Detailed Rationale

CRISIL Ratings has reaffirms its rating on the long term bank facilities of Tube Investments Of India Limited (TI) at 'CRISIL AA+/Stable', The rating on the short-term bank facilities and commercial paper has been reaffirmed at 'CRISIL A1+'. CRISIL Ratings has also withdrawn its rating on NCDs of Rs 100 crore basis independent confirmation from debenture trustee that these NCD’s have been fully redeemed. Also, the company has requested for withdrawal of the ratings on this programme.  The withdrawal of ratings on the NCDs is in line with CRISIL Ratings policy of withdrawal.

 

TI’s performance rebounded sharply from the second quarter of fiscal 2022 post relaxation in lock down after the 2nd wave of COVID. Healthy demand from end user segments like automotive and industrial machineries business drove the recovery. Besides, better contribution from its 58% subsidiary, CG Power and Industrial Solutions Limited (CG Power) and other leading subsidiary, Shanti Gears Ltd (SGL), led to doubling of consolidated revenues to ~Rs. 12570 crore in fiscal 2022. CG Power, itself contributed ~44% of consolidated revenues in fiscal 2022 (23% in fiscal 2021 being 4 month contribution), and helped TI lower revenue dependence on the cyclical automotive sector.  Better operating leverage and coverage of fixed costs, led to operating profitability of ~12% in fiscal 2022 (10.8% in fiscal 2021), also benefitting operating profits and cash generation.

 

Due to strong cash generation, the company was also able to retire debt materially, mainly at CG Power. As a result, consolidated debt levels reduced to ~Rs.800 crore at March 31, 2022, from almost Rs.2000 crore a year earlier, leading to material improvement in key debt metrics. For instance, the ratio of debt to earnings before interest, depreciation, tax and amortization (EBITDA) improved to 0.54 times in fiscal 2022, from 2.92 times in fiscal 2021.

 

TI is expected to register healthy double digit growth in revenues in fiscal 2023, led by good order outstanding in most verticals, especially CG Power, and about 6-10% thereafter. Operating profitability is expected to range between 11-12%, with some of the new businesses in the electric vehicle space, expected to make losses in initial years. The company has capital spending plans, including in new verticals, ranging between Rs.650-750 crore annually over the next 2-3 years. However, strong cash generation will obviate the need to add debt, leading to continued strong debt protection metrics.

 

CRISIL Ratings continue to reflect TI’s healthy business risk profile with diversified revenue streams and leading market positions in most businesses. The ratings are also supported by the company’s strong financial risk profile, and healthy financial flexibility, including due to its position as one of the leading companies of the Murugappa group. These strengths are partially offset by sluggish bicycle sale volumes and partial vulnerability of TI’s revenues and operating profitability to intense competition and cyclicality in the automobile and engineering sectors.

Analytical Approach

For arriving at its ratings, CRISIL Ratings has combined the business and financial risk profiles of TI and all its subsidiaries due to strong demonstration of operational and financial support, and diversity they add to TI’s credit profile. CRISIL Ratings has also amortised the goodwill on acquisition of SGL of around Rs. 280 Crore over a period of ten years commencing November 2012, and goodwill on acquisition of CG Power (Rs.285 crores) and intangible assets (Rs.587 crores) over a period of 10 years commencing November, 2020.

 

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:

• Healthy business risk profile marked by diversified revenue streams, and leading market positions in key business segments:

TI has a strong presence in the bicycle manufacturing (8% of consolidated revenue in fiscal 2022), engineering (31%) and metal forming (10%) businesses. Besides C G Power (44% of revenues) and gear and gear products (3%) have also helped revenue grow besides adding diversity to revenues. The company is among the top-three players in most of the business segments it operates in. For instance, SGL enjoys leadership position in the special gears and gearboxes segment. With the acquisition of CG Power, TI has also emerged as the market leader in the switchgear segment.

 

The bicycle division has been witnessing sluggish growth in fiscal 2022 as the impact of the pandemic subsided and there was relaxation in lock downs across the country. TI is focusing more on retail segment as they have been able to pass on the increase in raw material cost to the end customer. The cycle division, where TI is the largest player in specials segment, has a strong brand recognition which the company is leveraging to grow their retail segment in India as well in Europe and other developed markets.

 

TI’s large diameter tubes capacity has led the strong profitability for the engineering division from fiscal 2017 onwards. The company is now focussing on exports to maintain profitability and expand geographically. Over the medium term, tie-ups with both national and international customers will enable higher utilisation. Besides, engineering and metal form divisions have also benefited from their diversified product offerings. SGL is benefitting from improving demand for gears, resulting in continuous revenue growth and better operating profitability. 

 

The business risk profile continues to benefit from the ramp-up of its power and industrial solutions (CG Power) segment, as reflected in share of revenues of CG Power in total revenues almost doubling to 44% in fiscal 2022. Over the medium term, share of CG Power in overall revenues is expected to range between 45-50%, and help offset the impact of cyclicality seen in automotive demand, which has impacted TI’s engineering and metal forming businesses in the past. That said, better demand from the automotive sector is also expected to contribute to TI’s revenue growth over the medium term.

 

TI has made a few acquisitions and investments in fiscal 2022 in new businesses. The company forayed into 3 wheeler Electric Vehicle (EV) space through a 100% subsidiary, TI Clean Mobility Pvt Ltd (TCMPL). The company also acquired majority stakes in Cellestial E- Mobility Pvt Ltd (Cellestial) and IPLTech Electric Pvt Ltd (IPL Tech) through TCMPL. Cellestial is in the business of manufacturing electric tractors, while IPLTech manufactures electric heavy commercial vehicles. TI has also launched their electric 3 wheelers in the market. Besides, the company has also taken stakes in Moshine Electronics Pvt Ltd and Aerostrovilos Energy Pvt Ltd.

The new businesses are expected to start contributing to revenue from the second half of fiscal 2023, with gradual step up from fiscal 2024. TI also acquired 28% stake in Aerostrovilos Energy Pvt Ltd (AEPL), which is a start-up company for manufacturing micro gas turbines for power based applications, and 76% stake in Moshine Electronics Pvt Ltd (MEPL), which will commence manufacture of mobile camera modules. Revenue contribution from these businesses is expected to be nominal in fiscal 2023, with a gradual step up expected from fiscal 2024.

 

• Strong financial risk profile, and healthy financial flexibility, including due to its position as one of the leading companies of the Murugappa group

After moderation in debt metrics due to the takeover of then loss making CG Power, and additional debt raised, TI’s financial risk profile has emerged stronger, with aggressive reduction in debt in TIL and in CG Power in fiscal 2022, helped by strong cash generation. Gearing reduced to ~0.22 time as on March 31, 2022 from 0.90 time in previous fiscal as debt of over Rs.850 crores were pre-paid, mainly from cash accruals.  Debt/EBITDA ratio also improved to 0.54 times in fiscal 2022, from 2.92 times in fiscal 2021. Capital spend in fiscal 2022, was funded largely from accruals.

 

The company also invested Rs.450 crore in new verticals, TCMPL, Cellestial, IPL Tech, APEL and MPEL in fiscal 2022, and part of fiscal 2023, and is expected to invest upto Rs.1000 crores in these verticals by fiscal 2024. Overall, the company has capital spending plans, including in the new verticals, ranging between Rs.650-750 crore annually over the next 2-3 years. However, strong cash generation will obviate the need to add debt, leading to continued strong debt protection metrics.

 

CG Power has certain disputed contingent liabilities relating to taxes and other matters mainly, and these are continuing from when the company was under the previous management. CG Power’s current management, basis legal opinion taken, does not anticipate significant payout in the event of adverse decision. This nevertheless, will be a monitorable.

 

TI’s financial flexibility has also increased over time, supported by strong cash generation, and aggressive debt reduction. Besides, the value of its stake in SGL and CG Power is over Rs.24,000 crores, enhancing its fund raising ability. Also, TI continues to benefit from the Murugappa group’s strong relationships with the lending community, which facilitates debt raising at competitive rates as evidenced by NCD’s raised for part funding the acquisition. 

 

Weaknesses:

• Sluggish bicycle volume sales

TI is the second largest player in the domestic bicycles market and enjoys market leadership in the faster growing specials segment. TI’s bicycle sale volumes have stagnated at 20-22 lakh units in the last 3 fiscals, due to intense competitive pressures. Also, volumes dipped by 8% in fiscal 2022 due to relaxation in lock down as impact of pandemic waned. The overall bicycles industry is itself estimated to have witnessed a decline in volumes in fiscal 2022 and may continue to remain sluggish in the near term. TI, in a bid to improve margins has exited the institutional business and is focussing more on retail segment. The management has been able to increase the prices and pass on the increase in raw material prices to the end customer in the retail segments, which has helped revenues grow, despite sluggish volumes. The company is also exploring European markets where there is continuous demand for bicycle due to prevalence of clean mobility options in these markets. Operating margins in the cycle business are also likely to be impacted in fiscal 2023, due to high input prices, and only partial ability to pass on the same, given sluggish demand.

 

• Part vulnerability to intense competition and cyclical slowdown, especially from the automobile and engineering sector

Company’s operations are closely linked to automotive cycle as well as capex cycle. Any sharp slowdown impacts business volumes as well as operating leverage, which in turn impacting profitability margins as well. The slowdown in automobile sector and capex cycle restricted the company’s growth in fiscals 2020 and 2021. In 2022, the company ramped up revenues of CG power as well and grew its traditional cycles and engineering businesses materially in fiscal 2022, supported by revival in demand. Operating profitability too improved to ~12% during the year supported by improved operating leverage, cost rationalization measures and pass on of rise in commodity prices. Though demand scenario remains favorable in the near to medium term, TI will continue to remain vulnerable to cyclical automobile demand, volatile power costs, as well as increasing competition and moderate pricing power.

Liquidity: Strong

TI’s liquidity is strong, supported by strong cash generation, low debt on its balance sheet and sizeable cash surpluses of over Rs.900 crores. Accruals on a consolidated basis were over Rs 1200 crore in fiscal 2022 and expected to be over Rs 1300 crore in fiscal 2023 and beyond; this will be more than sufficient to fund nominal repayments as well as annual capex requirement of Rs 650-750 crore. The company also moderately utilized its working capital limits further benefiting liquidity. Besides, as a leading company of the Murugappa group, TI enjoys healthy reputation among the financial community which enables it to raise funds at attractive rates. Also, the company’s financial flexibility benefits from its sizeable holding in SGL and CG Power valued at over Rs.24,000 crores, which enhances its ability to raise funds, if required.

Outlook: Stable

CRISIL Ratings believes TI’s overall credit profile will remain healthy supported by well-diversified revenue profile, healthy market position and strong financial risk profile. Debt metrics are expected to remain healthy over the medium term, with strong cash generation obviating the need to additional det.

Rating Sensitivity factors

Upward Factors:

• Better than anticipated revenue growth, driven by diverse revenue streams, and improvement in market position in key verticals
• Sustenance of operating profitability at over 11-12%, leading to better than expected cash generation
• Sustenance of strong financial risk profile, and prudent capital spend and funding, leading to continued strong debt metrics
• Continued healthy cash surplus.

 

Downward Factors:

• Steep fall in revenues or consolidated operating profitability to below 7-8% on sustained basis, impacting cash generation   
• Significant rise in borrowings to fund higher capex or large acquisitions impacting debt metrics materially
• Large outflow to meet contingent and other liabilities related to CG Power depleting cash surpluses

About the Company

TI, part of the Murugappa group, has interests in bicycle manufacturing, engineering, and metal-forming businesses. The company has five subsidiaries: it owns 100% of the France-based Sedis group, which is in the chain business; 70% of SGL, which manufactures specialised gears and gear boxes; and 80% in CCPL and GCPL which are into manufacturing of components for premium bicycle segment. The company also holds 58% stake in CG Power (initially 56%), which manufactures switchgears, transformers and industrial products.

 

Other group companies include E.I.D. Parry India Limited (rated ‘CRISIL AA/Stable/CRISIL A1+’), Coromandel International Ltd (rated ‘CRISIL AA+/Positive/CRISIL A1+),  Cholamandalam Investment and Finance Company Ltd (rated, ‘CRISIL AA+/Stable/CRISIL A1+’), Cholamandalam  MS General Insurance Company (rated ‘CRISIL AA/Stable’), Chola MS Risk Services Ltd, Carborundum Universal Ltd (rated ‘CRISIL AA+/Stable/CRISIL A1+), Sterling Abrasives Ltd (rated ‘CRISIL A+/Stable’) and Parrys Sugar Refinery India Pvt Ltd (rated ‘CRISIL A+/Stable/CRISIL A1). The group’s holding company is Ambadi Investments Pvt Ltd (rated ‘CRISIL A1+’)

 

In the first three months of fiscal 2023, the company reported a profit after tax (PAT) of Rs.247 crore (Rs.135 crore in corresponding quarter of fiscal 2022), on net revenues of Rs.3799 crore (Rs.2437 crore).

Key Financial Indicators (TI Consolidated)

As on / for the period ended March 31		2022	2021
Operating Income	Rs Crore	12570	6093
PAT	Rs Crore	991	260
PAT/ Operating Income	%	7.9	4.3
Adjusted debt/adjusted net worth	Times	0.30	0.86
Interest coverage	Times	19.11	15.94

    Note – Financial Summary is based on CRISIL’s workings; this considers analytical approach taken by CRISIL Ratings.

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of Instrument	Date of Allotment	Coupon Rate (%)	Maturity Date	Issue Size (Rs. Crs.)	Complexity level	Rating Assigned with Outlook
NA	Commercial Paper	NA	NA	7-365 days	525	Simple	CRISIL A1+
NA	Cash Credit*	NA	NA	NA	400	NA	CRISIL AA+/Stable
NA	Letter of Credit**	NA	NA	NA	300	NA	CRISIL A1+

*Interchangeable with short-term buyer’s credit, packing credit, and working capital demand loan                

**Interchangeable with bank guarantee    

 

Annexure: Details of Ratings Withdrawn

ISIN	Name of Instrument	Date of Allotment	Coupon Rate (%)	Maturity Date	Issue Size (Rs. Crs.)	Complexity level
INE974X07025	Non-convertible debenture	NA	4.80%	27-Apr-22	100	Simple

 

Annexure – List of entities consolidated

Name of entity	Extent of consolidation	Rationale for consolidation
Shanthi Gears Ltd	Full	70% subsidiary, operational linkages
Financiere C10 SAS	Full	100% subsidiary (overseas), operational linkages
Creative Cycles Private Limited	Full	80% subsidiary, operational linkages
Great Cycles Private Limited	Full	80% subsidiary, operational linkages
C G Power & Industrial Solutions Ltd	Full	58.58% subsidiary; operational linkages

 

The consolidated entities include gear manufacturer, Shanthi Gears Ltd (SGL, 70.12% held subsidiary), France-based Financiere C10 SAS (Sedis group) (100% held), which is engaged in the chain business, and Sri Lanka based Creative Cycles Private Limited (CCPL, 80% held) and Great Cycles Private Limited (GCPL, 80% held) which are into manufacturing of components for premium cycle segments.