Detailed Rationale

CRISIL Ratings has revised its outlook on the long-term bank facilities of Tractors and Farm Equipment Limited (TAFE) 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 is driven by continuing strong business risk profile of TAFE reflected in its established market position as the second largest tractor manufacturer in India, robust distribution network both in domestic and export markets, and adequate  operating efficiencies. The ratings are also supported by TAFE’s strong financial risk profile with a debt free balance sheet and ample liquid surplus of ~Rs.6000 crore. Besides, the company’s strategic investments in AGCO Corporation, USA have a sizeable market value of ~Rs 13000 crore as of August 2023. These strengths are partially offset by sluggish export performance, and susceptibility of business performance to intense competition and cyclical nature of the tractor sector.

 

TAFE is expected to register revenue growth of 4-6% over the medium term, supported mainly by higher realisations, and a modest increase in tractor volumes (albeit on a high base registered in fiscal 2023) in the domestic market.  Export volumes will remain under pressure due to demand headwinds in key overseas markets, mainly Sri Lanka, Bangladesh, Nepal, Turkey, and parts of Africa. The company is also expected to sustain its operating profitability at 11-12%, supported by the moderation in input prices, by balancing its product mix and cost optimization measures, ensuring strong cash generation. Besides, TAFE 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. Sizeable acquisitions if any, are also unlikely to materially impact its financial risk profile.

 

Earlier, in fiscal 2023, TAFE registered healthy revenue growth of 14% driven by healthy domestic volume growth of 13% and reaching an all-time high sales of 1.75 lakh units (1.55 lakh units in fiscal 2022). Improved farm sentiments on the back of healthy crop prices, healthy reservoir levels due to good monsoon, higher minimum support prices (MSP) for key crops and increased rabi acreage supported volumes in fiscal 2023. However, on the export side, the company witnessed moderation in volumes due to weak macro-economic conditions in the key export markets. Despite elevated raw material costs for major part of fiscal 2023, operating profitability improved marginally to 9.2%, from 8.9% in fiscal 2022, supported by price hikes taken by the company and better operating leverage. Revenues registered a growth of ~5% in the first quarter of fiscal 2024, over corresponding quarter of fiscal 2023, while operating profitability also  improved to ~11%, supported by price hikes taken, and moderation in input prices.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of TAFE and its subsidiaries TAFE Motors and Tractors Ltd (TMTL; ‘CRISIL AA+/Positive/CRISIL A1+’) and TAFE Access Ltd (TAL; ‘CRISIL A+/Positive/CRISIL A1+’), collectively referred to as the TAFE group. This is because of the operational synergies and financial linkages among the companies.

 

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 market position in the domestic tractor industry: The TAFE-TMTL combine is the second largest tractor manufacturer in India with a market share of 18% in fiscal 2023; Mahindra and Mahindra Ltd (M&M, ‘CRISIL AAA/Stable/CRISIL A1+’) is the market leader with 41%. The TAFE-TMTL combine’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. The company is not very strong in higher HP tractors (>50 HP segment) and has a market share of less than 10%; this segment however, is not the biggest segment in the domestic market.

 

TAFE had peak market share of over 23% in fiscal 2016, which declined to ~17% in fiscal 2020, before improving to ~18-19% in fiscal 2023, and sustaining at these levels in the first four months of fiscal 2024. The decline in earlier periods was due to a jump in tractor sales in certain regions, where TAFE did not have a significant presence, and the company’s decision not to increase presence in certain states, due to payment delays being faced in the past.

 

• Adequate operating efficiency: The group’s operating profitability is adequate and has been improving since fiscal 2023, despite high commodity prices, especially iron and steel. Operating profitability is expected to be sustained at 11-12% over the medium term, supported by moderation in raw material prices, recent price hikes taken, balancing of the portfolio mix, and cost optimization measures. 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.

 

• Strong financial risk profile supported by superior liquidity: The group’s financial risk profile is supported by a debt-free balance sheet, large networth of over Rs 12,500 crore and ample liquid surplus of more than Rs 6,000 crore as on March 31, 2023. TAFE group’s net cash accrual is in excess of Rs.1500 crore per annum over the medium term  which will be more than sufficient to meet its moderate annual capex and working capital requirements. The group also has substantial liquid investment in AGCO Corp, USA (AGCO; rated ‘BBB-/Stable’ by S&P Global Ratings), valued at over Rs.13,000 crores in August 2023.

 

Weaknesses:

• Sluggish export performance: TAFE used to generate 13% of its tractor sales volumes from the export market until fiscal 2016. However, share of exports in overall volumes has declined to 8% in fiscal 2023, due to economic headwinds in key markets of Turkey and Africa and other markets in Asia, besides a partial slowdown in the US market, where tractors are sold through Agco. High inflation and currency devaluation in key markets (except US) has also impacted exports to these destinations. Recovery in exports will be critical for the company to enhance overall volumes and reduce competitive pressures on domestic volumes over the medium term.

 

• 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. The TAFE-TMTL combine derives about 92% of its tractor volume from the domestic market and remains susceptible to the inherent cyclicality in the tractor industry. Due to economic headwinds in key export markets such as Turkey and Africa in the recent past, the company’s dependence on the domestic market has increased, and is expected to remain so over the medium term. Exports at present account for less than 10% of overall sale volumes, from over 13% in fiscal 2016. The domestic market is also highly competitive, which limits sizeable improvement in market shares.

 

Tractors account for ~85% of the group’s revenue, with the rest coming from engine sales and service, gears, engineering plastic components (EPD), among other products. TAFE’s acquisition of interior systems business of the Indian arm of French automotive player Faurecia operating under Faurecia India Pvt Ltd (FIPL) for Rs.400 crore during December 2022 is expected to aid in growth of the EPD division. The acquisition is likely to offer synergistic benefits in terms of Faurecia’s expertise in design capabilities, product design and precision tooling design. TAFE will also get access to Faurecia’s operations in Maharashtra (Chakan), Andhra Pradesh (Anantapur) and Tamil Nadu. The segment is expected to contribute a revenue of Rs 320 crore during fiscal 2024 with gradual scaling up of the segment operations.

 

The group’s concerted effort to increase volumes across the business by widening its markets and product range will help mitigate business volatility. However, performance will remain susceptible to any sharp slowdown in domestic tractor demand, given tractors will remain the main stay of the group.

Liquidity: Superior

The TAFE group has superior liquidity driven by robust cash generating ability of more than Rs 1500 crore per annum and sizeable cash surplus of over Rs 6,000 crore as on March 31, 2023. The company is debt-free, and is expected to continue to remain the same, due to only modest capex needs and incremental working capital requirements, which will be funded entirely through accruals. Further, the group also has substantial liquid investment of Rs 3450 crore in AGCO Corp US (valued at Rs 13,000 crore as of August 2023).

Outlook: Positive

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

Rating Sensitivity factors

Upward factors:

• The group sustaining its market share in the domestic tractor market on steady state basis, and stepping up share of export volumes to over 10-12% of overall  volumes
• Operating profitability sustaining at ~11-12%, ensuring healthy cash generation
• Maintenance of  strong  financial risk profile and robust liquidity

 

Downward factors:

• The group’s market share in the tractor business weakens on a sustained basis to below 14-15%
• Sizeable debt funding capex or acquisition, materially impacting key debt metrics
• Sharp reduction in liquidity, due to material dividend payment, share buyback, capital reduction or for any other means

About the Company

Set up in 1961, TAFE is the flagship company of the south India-based Amalgamations group. The company manufactures tractors in Madurai (Tamil Nadu) and Doddaballapur (Karnataka). TAFE also manufactures engineering plastics and power sources (batteries). TAFE was set up in technical and financial partnership with Massey Ferguson Ltd, which was acquired by AGCO, one of the largest farm equipment manufacturers in the world. As on March 31, 2023, Simpson & Co Ltd, a holding company of the Amalgamations group, owns 79.3% of TAFE, while AGCO owns the remaining 20.70%. In 2005, TAFE acquired the gears, tractors, and engine division of Eicher for Rs 350 crore through TMTL.

About the Group

TAFE is part of Chennai based Amalgamation group. Amalgamations Pvt Ltd (APL), the holding company of the group holds majority stake in TAFE through Simpson & Company Ltd (SCL). SCL is engaged in manufacturing diesel engines for surface transport vehicles. The company's product portfolio includes engines for agricultural, industrial, power generation, marine. The company was incorporated in 1925 and has its registered office located in Tamil Nadu.

Key Financial Indicators

Particulars	Unit	2022	2021
Net sales	Rs crore	11,103	10,345
Profit after tax (PAT)	Rs crore	1174	1,304
PAT margin	%	10.6	12.6
Adj Debt/Adj Networth	Times	0.0	0.0
Interest Coverage Ratio	Times	223.44	200.15

TAFE has achieved a revenue of Rs.12619 crore and a PAT of Rs.1278 crore for fiscal 2023 as against revenue of Rs.11103 crore and PAT of Rs.1174 crore over for fiscal 2022

Any other information: Not applicable