Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AA/Stable/CRISIL A1+’ ratings on the bank facilities of Turbo Energy Private Limited (TEPL).

 

TEPL’s performance improved in fiscal 2022 after slow down in previous two fiscals in line with the trend in automobile sector. The company’ revenues improved to Rs. 1734 Crs during fiscal 2022, compared with Rs 1200-1300 crore registered in fiscals 2020 and 2021, driven by improved offtake from automobile original equipment manufacturers (OEMs). Benefits of higher volumes and sustained efficiency improvement measures enabled the company to restore its operating margins to 17.5%. CRISIL expects the company to register 10% growth in revenues and operating margins to sustain 16-16.5% in the medium term on account of steady demand scenario and continued cost improvement measures.

 

The rating also factors in the company’s strong financial risk profile supported by robust debt protection metrics. While the networth is expected to grow with steady accretion to reserves, debt level will remain moderate given the modest capex plans of Rs 50 crore per annum, scheduled repayment of existing loans and prudent working capital management. Liquidity is further supported by large liquid surplus of Rs 1000 crore as on 31st March 2022 and ~20 crore of unutilized bank lines.

 

The ratings continue to reflect TEPL’s leadership position in the domestic turbo charger industry, access to technology from BorgWarner Inc (rated, S&P BBB+/Stable/A2) (BorgWarner, parent of BorgWarner Turbo Systems worldwide headquarters GmbH), strong financial risk profile, and superior liquidity. These strengths are partially offset by exposure to demand cyclicality from original equipment manufacturers (OEMs) in the automobile industry, high revenue concentration, and threat from increasing preference for electric vehicles (EV), albeit in the long term.

Analytical Approach

The business and financial risk profiles of TEPL and its wholly-owned subsidiary, Turbo Energy Germany GmbH (TEGG) have been consolidated due to operational and financial linkages between them.

 

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:

• Established leadership position in the domestic turbo charger industry

TEPL is the market leader in the domestic turbo charger market with over 60% of market share, additionally it exports to BorgWarner across the world. Owing to its strong market position, the company has forged long standing relationship with key OEMs such as Ashok Leyland Ltd, Tata Motors Ltd (TML, rated, CRISIL AA-/Stable/CRISIL A1+) and Mahindra and Mahindra Ltd (M&M rated, CRISIL AAA/Stable/CRISIL A1+). It has also added Ford India Pvt Ltd and Hyundai Motor India Ltd (HMIL rated, CRISIL AAA/Stable/CRISIL A1+) in the recent past. The company also enjoys high share of business with its customers, including being sole supplier for select models. Additionally, it supplies to off road vehicles such as tractors and earth movers, which makes up less than 5% of the total sales.

 

The domestic turbocharger market is predominantly geared towards diesel engines with very small petrol engine presence. Although some OEMs have indicated the phasing out of diesel variants in passenger vehicles (PV), the same will be mainly in the small car segment. Besides, the small car segment is largely petrol based, whereas diesel engines are predominant in the utility vehicle segment of PVs. Additionally, commercial vehicles and tractors also largely deploy diesel engines. Further, expected higher demand for turbo chargers under Bharat Stage (BS) VI norms will support demand over the medium term.

 

• Access to technology and support from BorgWarner

The company’s association with BorgWarner (a leading player in the global turbocharger market) enables access to latest technology. This is further augmented by TEPL’s strong in-house research and development (R&D) capabilities.

 

• Strong financial risk profile

TEPL’s financial risk profile is strong marked by gearing at less than 0.25 time as on March 31, 2022. Debt protection metrics are also comfortable with interest coverage  at over 47 times in fiscal 2022. Besides, the company has huge liquid surplus of Rs.1000 crore of as on Mar 31, 2022. The Company undertook nominal capex of Rs 50 crore in FY22 and in the absence of any major capex plans in medium term, the company will continue to be net debt free and maintain its strong credit metrics over the medium term.

 

Weaknesses:

• Exposure to demand cyclicality from OEMs in the automobile industry

Offtake from domestic OEMs contributed ~77% of TEPL’s sales in the first nine months of 2022. This high dependence on the OEM segment, renders the company’s performance partly vulnerable to the inherent cyclicality in the automobile industry. While the company has presence in aftermarket (~7% of sales in 9M FY22) and exports (~16% of sales in 9M FY22), OEMs are likely to contribute more than two-thirds of the company’s revenues over the medium term, in turn exposing the company to underlying demand cyclicality. 

 

• High concentration in revenues

TEPL derives a sizeable portion of its revenues from diesel PVs, whose share in overall PVs has been continuously declining over the years. Besides its revenue dependence on few OEMs is also high. Its top 5 customers have accounted for an average ~86% of its revenues in the last 3 fiscals. TEPL is also taking initiatives to enhance its presence in the commercial vehicle and tractor segment. Company will also focus on increasing penetration of turbo-chargers in petrol passenger vehicles. Ramp up of revenues to newer customers, new segments and new geographies will be critical for lowering volatility in revenues and customer concentration.

 

• Risk from emerging technologies, albeit in the long term

The use of turbo charger is limited to internal combustion (IC) engines. Turbo chargers help in increasing the efficiency and the reducing emissions of IC engines and will see increasing demand in the medium term as governments across the world move towards stricter emission norms. However, in the long term, the increase in penetration of EV will pose a threat to IC engines. Nevertheless, the adoption of EV vehicles will depend on various factors such as government incentives for purchase of EV, development of infrastructure, availability of viable battery technology etc.  TEPL is in the primitive stages of researching E-compressors and Electronic Braking which will be used in EV. The amount spent on the R and D expenses are accounted in the P&L account as technical feasibility has not been achieved. Evolution of EV within the Indian automobile industry will be a key monitorable for TEPL.

Liquidity: Superior

TEPL enjoys superior liquidity driven by expected cash accruals of more than Rs.250 in the medium term and liquid surplus of Rs.1000 crore which should be more than sufficient to meet the long term debt obligations of ~Rs 74 crore and Rs 40 crore in fiscals 2023 and 2024 respectively, and capex requirements of around Rs. 50 crore per annum.

Outlook: Stable

TEPL will continue to benefit from its leadership position in the domestic turbo charger market and technological support from BorgWarner. The company is also expected to sustain its strong financial risk profile due to healthy cash generating ability, modest capital spending, and superior liquidity position.

Rating Sensitivity factors

Upward factors

• Increased diversity of revenues in terms of products, customers and segments
• Healthy double digit growth in revenues with stable operating profitability of 17-18%

 

Downward factors

• Material decline in market share also impacting business performance; operating profitability reducing to under 10%
• Major debt funded capex or acquisition leading to significant moderation in credit metrics
• Material reduction of liquid surplus, due to high dividend payout, share buy-back or capital reduction.

About the Company

The company was incorporated in 1982. It is a joint venture company between Brakes India Private Limited (part of the TVS group, rated ‘CRISIL AA+/Stable/CRISIL A1+’), Sundaram Finance holdings Ltd and BorgWarner Turbo Systems. Brakes India, Sundaram Finance Holdings and BorgWarner each hold ~32% in TEPL as of March 31, 2022.

 

TEPL is a pioneer and the largest manufacturer of turbochargers in India, and enjoys over 60% market share in the domestic turbo charger market. TEPL manufactures a wide range of turbocharger products for passenger cars, commercial vehicles, off-highway equipment and industrial and marine applications.

 

TEPL has three manufacturing locations (Pulivalam and Paiyanur in Tamil Nadu and Vadodara in Gujarat) with the capacity to produce about 2 million turbochargers and 5 million turbocharger components per year. TEPL is the most backward integrated turbocharger manufacturer in India, ensuring consistent quality and reliable supply from its 3 plants.

Key Financial Indicators

As on / for the period ended March 31		2021	2020
Operating income	Rs crore	1273	1312
Reported profit after tax	Rs crore	102	101
PAT margin	%	8.0	7.7
Adjusted debt/adjusted net worth	Times	0.20	0.11
Interest coverage	Times	33.37	31.61

 

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs crore)	Complexity Levels	Rating assigned with outlook
NA	Term Loan	NA	NA	Mar-26	200	NA	CRISIL AA/Stable
NA	Cash Credit#	NA	NA	NA	20	NA	CRISIL AA/Stable
NA	Letter of Credit*	NA	NA	NA	20	NA	CRISIL A1+
NA	Sales Bill Discounting##	NA	NA	NA	160	NA	CRISIL A1+

*Interchangeable with Bank guarantee and SBLC

#Interchangeable with WCDL, Export packing credit/Bill invoice discounting

##Interchangeable with WCDL

Annexure – List of entities consolidated

Names of Entities Consolidated	Extent of Consolidation	Rationale for Consolidation
Turbo Energy Germany GmbH	Full	Wholly-owned subsidiary, business synergies