Rating Rationale
August 17, 2018 | Mumbai
Tube Investments of India Limited
Long-term rating upgraded to 'CRISIL AA+/Stable'; short-term rating reaffirmed
Rating Action
Total Bank Loan Facilities Rated Rs.700 Crore
Long Term Rating CRISIL AA+/Stable (Upgraded from 'CRISIL AA/Positive')
Short Term Rating CRISIL A1+ (Reaffirmed)
Rs.150 Crore Non Convertible Debentures CRISIL AA+/Stable (Upgraded from 'CRISIL AA/Positive')
Rs.100 Crore Non Convertible Debentures CRISIL AA+/Stable (Upgraded from 'CRISIL AA/Positive')
Rs.100 Crore Non Convertible Debentures CRISIL AA+/Stable (Upgraded from 'CRISIL AA/Positive')
Rs.100 Crore Non Convertible Debentures CRISIL AA+/Stable (Upgraded from 'CRISIL AA/Positive')
Rs.75 Crore Non Convertible Debentures CRISIL AA/Positive (Withdrawn)
Rs.525 Crore Commercial Paper Programme CRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has upgraded its ratings non-convertible debenture (NCD) programme and long term bank facilities of Tube Investments of India Limited (TI) to 'CRISIL AA+/Stable' from 'CRISIL AA/Positive'; its rating on TI's short term bank facility and commercial paper programmes have been reaffirmed at 'CRISIL A1+'. CRISIL has also withdrawn its rating on NCDs of Rs.75 crore as they have been fully redeemed. The withdrawal in ratings is in line with CRISIL's policy on withdrawal of ratings.

The upgrade reflects CRISIL's belief that the improvement in TI's credit risk profile will sustain over the medium term supported by steady demand prospects for of its engineering, metal forming and gears businesses, even as its bicycle business is expected to also witness gradual improvement. Its operating margins which moderated to about 8.5% due to one-time extraordinary losses in fiscal 2018, are expected to stabilize at 9-9.2% over the medium term as capacity utilization levels across businesses improve, leading to better absorption of fixed overheads and healthy cash accruals of Rs.300-350 crores per annum.

TI is likely to incur capital expenditure (capex) of ~Rs 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 resulting in further strengthening of TI's financial risk profile going forward. Thus, its healthy credit metrics are expected to sustain with TIL's gearing at less than 0.7-0.8 time and debt to earnings before depreciation, interest, tax and amortisation (EBITDA) at below 2 times over the medium term.

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 comfortable 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 sluggish performance of TI's bicycle business in the recent past, and marginal vulnerability of its operating profitability to intense competition and cyclicality in the automobile sector.

Analytical Approach

CRISIL has combined the business and financial risk profiles of Tube Investments of India Ltd (TI), TI Tsubamex Pvt Ltd (78:22 joint venture with Tsubamex Co. Ltd. Japan, for design and manufacture of sheet metal dies and fixtures for automobiles), 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. CRISIL has also amortised the goodwill on acquisition of SGL of around Rs. 280 Crore over a period of ten years commencing November 2012.

Key Rating Drivers & Detailed Description
* 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 (25% of consolidated revenue in fiscal 2017), engineering (45%), metal forming (26%), and gear and gear products (4%) 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 automotive sector. This is also expected to lead to better business performance by TI over the near-to-medium term.

TI's large diameter tubes capacity has stabilised after initial problems, which has led to the improvement in profitability for the engineering division in fiscals 2017 and 2018. Over the medium term, tie-ups with both national and international customers should enable higher utilisation. Furthermore, the bicycle division is expected to benefit from the execution of institutional orders and the ramp-up of the new plant in Rajpura (Punjab), which will offer freight savings, as ancillary units are located at a short distance. Besides, engineering and metal form divisions are also expected to benefit from improving demand sentiment from the automotive sector. TI's subsidiary, SGL, too is benefitting from improving demand for gears, resulting in steady revenue growth and better coverage of fixed costs

Higher business levels across segments, initiatives to enhance value offerings, and continuing productivity initiatives (leading to better asset utilisation) is expected to result in revenue growth of around 7-8% over the medium term (against 5% revenue growth between fiscals 2014 and 2018), while TI's profitability is expected to be at 9.0-9.2%, against 8.8% over the four fiscals through 2018.

* Comfortable 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 is improving, supported by steep debt reduction initiatives undertaken by its management. It has retired a significant portion of its long-term debt from the proceeds (Rs 882 crore before tax) generated from 14% stake sale in Chola MS to the other joint venture partner, Mitsui Sumitomo Insurance Company Ltd (Mitsui), Japan, leading to its debt levels reducing to Rs.785 crore at March 31, 2018, from the earlier levels of Rs.1449 crore. This has helped TI reduce its debt to earnings before interest, depreciation, tax and amortisation (EBITDA) ratio to under 2 times as on March 31, 2018, from 4 times earlier, while its interest cover ratio has also improved to over 6.5 times in fiscal 2018, from the earlier levels of 2.8 times.

Over the medium term, cash generation is expected to improve to Rs.300-350 crore per annum (from Rs 230 crore in fiscal 2018) due to better business performance as well as lower interest payout, following expected gradual reduction in debt levels due to progressive debt repayment.

With only moderate capital spending expected to be incurred and prudent working capital management, CRISIL expects TI's gearing to remain below 0.7-0.8 time, on a sustained basis over the medium term, while debt to EBITDA ratio is expected to be healthy at under 2 times over the medium term. Additionally, TI continues to benefit from the Murugappa group's strong relationships with the lending community, which facilitates debt raising at competitive rates.

* Sluggish performance of TI's bicycles business in recent past

TI's bicycle business has witnessed sluggish growth in recent times, due to intense competitive pressures and also sluggish offtake in the standards bicycle segment, which accounts for ~45% of industry volumes (though only about 30% for TI). The overall bicycles industry is itself estimated to have witnessed a decline in volumes in fiscal 2018, as sale of special bicycles, too witnessed some pressure, including due to the impact of demonetisation. A sizeable part of the bicycle business is also dependent on government orders, which happen in spurts, and also has longer gestation period, besides being very competitively priced.

TI is the second largest player in the domestic bicycles market and enjoys market leadership in the faster growing specials segment. Yet its revenues registered a compounded annual growth rate of only 1% between fiscal 2013 and fiscal 2018, and witnessed a year-on-year decline of 4% in fiscal 2018, as special volume sales too turned sluggish. The share of bicycles in TI's overall revenues therefore declined to under 30% in fiscal 2018, and is unlikely to increase sharply again, due to better growth expected at the engineering and metal forming businesses of the company. Albeit, profitability of bicycle division is expected to improve from fiscal 2019 onwards, with freight savings from the Rajpura plant, and absence of one time-settlement costs incurred due to shut down of its Noida unit in fiscal 2018.

* Vulnerability to intense competition and cyclical slowdown in the automobile sector
Consolidated operating profitability, which averaged 8.8% between fiscal 2015 and fiscal 2018, 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.

CRISIL expects TI's operating profitability to stabilise at 9.0-9.2% over the near to medium term, supported by higher business levels and better coverage of fixed costs, as well as increasing focus on profitable orders at SGL.

Outlook: Stable

CRISIL believes TI's overall credit profile will remain healthy supported by well-diversified revenue profile and continued growing demand from customers in the automotive and industrial sectors, resulting in healthy cash generation over the medium term. The company's prudent capital spend and working capital management is also expected to ensure credit metrics remain at healthy levels.

Upside Scenario
* Scale up in business levels and operating profitability at a higher rate than expected, leading to significantly higher cash generation
* Prudent capital spending and management of working capital results in continued healthy gearing and strengthening of debt protection metrics; for instance, debt to EBITDA ratio remaining at 1-1.25 times and gearing below ~0.4-0.5 times on sustained basis, over the medium term.
* Substantial build up in cash surplus

Downside scenario
* Lower-than-expected cash generation, due to modest business performance
* Slower-than-expected progress in correction of its gearing and debt protection metrics, due to large acquisitions or higher capital spending or elongation of working capital; for instance debt/EBITDA of 2.0 times and gearing exceeding 1.0 time.

About the Company

TI, part of the Rs.33,000 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; 70.12% of SGL, which manufactures specialised gears and gear boxes; 75% in TI Tsubamex Pvt Ltd, which is into sheet metal stamping and design; 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, TI Tsubamex 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).

For fiscal 2018, TI, on a standalone basis, reported a profit after tax (PAT) of Rs 136 crore on revenue of Rs 4598 crore, against a PAT of Rs 159 crore on revenue of Rs 4108 crore for fiscal 2017.
For fiscal 2018, SGL reported a PAT of Rs 29 crore on revenue of Rs 214 crore, against a PAT of Rs 22 crore on revenue of Rs 184 crore for fiscal 2017.

On a consolidated basis, TI's net profit was Rs 62 crore on operating revenues of Rs 1,483 crore for the first three months of fiscal 2019 as compared to net profit of Rs 38 crore on operating revenues of Rs 1,237 crore during the corresponding period of the previous fiscal.

On a standalone basis, TI's net profit was Rs 54 crore on operating revenues of Rs 1,362 crore for the first three months of fiscal 2019 as compared to net profit of Rs 35 crore on operating revenues of Rs 1,134 crore during the corresponding period of the previous fiscal.

Key Financial Indicators (Consolidated)
As on / for the period ended March 31  Unite 2018 2017
Revenue Rs Crore 5034 4505
Profit after tax Rs Crore 127 146
PAT margins % 2.5 3.2
Adjusted debt/adjusted net worth Times 0.65 0.74
Interest coverage Times 6.55 5.47
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. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments.
Annexure - Details of Instrument(s)
ISIN Name of Instrument Date of Allotment Coupon Rate (%) Maturity Date Issue Size (Rs.Crs) Rating Assigned with Outlook
INE149A07121 Non-convertible debenture 09-Aug-2012 9.81% 09-Aug-2017 75 Withdrawn
INE149A07238 Non-convertible debenture 25-Sep-2015 8.90% 25-Sept-2018 100 CRISIL AA+/Stable
INE149A07246 Non-convertible debenture 26-Oct-2015 8.79% 26-Oct-2018 150 CRISIL AA+/Stable
INE149A07253 Non-convertible debenture 20-Feb-2017 7.55% 20-Feb-2020 100 CRISIL AA+/Stable
INE974X07017 Non-convertible debenture NA 7.56% 28-Dec-2020 100 CRISIL AA+/Stable
NA Commercial Paper NA NA 7-365 days 525 CRISIL A1+
NA Cash Credit* NA NA NA 400 CRISIL AA+/Stable
NA Letter of Credit** NA NA NA 300 CRISIL A1+
*Interchangeable with short-term buyer's credit, packing credit, and working capital demand loan 
**Interchangeable with bank guarantee
Annexure - Rating History for last 3 Years
  Current 2018 (History) 2017  2016  2015  Start of 2015
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Commercial Paper  ST  525.00  CRISIL A1+      14-12-17  CRISIL A1+    --    --  -- 
Non Convertible Debentures  LT  450.00
CRISIL AA+/Stable      14-12-17  CRISIL AA/Positive  07-11-16  CRISIL AA/Positive  01-10-15  CRISIL AA/Stable  CRISIL AA/Stable 
            20-07-17  CRISIL AA/Positive  04-07-16  CRISIL AA/Positive  04-09-15  CRISIL AA/Stable   
            11-07-17  CRISIL AA/Positive  09-02-16  CRISIL AA/Stable  18-08-15  CRISIL AA/Stable   
            07-02-17  CRISIL AA/Positive  05-01-16  CRISIL AA/Stable  17-04-15  CRISIL AA/Stable   
                    05-02-15  CRISIL AA/Stable   
Short Term Debt  ST          07-02-17  CRISIL A1+  07-11-16  CRISIL A1+  01-10-15  CRISIL A1+  CRISIL A1+ 
                04-07-16  CRISIL A1+  04-09-15  CRISIL A1+   
                09-02-16  CRISIL A1+  18-08-15  CRISIL A1+   
                05-01-16  CRISIL A1+  17-04-15  CRISIL A1+   
                    05-02-15  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+/Stable      14-12-17  CRISIL AA/Positive  07-11-16  CRISIL AA/Positive  01-10-15  CRISIL AA/Stable  CRISIL AA/Stable 
            20-07-17  CRISIL AA/Positive  04-07-16  CRISIL AA/Positive  04-09-15  CRISIL AA/Stable   
            11-07-17  CRISIL AA/Positive  09-02-16  CRISIL AA/Stable  17-04-15  CRISIL AA/Stable   
            07-02-17  CRISIL AA/Positive  05-01-16  CRISIL AA/Stable  05-02-15  CRISIL AA/Stable   
Non Fund-based Bank Facilities  LT/ST  300.00  CRISIL A1+      14-12-17  CRISIL A1+  07-11-16  CRISIL A1+  01-10-15  CRISIL A1+  CRISIL A1+ 
            20-07-17  CRISIL A1+  04-07-16  CRISIL A1+  04-09-15  CRISIL A1+   
            11-07-17  CRISIL A1+  09-02-16  CRISIL A1+  17-04-15  CRISIL A1+   
            07-02-17  CRISIL A1+  05-01-16  CRISIL A1+  05-02-15  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+/Stable Cash Credit* 400 CRISIL AA/Positive
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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