Rating Rationale
September 08, 2020 | Mumbai
Tube Investments Of India Limited
Long-term rating placed on 'Watch Developing'; short-term rating reaffirmed
 
Rating Action
Total Bank Loan Facilities Rated Rs.700 Crore
Long Term Rating CRISIL AA+ (Placed on 'Rating Watch With Developing Implications')
Short Term Rating CRISIL A1+ (Reaffirmed)
 
Rs.200 Crore Non Convertible Debentures CRISIL AA+ (Placed on 'Rating Watch With Developing Implications')
Rs.525 Crore Commercial Paper CRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has placed its ratings on the long term bank facilities and Rs.100 crore non-convertible debenture (NCD) programme of Tube Investments of India Ltd (TI) on 'Rating Watch with Developing Implications' while the rating on TI's short term bank facilities and commercial paper programmes has been reaffirmed at 'CRISIL A1+'.
 
CRISIL has also withdrawn its rating on TI's Rs. 100 crore NCD programme (See Annexure 'Details of Rating Withdrawn' for details) on receipt of independent confirmation of their redemption. The rating is withdrawn in line with CRISIL's rating withdrawal policy.
 
The rating action follows TI's announcement on August 28, 2020 to the exchanges stating that the company has won the bid for acquiring 56.2% stake in C G Power and Industrial Solutions Ltd (C G Power) at an estimated total cost of Rs 700 crores. On September 2, 2020, TI's Board also approved investment of a further Rs 100 crore in the equity of CG Power, taking overall cost of acquisition to Rs 800 crore for a 58.58% stake. The acquisition is likely to be funded largely through a combination of debt and cash surpluses.
 
The proposed acquisition of C G Power is expected to significantly add scale to TI's business profile, with TI's consolidated revenue improving to over Rs 8,000 crore, from Rs 4,750 crore in fiscal 2020. Besides, the acquisition is also expected to yield synergies such as common vendors and complementary product categories, and strengthen TI's overall business risk profile by providing further diversity to revenues and reducing dependence on the cyclical automotive sector (currently 55-60%% of TI's revenues is derived from the automotive industry). Furthermore, benefits derived from the cost control measures initiated in the past are expected to continue, and along with ramp up of C G Power's utilisation levels, leading to operating profitability of 8-10% (TI's operating profitability was 12% in fiscal 2020) over the medium term.
 
However, TI's financial risk profile will be moderately affected over the medium term, owing to expected increase in debt for part funding the acquisition, as well as due to addition of C G Power's debt. This increase in debt coupled with impact of lockdown on account of COVID-19 outbreak and overall slowdown in the automotive industry are likely to impact TI's credit metrics in fiscal 2021, leading to peak consolidated gearing of close to 1-1.2 times. A gradual improvement is expected as benefits of integration are realised.
 
C G Power is a large player in the domestic engineering and manufacturing segment and had standalone revenues over Rs 5,000 crores in FY19. However, due to various financial irregularities by the erstwhile promoters, is now a stressed asset. This has 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 have been looking for a resolution of the debt.
 
With TI being declared as the successful bidder, TI will infuse Rs.687.50 crore upfront into C G Power which will ease its working capital issues.  TI has also entered into a One Time Settlement (OTS) with existing lenders of C G Power, prior to take over of C G Power.
 
The acquisition will be subject to necessary regulatory approvals, including from the Competition Commission of India.
 
CRISIL is closely monitoring the outcome of this proposed acquisition and will remain in dialogue with the management of TI. The rating will be removed from watch and final rating action taken once necessary approvals are in place. 
 
CRISIL's ratings continue to reflect the company's healthy business risk profile with diversified revenue streams and leading market positions in most businesses. The ratings also factor in its adequate 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 moderation in TI's bicycle segment revenues, and marginal vulnerability of its operating profitability to intense competition and cyclicality in the automobile sector.

Analytical Approach

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.

Please refer Annexure - Details of entities consolidaed, 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 (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. 

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.

If the proposed acquisition is successfully completed, with the increase in overall debt, 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 C G Power post fund infusion by TI, coupled with expected recovery in existing business cash flows of TI from fiscal 2022, and through monetisation of non-core real estate assets at C G Power. Gross debt to EBITDA and gearing are expected at ~2-2.2 times and below 1 times by end of fiscal 2022. C G Power will also reduce its debt over the medium term through sale of assets. Successful integration and revival of operations at C G 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. 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. While the business profile is expected to further diversify due to the acquisition, one of the segments of the entity being acquired is in electrical equipment which is characterized by intense competition and stretched working capital.
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. 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. While repayment obligations are expected to increase from fiscal 2022 on successful completion of the acquisition, refinancing, in case of any exigencies is not expected to be a challenge, considering its strong financial flexibility. The company also moderately utilized its working capital limits and current cash surpluses stood at around Rs. 350 crore at August 31, 2020 further benefitting liquidity. Besides, some of the debt which will be acquired from C G Power will also be retired through sale of real estate assets.

Rating Sensitivity Factors:
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 correcting to below 0.5-0.7x times and gross debt to EBITDA of less than 1.5-1.7 times, post-acquisition and 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, necessitating further debt addition, and preventing envisaged improvement in credit metrics over the medium term. For instance, gearing increasing to over 1.5-1.6x and gross debt to EBITDA of over 3.5-3.7x in fiscal 2022.

About the Company

TI, part of the Rs. 36,900 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.

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. The demerger has been completed and the Company has issued shares to the Shareholders of erstwhile TI Financial Holdings Limited based on the record date of August 28, 2017. Presently, TI holds the manufacturing business, comprising bicycles, metal forming, engineering, and TI's subsidiaries - SGL, and Sedis. TI Financial Holdings Ltd (TIFHL) holds the financial services business of the group, viz. CIFCO, Chola MS and Chola MS Risk Services Ltd (Chola MS Risk).

On a consolidated basis, TI's net loss was Rs 65 crore on operating revenues of Rs 457 crore for the first three months of fiscal 2021 as compared to net profit of Rs 79 crore on operating revenues of Rs 1,384 crore during the corresponding period of the previous fiscal.

On a standalone basis C G Power's net loss was Rs 1,799 crore on operating revenues of Rs 3,169 crore for fiscal 2020 as compared to net loss of Rs 1,417 crore on operating revenues of Rs 5,361 crore during the previous fiscal.

Key Financial Indicators (TI; Consolidated)
As on/for the period ended March 31 Unit 2020 2019
Operating Income Rs Crore 4768 5797
PAT Rs Crore 285 222
PAT/ Operating Income % 6.0 3.8
Adjusted debt/adjusted networth Times 0.23 0.44
Interest coverage Times 15.93 9.52
 Note - Financial Summary is based on CRISIL's workings; this considers analytical approach taken by CRISIL. 

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)
ISIN Name of Instrument Date of Allotment Coupon Rate (%) Maturity Date Issue Size (Rs.Crs) Complexity level Rating Assigned with Outlook/ Rating Watch
INE974X07017 Non Convertible Debenture NA 7.56% 28-Dec-2020 100 Simple CRISIL AA+/Watch Developing
NA Commercial Paper NA NA 7-365 days 525 Simple CRISIL A1+
NA Cash Credit* NA NA NA 400 NA CRISIL AA+/Watch Developing
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 Rating Withdrawn 
ISIN Name of Instrument Date of Allotment Coupon Rate (%) Maturity Date Issue Size (Rs.Crs) Complexity level
INE149A07253 Non-Convertible Debenture 20-Feb-2017 7.55% 20-Feb-2020 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
 
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.

C G Power will also be fully consolidated with TI post completion of the acquisition, since TI will acquire controlling stake and will have operational linkages with C G Power. The proposed goodwill on acquisition of C G Power will also be amortised over a period of ten years from completion of the acquisition.
Annexure - Rating History for last 3 Years
  Current 2020 (History) 2019  2018  2017  Start of 2017
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Commercial Paper  ST  525.00  CRISIL A1+  11-08-20  CRISIL A1+  01-10-19  CRISIL A1+  17-12-18  CRISIL A1+  14-12-17  CRISIL A1+  -- 
                17-08-18  CRISIL A1+       
Non Convertible Debentures  LT  100.00
08-09-20 
CRISIL AA+/(Watch) Developing  11-08-20  CRISIL AA+/Stable  01-10-19  CRISIL AA+/Stable  17-12-18  CRISIL AA+/Stable  14-12-17  CRISIL AA/Positive  CRISIL AA/Positive 
                17-08-18  CRISIL AA+/Stable  20-07-17  CRISIL AA/Positive   
                    11-07-17  CRISIL AA/Positive   
                    07-02-17  CRISIL AA/Positive   
Short Term Debt  ST                  07-02-17  CRISIL A1+  CRISIL A1+ 
Short Term Debt (Including Commercial Paper)  ST                  20-07-17  CRISIL A1+  -- 
                    11-07-17  CRISIL A1+   
Fund-based Bank Facilities  LT/ST  400.00  CRISIL AA+/(Watch) Developing  11-08-20  CRISIL AA+/Stable  01-10-19  CRISIL AA+/Stable  17-12-18  CRISIL AA+/Stable  14-12-17  CRISIL AA/Positive  CRISIL AA/Positive 
                17-08-18  CRISIL AA+/Stable  20-07-17  CRISIL AA/Positive   
                    11-07-17  CRISIL AA/Positive   
                    07-02-17  CRISIL AA/Positive   
Non Fund-based Bank Facilities  LT/ST  300.00  CRISIL A1+  11-08-20  CRISIL A1+  01-10-19  CRISIL A1+  17-12-18  CRISIL A1+  14-12-17  CRISIL A1+  CRISIL A1+ 
                17-08-18  CRISIL A1+  20-07-17  CRISIL A1+   
                    11-07-17  CRISIL A1+   
                    07-02-17  CRISIL A1+   
All amounts are in Rs.Cr.
 
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Cash Credit* 400 CRISIL AA+/Watch Developing Cash Credit* 400 CRISIL AA+/Stable
Letter of Credit** 300 CRISIL A1+ Letter of Credit** 300 CRISIL A1+
Total 700 -- Total 700 --
*Interchangeable with short-term buyer's credit, packing credit, and working capital demand loan 
**Interchangeable with bank guarantee
Links to related criteria
CRISILs Approach to Financial Ratios
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating criteria for manufaturing and service sector companies
Rating Criteria for Auto Component Suppliers
CRISILs Criteria for Consolidation
CRISILs Criteria for rating short term debt

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