Detailed Rationale

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 CRISIL Ratings has also withdrawn its rating on NCDs of Rs 100 crore basis independent confirmation from debenture trustee that these NCD’s have been fully redeemed, along with the company’s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

 

TI’s performance rebounded sharply in second half of the fiscal 2021 post relaxation of pandemic related lockdowns. Healthy demand from end user segments like automotive and industrial machineries and pick up in bicycles business drove the recovery. TI also completed its acquisition of C G Power and Industrial Solutions Limited (C G Power) in November 2020. Aided by these factors, revenues grew by ~28% on year. While operating margins declined by ~200 basis points on year to ~11%, same was better than estimates as company took cost cutting measures and benefitted from improvement in operational efficiencies, and softer input prices in the initial part of the fiscal.

 

TI has invested ~Rs 688 crore till date (52.61% stake) out of the total requirement of Rs 800 crore (58.05% stake) for acquisition of C G Power. TI raised equity of Rs 350 crore and availed debt of Rs 100 crore to part fund the acquisition with balance coming from accruals.

 

C G Power is a large player in the domestic engineering and manufacturing segment and had standalone revenues over Rs 5,000 crores in fiscal 2019. However, due to various financial irregularities by the erstwhile promoters, company had run into stress. This had adversely affected the operations of the company and revenues have fallen drastically in fiscal 2020 to about Rs 3100 crores. The lenders of C G Power had been looking for a resolution of the debt.

 

As a part of the acquisition, TI had also entered into a One Time Settlement (OTS) with existing lenders of C G Power and restructuring of the debt has been completed.

 

With C G Power contributing to revenues for full year from fiscal 2022, CRISIL expects TI’s revenues to register over 50% increase to over Rs 9000 crore. Operating margins are also expected to remain healthy at 10-12% driven by increase in scale of operations and continuing benefits of past cost rationalization measures, which will help mitigate some of the impact of higher input prices, which too are being passed on, albeit with a lag.

 

TI’s financial risk profile was moderately impacted due to addition of debt on account of the debt for part funding the acquisition, as well as due to addition of C G Power’s debt. However, the impact was partially cushioned by TI raising equity and healthy profits, which resulted in key debt metrics moderating lesser than expected. The gearing was under 0.9 times at March 31, 2021 (0.23 times at March 31, 2020), while the ratio of gross debt to earnings before interest, depreciation, tax and amortisation (EBITDA), peaked at 2.9 times in fiscal 2021. However, with integration of C G Power on track and ramp up in operations, as well as prudently funded capital expenditure, debt metrics are expected to witness gradual improvement over medium term.

 

CRISIL Ratings continue to reflect TI’ healthy business risk profile with diversified revenue streams and leading market positions in most businesses. The ratings also factor in its adequate and improving 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 the vulnerability of its 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 since they operate in similar lines of business with significant operational and financial linkages. CRISIL Ratings has also amortised the goodwill on acquisition of Shanthi Gears Limited (SGL) of around Rs. 280 Crore over a period of ten years commencing November 2012.

 

CRISIL Ratings has also fully consolidated C G Power post completion of acquisition in as there are financial and operational linkages and TI has guaranteed debt raised by C G Power. CRISIL Ratings has also amortized the goodwill on account of acquisition of C G Power of Rs 285 crore and intangible assets of Rs 587 crore 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 bicycle manufacturing (14% of consolidated revenue in fiscal 2021), engineering (37%), metal forming (24%), C G Power (22%) and gear and gear products (3%) businesses. The company is among the top-three players in these segments. Acquisition of 70.12% stake in SGL in fiscal 2013 has also helped diversify revenue further besides providing a leadership position in the special gears and gearboxes segment. With the acquisition of C G Power, TI has further diversified in the engineering and capital goods sector which will also reduce dependence on the cyclical auto sector. The business risk profile continues to benefit from the ramp-up of its recently commissioned large diameter tubes plant and improving volume outlook across engineering and metal forming business segments, driven by better demand from the non-automotive sector. This is expected to offset some of the impact of demand cyclicality witnessed in the automotive sector.

 

TI’s large diameter tubes capacity has stabilised after initial problems, which has led to the improvement in profitability for the engineering division from fiscal 2017 onwards. Over the medium term, tie-ups with both national and international customers should enable higher utilisation. Furthermore, the bicycle division is seeing the benefit from the exit from the lower margin institutional sales and increased focus on retail segment. Besides, engineering and metal form divisions are also expected to benefit from their diversified product offerings. TI’s subsidiary, SGL, too is benefitting from improving demand for gears, resulting in steady revenue growth and better coverage of fixed costs.  TI has also forayed into 3 wheeler Electric Vehicle (EV) space and is in the process of setting up a plant for the same which is expected to be commissioned by end of fiscal 2022.

 

Driven by healthy demand from end segments and ramp up of C G Power, CRISIL Ratings expects TI’s revenues to register healthy growth to over Rs 9000 crore in fiscal 2022, and cross Rs.10,000 crore over the medium term. Operating margins are expected to remain stable at 10-12% aided by ability to pass on increase in raw material prices, albeit with a lag and internal projects undertaken in last 2-3 fiscals for improving operational efficiencies. These projects had helped in improvement in operating margins to 12.8% in fiscal 2020 from 8.5% in fiscal 2018 and has also aided in limiting the decline in margins to 200 bps in fiscal 2021 despite impact of the pandemic and rise in commodity prices.

 

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

TI’s financial risk profile has remained strong, despite acquisition of C G Power and addition of debt on account of the acquisition. Gearing increased to ~0.9 time as on March 31, 2021 from 0.23 time in previous fiscal as debt of ~Rs 1600 crore came on the books. This was however, partially tempered by the equity raise of Rs 350 crore done by TI. Besides, 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. 

 

Going forward, capital expenditure (capex) is expected to be Rs 250-300 crore annually to debottleneck existing capacities and for routine modernisation of its units.  CRISIL Ratings expects the capex to be funded largely through cash accruals.

 

Aided by higher contribution from C G Power, accruals are expected to increase to over Rs 700 crore (Rs 513 crore in fiscal 2021) thereby improving debt protection metrics like net cash accruals to total debt (NCATD) to over 0.4 time from 0.27 time in fiscal 2021, and gearing to under 0.7 time. Besides, the ratio of gross debt to EBITDA is also expected to improve to below 1.5 time over medium term from peak of ~2.9 time in fiscal 2021.

 

CG Power also had sizeable contingent liabilities in form of guarantees given to overseas subsidiaries by the Indian entity, and tax claims. TI as an acquirer was in discussion with lenders to resolve some of these liabilities including through sale of overseas assets and settlement of debt with haircuts. Settlement amount has been arrived at some involving haircuts of ~70-80% while balance are under negotiation and is expected to be resolved over medium term. With respect to the tax claims, based on discussion with legal counsel, no material claims are anticipated. 

 

Consequently, CRISIL Ratings understands that while repayment obligation for fiscal 2022 as per audited financials is higher at ~Rs 590 crore, significant component of it (~Rs 540 crore) relates to debt in overseas subsidiaries of C G Power which is currently under resolution or has been crystallized with a hair-cut and actual repayment liability will be lower. CRISIL Ratings does not expect actual outflow under these liabilities to exceed Rs 150-160 crore in fiscal 2022. In any case, healthy accruals will more than suffice to meet repayment of ~Rs 210 crore and Rs 90 crore in fiscal 2022 and 2023 and annual capex of Rs 250-300 crore respectively. Any significant additional liability, or higher than anticipated amount for settlement of contingent claims will remain a monitorable.

 

The debt sanctioned to C G Power has a relaxed repayment schedule with repayment starting in end of fiscal 2023 only and providing cushion for ramp up and stabilization of operations. Further, monetization of non-core assets in CG Power can also help in debt reduction and will remain a monitorable.

 

Weaknesses:

• Vulnerability to intense competition and cyclical slowdown, especially from the automobile and engineering sector:

Consolidated operating profitability declined to ~11% in fiscal 2021 from ~13% previous fiscal due to impact on operations in the first fiscal. Additionally, continuous rise in commodity prices also had an impact as TI was able to pass on the increase with a lag. However, cost rationalization measures taken in the past continued to help and aided in limiting the fall in operating profitability. The profitability of its bicycle division has improved post decision to exit from the lower margin institutional business, introduction of new models, continued freight savings from the Rajpura plant, and focus on various cost reduction initiatives. However, TI remains vulnerable to increasing competition, cyclical automobile demand, volatile power costs, and only moderate pricing power. Also, SGL’s operating profitability has moderated from healthy levels of around 25% in the past, as recent orders have not been as profitable as earlier ones, due to intense competition.

 

The engineering business, similar to the automotive business, is also prone to cyclical headwinds during economic downturns, which renders some vulnerability to TI’s business performance. Albeit, presence across different verticals of the engineering segment places TI in a better position compared to peers.

Liquidity: Strong

TI’s liquidity is strong, supported by the Murugappa Group parentage and its ability to raise funds from multiple sources at attractive rates of interest, given the group’s strong franchise with the lending community. Annual accruals are expected to be over Rs 700 crore in fiscals 2022 and 2023 and sufficient to meet repayment obligation of Rs 210 crore in fiscal 2022 and Rs 90 crore in fiscal 2023, apart from annual capex requirement of Rs 250-300 crore. In case of increase in repayment obligations on account of contingencies related to C G Power also, refinancing, is not expected to be a challenge, considering its strong financial flexibility. The company also moderately utilized its working capital limits and cash surpluses stood at around Rs. 350 crore at March 31, 2021 further benefitting liquidity. 

Outlook: Stable

CRISIL Ratings believes TI’s overall credit profile will remain healthy supported by well-diversified revenue profile, healthy market position and adequate and improving financial risk profile. Debt metrics are expected to gradually improve over the medium term, with expected ramp up in operations of C G Power, steady profitability, and progressive repayment of debt.

Rating Sensitivity factors

Upward Factors:

• Strong revenue growth and sustenance of operating profitability at 10-12%, leading to better than anticipated cash generation
• Strengthening of financial risk profile marked by improving debt metrics; for instance, gearing of below 0.5x times and gross debt to EBITDA of less than 1.5 times
• Substantial build-up in cash surplus.

 

Downward Factors:

• Steep fall in revenues and operating profitability to below 7-8% on sustained basis, impacting cash generation   
• Slower than expected benefits of integration with C G Power, or higher than expected outflow to meet contingent and other liabilities related to C G Power or delays in monetization of non-core real estate assets, or material capital spending, necessitating further debt addition, and preventing envisaged improvement in debt metrics; gearing increasing to over 1.5-1.6x and gross debt to EBITDA of over 3.5 times

About the Company

TI, part of the Rs. 41,713 crore Murugappa group, has interests in bicycle manufacturing, engineering, power solutions, 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; 80% in CCPL and GCPL which are into manufacturing of components for premium bicycle segment, and 52.6% in C G Power, which is into the design, manufacturing, and marketing of products related to power generation, transmission, and distribution.

 

In fiscal 2017, TI’s Board of Directors approved a de-merger plan to separate its manufacturing and the financial services business into separate legal entities, with identical shareholding. Post demerger, TI held the manufacturing business, comprising bicycles, metal forming, engineering, and its subsidiaries – SGL and Sedis.  TI Financial Holdings Ltd (TIFHL) holds majority stake in the financial services business of the group, viz. Cholamandalam Investment and Finance Company Ltd (CIFCO, rated ‘CRISIL AA+/Stable/CRISIL A1+’), Cholamandalam MS General Insurance Company (Chola MS, rated ‘CRISIL AA/Stable’) and Chola MS Risk Services Ltd (Chola MS Risk).

 

In the first half of fiscal 2022, the company’s operating income and profit after tax (PAT) stood at Rs 5700 crore and Rs 337 crore, respectively, against Rs 1650 crore and Rs 36 crore, respectively, for the corresponding period of the previous fiscal.

Key Financial Indicators (TI Consolidated)

As on / for the period ended March 31		2021	2020
Operating Income	Rs Crore	6093	4768
PAT	Rs Crore	260	285
PAT/ Operating Income	%	4.3	6.0
Adjusted debt/adjusted net worth	Times	0.86	0.23
Interest coverage	Times	15.94	15.93

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

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
INE974X07025	Non-convertible debenture	27-Oct-20	4.80%	27-Apr-22	100	Simple	CRISIL AA+/Stable
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
INE974X07017	Non-convertible debenture	NA	7.56%	28-Dec-20	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	52.61% subsidiary; operational linkages

 

The consolidated entities include gear manufacturer, C G Power, 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.