| Tube Investments of India Limited | ||||||
| Long-term rating removed from 'Watch Developing'; short-term rating reaffirmed | ||||||
| Rating Action | ||||||
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| 1 crore = 10 million | ||||||
| Refer to annexure for Details of Instruments & Bank Facilities |
| Detailed Rationale |
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CRISIL has removed its ratings on the long term bank facilities and long term debt instruments of Tube Investments of India Limited (TI) from 'Rating Watch with Developing Implications', reaffirmed the rating at 'CRISIL AA+' and assigned a 'Stable' outlook. The rating on the short-term facility and commercial paper has been reaffirmed at 'CRISIL A1+'. |
| Analytical Approach |
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For arriving at its ratings, CRISIL 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 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. |
| Key Rating Drivers & Detailed Description |
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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 (16% of consolidated revenue in fiscal 2020), engineering (45%), metal forming (34%), and gear and gear products (5%) 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. 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 decline in demand from auto 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. However, TI's revenue is expected to decline in the near term due to headwinds faced by the domestic auto industry and TI's sizeable exposure to the automotive business in its engineering and metal forming segments. While a decline in operating margins is expected, TI's focus on initiatives to enhance value offerings, and continuing productivity initiatives (leading to better asset utilisation) is expected to result in sustenance of operating profitability at 8-10%, (12% in fiscal 2020) despite the slowdown in automotive sector and impact of lockdown. * Adequate 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, supported by steep debt reduction initiatives undertaken by its management in the past besides generating healthy free cash flows. This had helped TI reduce its gearing to under 0.23 times as on March 31, 2020, from 1.09 times earlier, while its interest cover ratio has also improved to ~16 times in fiscal 2020, from the earlier levels of 2.8 times. Besides, TI continues to benefit from the Murugappa group's strong relationships with the lending community, which facilitates debt raising at competitive rates. Moreover, being a leading company of the group also enhances its financial flexibility. Going forward, capital expenditure (capex) is expected to be nominal ~Rs 100-200 crore annually to debottleneck existing capacities and for routine modernisation of its units. CRISIL expects the capex to be funded largely through cash accruals. With the proposed acquisition of CG Power, peak gearing is likely to deteriorate to ~1-1.2 times, from 0.23 time in fiscal 2020, while gross debt to EBITDA will also increase materially. Besides, cash generation is also expected to moderate to Rs. 250 crore for fiscal 2021 (from Rs 393 crore in fiscal 2020) due to impact of Covid-19 coupled with higher interest outgo in the near term, and then subsequently improve. Consequently, debt protection metrics like net cash accruals to total debt (NCATD) and interest coverage ratios are expected to moderate to less than 0.15 time and 4.7 time on annualised basis, post the acquisition, compared to over 1 time and 15.9 time respectively in fiscal 2020. However, credit metrics are expected to gradually correct over the medium term, with expected revival in operations of CG Power post fund infusion by TI, coupled with expected recovery in existing business cash flows of TI from fiscal 2022. Further monetisation of non-core real estate assets at CG Power will also help lower debt. Gross debt to EBITDA and gearing are expected at ~2-2.2 times and below 1 times by end of fiscal 2022. CG Power will also reduce its debt over the medium term through sale of assets. Successful integration and revival of operations at CG Power, and monetisation of non-core real estate assets will be key monitorables, post-acquisition. CG Power also has sizeable contingent liabilities in form of guarantees given to overseas subsidiaries by the Indian entity, and tax claims. While TI as an acquirer is in discussion with lenders to resolve some of these liabilities including through sale of overseas assets, no material impact is expected post acquisition. TI's management may also propose to close down most of CG Power's overseas subsidiaries over time; some are already in the process of liquidation. With respect to the tax claims, based on discussion with legal counsel, no material claims are anticipated. Nevertheless, any large outflow on these aspects will also be a monitorable. Weaknesses: * Moderation in TI's bicycles segment revenues TI is the second largest player in the domestic bicycles market and enjoys market leadership in the faster growing specials segment. TI's bicycle business has witnessed sluggish growth in recent times, due to intense competitive pressures and also tepid off-take in the standards bicycle segment, which accounts for ~45% of industry volumes (though only about 29% for TI). The overall bicycles industry is itself estimated to have witnessed a decline in volumes in fiscal 2020, as sale of special bicycles, too witnessed some pressure. TI, in a bid to improve margins has exited the institutional business which was dependent on large Government orders. These orders come in spurts, had longer gestation period and were very competitively priced which lent irregularity to revenues and lower margins. While the strategy of focussing on only retail sales has led to a decline in overall revenues from bicycles (16% of revenues in fiscal 2020 compared to 23% in fiscal 2019), the same has been offset by an improvement in margins and lower net working capital. This also enables TI to focus more and strengthen its presence on the retail segment; albeit the share of bicycles in TI's overall revenues is unlikely to increase sharply again. * Vulnerability to intense competition and cyclical slowdown, especially from the automobile sector Consolidated operating profitability improved to 12% in fiscal 2020 from an average of 9% between fiscal 2015 and fiscal 2019 due to sustained cost rationalization measures and consolidation of units. The profitability of its bicycle division is expected to sustain at fiscal 2020 levels due 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 and sub-optimal utilisation of capacities. The imposition of lockdown has further affected operations and CRISIL expects TI's consolidated operating profitability to stabilise at 8-10% over the near to medium term, supported by rationalization of fixed overheads across businesses, as well as increasing focus on profitable orders at SGL. * Increased working capital intensity of operations With the acquisition of CG power, the working capital requirements are expected to increase as CG power caters to segments such as electrical equipment, where receivables are usually stretched and in the range of 100-120 days. Hence, the overall gross current asset days, are expected to increase from 90 days and remain over 135 days post the acquisition. Higher than anticipated increase in working capital may result in increased short term debt, preventing the improvement in overall financial risk profile. |
| Liquidity Strong |
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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. While, the company is expected to generate lower accruals of around Rs. 250 crore in fiscal 2021, due to the ongoing auto sector slowdown exacerbated by COVID-19 outbreak; accruals are expected to improve to over Rs 500 crore annually over the medium term. TI will utilize these accruals to service part of its debt, and fund annual capex of about Rs. 150 crore. The company's long-term debt repayment is about Rs. 100 crore in fiscals 2021. |
| Outlook: Stable |
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CRISIL believes TI's overall credit profile will remain healthy supported by well-diversified revenue profile, established market position in different business segments, and adequate financial risk profile. Credit metrics are expected to gradually correct over the medium term, with expected revival in operations of TI, CG Power and progressive repayment of debt. |
| Rating Sensitivity factors |
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Upward Factors: * Stability in revenue growth, and sustenance of operating profitability at 10-12% on consolidated basis, leading to healthy cash generation * Strengthening of financial risk profile marked by improving credit metrics; for instance, gearing of below 0.5-0.7 times and gross debt to EBITDA of less than 1.3-1.5 times, post-integration of CG Power. * Substantial build-up in cash surplus. Downward Factors: * Steep fall in revenues or consolidated operating profitability to below 7-8% on sustained basis, impacting cash generation * Slower than expected benefits of integration with CG Power, or higher than expected outflow to meet contingent and other liabilities related to CG Power or delays in monetization of non-core real estate assets, preventing envisaged improvement in credit metrics - for instance, gearing of over 1.5-1.6 times and gross debt to EBITDA of over 2.3-2.5 times in fiscal 2022. |
| About the Company |
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TI, part of the Rs. 38,105 crore 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. |
| Key Financial Indicators | ||||||||||||||||||||||||
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Any other information: Not applicable |
| Note on complexity levels of the rated instrument: CRISIL 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. For more details on the CRISIL complexity levels, please visit www.crisil.com/complexity-levels. |
| Annexure - Details of Instrument(s) | ||||||||||||||||||||||||||||||||||||||||||||||||
**Interchangeable with short-term buyer's credit, packing credit, and working capital demand loan @Interchangeable with bank guarantee | ||||||||||||||||||||||||||||||||||||||||||||||||
| Annexure - List of entities consolidated | ||||||||||||||||||||||||||||||||||||||||||||||||
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| 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. |
| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| All amounts are in Rs.Cr. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annexure - Details of various bank facilities | ||||||||||||||||||||||||||||||
@Interchangeable with bank guarantee | ||||||||||||||||||||||||||||||
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