ratings has factored in support from TMTL’s parent, TAFE as the two companies are in the same business and have significant business synergies and common management. Timely support from parent is expected to be forthcoming, if required.

Key rating drivers and detailed description

Strengths:

  • Support from the parent: TAFE acquired 100% stake in TMTL (erstwhile tractor division of Eicher Motors) in 2005. TMTL, being a subsidiary of TAFE, enjoys significant synergies in terms of complementary product portfolio, interlinked operations, shared distribution network and common marketing team. TMTL operates as an integral part of TAFE and will continue to receive support from the parent.

 

  • Established market position in the domestic tractor industry: TAFE-TMTL combine (TAFE Group) is the second largest tractor manufacturer in India with a market share of 18% in fiscal 2023 after Mahindra and Mahindra Ltd (M&M, ‘CRISIL AAA/Stable/CRISIL A1+’) which is the market leader with a share of 41%. The TAFE group’s market position is backed by its strong brand and presence in the lower and medium horse power (HP) segment (30-50 HP), frequent launch of new models and wide reach through its well established distribution network with over 1600+ dealers across India supported by over 2000 sales outlets. TAFE group had peak market share of over 23% in fiscal 2016, which declined to ~17% in fiscal 2020, before improving to ~18% in fiscal 2023, reflecting high competitive intensity. Besides, tractor sales tend to rise sharply in certain regions in different fiscals.

 

  • Adequate operating efficiency: TMTL has maintained healthy double-digit operating profitability since fiscal 2006, except for fiscal 2023 where the margins declined below 10% due to steep rise in the raw materials prices. However, the operating margin has improved significantly by 370 bps to 11.3% in the first quarter of fiscal 2024 from 7.6% in corresponding period of previous fiscal on account of moderation in key raw material prices and impact of recent price hikes. The synergies between TAFE and TMTL have helped leverage each company’s strengths in different regions and optimise procurement, product development, manufacturing and distribution networks. CRISIL Ratings believes the TMTL’s business risk profile will continue to benefit from its established market position, healthy operating efficiency and synergies emanating from strong parentage.

 

  • Strong financial risk profile supported by superior liquidity: TMTL’s financial risk profile is supported by a debt-free balance sheet, healthy networth of over Rs 3900 crore and ample liquid surplus of more than Rs 2500 crore as on March 31, 2023. TMTL’s estimated cash accrual of Rs.500-600 crore per annum over the medium term will be more than sufficient to meet its moderate annual capex and working capital requirements. TMTL also has substantial liquid investment in AGCO Corp, USA (AGCO; rated ‘BBB-/Stable’ by S&P Global Ratings) with a market value of over ~Rs 3,500 crore as of August 2023

 

Weaknesses:

  • High dependence on the cyclical domestic tractor market: The demand for tractors in India is determined by multiple variables, such as monsoon, crop prices and availability of finance. Sluggish monsoons directly impact sale of tractors and  accordingly company will be exposed to fluctuations in cyclical domestic market. Besides, competitive intensity remains high, with presence of established players, with strong product profiles and distribution network.

 

  • Moderate revenue diversity: Tractors comprise around 90% of revenue, with the rest coming from sales and service of engines and gears. Through the company’s concerted effort to increase volume by widening its markets and product range will help mitigate business volatility, it will remain susceptible to any sharp slowdown in domestic demand.

Liquidity: Superior
TMTL has superior liquidity driven by robust cash generating ability of more than Rs 500-600 crore per annum and sizeable cash surplus of over Rs 2500 crore as on March 31, 2023. The company is debt-free. Limited annual capex and incremental working capital requirement will be funded entirely through accrual. Further, TMTL also has substantial liquid investment of Rs 1020 crore in AGCO Corp US (valued at over Rs 3500 crore as of August 2023).

Outlook: Positive

CRISIL Ratings believes that TMTL will sustain its market position as the second largest domestic player in the tractor industry (along with its parent) and also maintain adequate operating efficiencies, by balancing its product mix and cost optimization initiatives. TMTL is expected to maintain its strong financial risk profile, and robust liquidity position over the medium term.

Rating Sensitivity factors:

Upward factors:

  • Sustenance of strong business and financial risk profile
  • Upward change in the credit risk profile of the parent, TAFE by one notch.

 

Downward factors:

  • Downward revision in credit risk profile of parent by one notch or change in stance of support
  • Moderation in TAFE group’s market position in tractor business
  • Sizeable debt funding capex or acquisition, materially impacting key credit metrics
  • Sharp reduction in liquidity, due to material dividend payment, share buyback, capital reduction etc.

About the company

TMTL is 100% wholly owned by TAFE. In 2005, TAFE acquired the gears, tractors, and engine division of Eicher for Rs 350 crore through SPV called TMTL  and it continues to manufacture tractors under the brand Eicher. TMTL’s plants are located in Madhya Pradesh, Rajasthan and Himachal Pradesh. Apart from manufacturing tractors & allied products, TMTL  is also involved in sales and manufacturing of Engines, gensets and gears for agricultural and industrial applications.

About the Group

TMTL is part of Chennai based Amalgamation group. Amalgamations Pvt Ltd (APL), the holding company of the group holds majority stake in TMTL through TAFE. Set up in 1961, TAFE is the flagship company of the south India-based Amalgamations group. TAFE, along with its subsidiary TMTL, is the second largest player in domestic tractors market with a market share of 18% as on fiscal 2023.

Key Financial Indicators

Particulars Unit 2022 2021
Net sales Rs crore 3565 3546
Profit after tax (PAT) Rs crore 416 514
PAT margin % 11.7 17.4
Adj Debt/Adj Networth Times 0 0
Interest Coverage Ratio Times 305.79 406.04

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 and are included (where applicable) in the 'Annexure - Details of Instrument' in this Rating Rationale.

CRISIL Ratings will disclose complexity level for all securities - including those that are yet to be placed - based on available information. The complexity level for instruments may be updated, where required, in the rating rationale published subsequent to the issuance of the instrument when details on such features are available.

For more details on the CRISIL Ratings` complexity levels please visit www.crisilratings.com. 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 crore)

Complexity

level

Rating assigned with outlook

NA

Proposed Working Capital Facility

NA

NA

NA

1.0

NA

CRISIL AA+/Positive

NA

Proposed Letter of Credit & Bank Guarantee

NA

NA

NA

20.0

NA

CRISIL A1+

 

Annexure - Rating History for last 3 Years
  Current 2023 (History) 2022  2021  2020  Start of 2020
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund Based Facilities LT 1.0 CRISIL AA+/Positive   -- 03-06-22 CRISIL AA+/Stable 08-04-21 CRISIL AA+/Stable   -- --
Non-Fund Based Facilities ST 20.0 CRISIL A1+   -- 03-06-22 CRISIL A1+ 08-04-21 CRISIL A1+   -- --
Short Term Debt ST   --   --   -- 08-04-21 Withdrawn 27-02-20 CRISIL A1+ CRISIL A1+
      --   --   -- 16-02-21 CRISIL A1+   -- --
All amounts are in Rs.Cr.
Annexure - Details of Bank Lenders & Facilities
Facility Amount (Rs.Crore) Rating
Proposed Letter of Credit & Bank Guarantee 20 CRISIL A1+
Proposed Working Capital Facility 1 CRISIL AA+/Positive
Criteria Details
Links to related criteria
CRISILs Approach to Financial Ratios
Rating criteria for manufaturing and service sector companies
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating Criteria for Tractor Industry
CRISILs Criteria for rating short term debt
Criteria for Notching up Stand Alone Ratings of Companies based on Parent Support

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