Rating Rationale
April 29, 2020 | Mumbai
TVS Srichakra Limited
Rating Reaffirmed 
 
Rating Action
Rs.300 Crore Commercial Paper CRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has reaffirmed its rating on the commercial paper programme of TVS Srichakra Limited (TVS Srichakra) at 'CRISIL A1+'.
 
Amidst a wider consumption slowdown, liquidity crunch and transition to stringent BS-VI emission norms, fiscal 2020 was a challenging year for the Indian automobile year. The situation was further aggravated due to the spread of Coronavirus (N-Covid 19) in the last quarter of the fiscal. TVS Srichakra's revenues declined by 9% during nine-month period of fiscal 2020 over the corresponding previous period due to lower offtake from original equipment manufacturers (OEM), though partially mitigated by steady volumes in the replacement market.  Operating profitability during this period, however was maintained at ~11% as the intensifying competition especially in the replacement market was offset by internal cost optimization measures.
 
While demand in fiscal 2021 is also expected to remain subdued due to the on-going lockdown situation and challenging business environment, TVS Srichakra remains well placed to sustain its market position in the domestic two-and-three wheeler tyres segment, supported by its established brands and distribution network, and a diversified revenue mix with presence across OEM clients, in aftermarket and in overseas markets. Sharper than expected decline in volumes leading to larger impact on profitability and accruals would however remain a key rating monitorable.
 
The rating continue to reflect the company's healthy market position, sound operating efficiencies, prudent working capital management, and healthy financial metrics. These rating strengths are partially offset by a modest product portfolio compared with other domestic peers, and susceptibility of profitability to volatility in raw material prices and to intense competition.

Analytical Approach

For arriving at its rating, CRISIL has combined the business and financial risk profiles of TVS Srichakra and all its subsidiaries, held directly or indirectly, as the entities share a common management, operate with significant operational and financial linkages. The consolidated entities include TVS Srichakra Investments Limited and TVS Sensing Solutions Limited ('CRISIL BBB+/Stable') CRISIL considers these entities as being strategic to TVS Srichakra in view of their strong integration with TVS Srichakra's operations.
 
TVS Srichakra entered into a non-cancellable sale and lease-back agreement for assets of Rs.52.8 crore in fiscal 2013. CRISIL has considered the transaction as a financial lease, and capitalised the present value of future lease rental obligations as fixed assets. This has led to increase in long-term debt. The lease rental payable annually has been bifurcated into interest and depreciation for analysing the yearly financials.

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 position in the domestic two and three-wheeler tyres industry: TVS Srichakra is one of the leading domestic manufacturers of two- and three-wheeler bias tyres and has emerged as the largest supplier to all established domestic automobile OEMs including Bajaj Auto Ltd ('CRISIL AAA/Stable/FAAA/Stable/CRISIL A1+'), Hero MotoCorp Ltd ('CRISIL AAA/Stable/FAAA/Stable/CRISIL A1+'), Honda Motorcycle & Scooter India Ltd, Suzuki Motorcycles India Ltd, TVS Motor Co. Ltd and Yamaha Motor. Furthermore, the company has strengthened its presence in the domestic two-wheeler bias tyres aftermarket segment, where it is the third largest player supported by its network of over 3000 dealers and healthy product range. The company also has a contract manufacturing agreement with French tyre major, Michelin, to make two-wheeler bias tyres under the Michelin brand, for the aftermarket. Exports, through the 'TVS Eurogrip' brand are mainly to European, North American, African and Middle East countries, and include supplies of off-the road tyres for agricultural, mining and industrial use.

* Strong operating efficiencies: Operating efficiencies have improved significantly over the past five years, mainly driven by cost control measures, upgrading its manufacturing facilities and prudent working capital management. Production efficiencies have been enhanced over the years through total productive maintenance (TPM) initiatives. This coupled with focus on enhancing sales to the more profitable aftermarket & export segments and softer trend in rubber prices, operating profitability steadily improved to 15.5% and 15.9% in fiscal 2016 and 2017 respectively, from levels of about 7% in fiscal 2013. However, operating profitability moderated to about 10.8% in fiscal 2019, due to increase in prices of crude based raw materials, higher competitive intensity in the market due to entry of new players as well as reduced exposure to after market segment.

* Prudent working capital management: Working capital cycle has also witnessed a healthy improvement over the years supported by initiatives to transform the aftermarket business to a predominantly cash-and-carry model; resulting in lower collection cycle. The gross current asset days has increased to 136 days in fiscal 2019 (compared to 110 days in fiscal 2018) as the company had stocked up natural rubber prior to increase in prices, as well as extended period to customers owing to demand slowdown in the end market. Company also imports some of its raw material requirements to ensure stable supply for operations. During fiscal 2020, TVS Srichakra has reduced its share of imports due to rupee depreciation, thereby leading to lower inventory stocking compared to fiscal 2019.  Working capital management is expected to remain efficient over the medium term.

* Healthy financial risk profile: TVS Srichakra's financial risk profile is healthy with comfortable gearing and healthy debt protection metrics. Gearing of the company is expected to be comfortable at below 0.50 times as on 31st March 2020, compared to 0.61 times as on 31st March 2019 due to lower working capital requirements mainly inventory. Interest coverage and net cash accruals to total debt are expected to remain healthy at over 6.50 times and over 0.40 times respectively for fiscal 2020. TVS Srichakra will defer its large capital expenditure (capex) plans and maintain maintenance capex of about Rs 50-60 crore annually until steady improvement in end market demand. Healthy cash generation, prudent use of debt and control over working capital, is expected to ensure the credit metrics remain healthy levels. Any sizeable debt funded acquisition or greenfield expansion, however, would be a rating monitorable.

Weaknesses:
* Lack of diversity in revenue profile: While TVS Srichakra has a strong market position in the two-wheeler bias tyres segment, its product portfolio is however lacks the diversity of its well established peers such as MRF Ltd, JK Tyres Ltd and Apollo Tyres Ltd ('CRISIL AA+/ Stable/ CRISIL A1+'). These peers have a more rounded product portfolio also catering to passenger vehicles and commercial vehicles. This also results in lower revenues for the company compared to these larger peers; this differential is expected is expected to continue in future too, as the company is unlikely to diversify into these segments. Additionally, the share of replacement market is relatively lower which further increases the vulnerability of revenues during periods of decline in OEM volumes (like in fiscal 2020).

* Susceptibility of operating margins to volatility in raw material prices and intense competition: Intense competition and sharp volatility in rubber prices lead to a certain degree of volatility in operating profitability, as also for its peers. Additionally, the volatility in crude prices and forex movements has also led to an increase in other key raw material costs. While rubber price changes are passed through to OEMs, the company has some flexibility to hold on to prices in the more profitable aftermarket segment. However, TVS Srichakra's peers too are adding capacity (including entry of new players), including for the aftermarket segment, which could intensify competitive pressures, and lead to a moderation in profitability over the medium term.
Liquidity Adequate

TVS Srichakra has adequate liquidity driven by expected cash accruals of more than Rs. 100 crore per annum over the medium term and access to adequate bank limits of Rs 370 crore (including commercial paper for Rs 300 crore), utilized to the tune of 85% on an average over the 12 months ended February 2020. The company has low repayment obligations around Rs. 10-15 crore per annum in fiscal 2020 and fiscal 2021. CRISIL believes the company has sufficient accruals to meet its repayment obligations, moderate maintenance capex as well as investment requirements in subsidiaries. With a moderate gearing of about 0.5 times expected as of March 31, 2020, TVS Srichakra has sufficient gearing headroom, to raise additional debt for short-term exigencies due to the shutdown in operations.

Rating Sensitivity factors
Downward factors
* Sustained decline in profitability below 8% due to increase in competitive pressures in the industry or rise in raw material prices
* Significant increase in working capital requirements as marked by gross current asset days above 175 days.
* Any future large debt funded acquisitions resulting in net debt to EBITDA ratio rising to above 2.5 times
About the Company

TVS Srichakra, incorporated in 1982, is part of the TVS automotive-ancillary group and is one of the leading domestic manufacturers of two and three-wheeler bias tyres and has manufacturing facilities at Madurai and Rudrapur. The promoters, from the TVS family, hold 45 per cent stake in the company both directly and through various holding companies, and the rest is held by various institutional players, bodies corporate, and the public.

During the first nine months of fiscal 2020, TVS Srichakra (on a standalone basis) reported profit after tax of Rs. 60 crore (Rs. 87 crore for corresponding period of fiscal 2019) on net sales of Rs. 1,635 crore (Rs. 1,802 crore).

Key Financial Indicators
As on/for the period ended March 31 Unit 2019 2018
Revenue Rs Crores 2431 2152
Profit After Tax (PAT) Rs Crores 103 117
PAT Margins % 4.2 5.5
Adjusted debt/adjusted networth Times 0.59 0.53
Interest coverage Times 7.3 8.2
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.Cr) Rating Assigned with Outlook
NA Commercial Paper NA NA 7-365 days 300 CRISIL A1+
 
Annexure - List of entities consolidated
Sr.No Name of entities Extent of consolidation Rationale for Consolidation
1 TVS Sensing Solutions Private Limited 100% Subsidiaries, common management and financial linkages
2 TVS Srichakra Investments Limited 100% Subsidiaries, common management and financial linkages
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  300.00  CRISIL A1+      27-12-19  CRISIL A1+  19-12-18  CRISIL A1+  09-08-17  CRISIL A1+  CRISIL A1+ 
                12-01-18  CRISIL A1+  12-07-17  CRISIL A1+   
Vendor Financing  ST    --    --    --  12-01-18  Withdrawn 09-08-17  CRISIL A1+  CRISIL A1+ 
                    12-07-17  CRISIL A1+   
Fund-based Bank Facilities  LT/ST    --    --    --  12-01-18  Withdrawn/ Withdrawn  09-08-17  CRISIL AA-/Stable/ CRISIL A1+  CRISIL AA-/Stable/ CRISIL A1+ 
                    12-07-17  CRISIL AA-/Stable/ CRISIL A1+   
Non Fund-based Bank Facilities  LT/ST    --    --    --  12-01-18  Withdrawn  09-08-17  CRISIL A1+  CRISIL A1+ 
                    12-07-17  CRISIL A1+   
All amounts are in Rs.Cr.
 
Links to related criteria
CRISILs Approach to Financial Ratios
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

For further information contact:
Media Relations
 Analytical Contacts
 Customer Service Helpdesk
Saman Khan
Media Relations
CRISIL Limited
D: +91 22 3342 3895
B: +91 22 3342 3000
saman.khan@crisil.com

Naireen Ahmed
Media Relations
CRISIL Limited
D: +91 22 3342 1818
B: +91 22 3342 3000
naireen.ahmed@crisil.com

 Anuj Sethi
Senior Director - CRISIL Ratings
CRISIL Limited
B:+91 44 6656 3100
anuj.sethi@crisil.com

Sameer Charania
Director - CRISIL Ratings
CRISIL Limited
D:+91 22 4097 8025
sameer.charania@crisil.com

Preetham Sharma
Rating Analyst - CRISIL Ratings
CRISIL Limited
D:+91 44 6656 3141
preetham.sharma@crisil.com 		Timings: 10.00 am to 7.00 pm
Toll free Number:1800 267 1301

For a copy of Rationales / Rating Reports:
CRISILratingdesk@crisil.com
 
For Analytical queries:
ratingsinvestordesk@crisil.com

 

Note for Media:
This rating rationale is transmitted to you for the sole purpose of dissemination through your newspaper / magazine / agency. The rating rationale may be used by you in full or in part without changing the meaning or context thereof but with due credit to CRISIL. However, CRISIL alone has the sole right of distribution (whether directly or indirectly) of its rationales for consideration or otherwise through any media including websites, portals etc.


About CRISIL Limited

CRISIL is a leading agile and innovative, global analytics company driven by its mission of making markets function better. We are India’s foremost provider of ratings, data, research, analytics and solutions. A strong track record of growth, culture of innovation and global footprint sets us apart. We have delivered independent opinions, actionable insights, and efficient solutions to over 1,00,000 customers.
 
We are majority owned by S&P Global Inc., a leading provider of transparent and independent ratings, benchmarks, analytics and data to the capital and commodity markets worldwide.
 
For more information, visit www.crisil.com 

Connect with us: TWITTER | LINKEDIN | YOUTUBE | FACEBOOK

About CRISIL Ratings
CRISIL Ratings is part of CRISIL Limited (“CRISIL”). We pioneered the concept of credit rating in India in 1987. CRISIL is registered in India as a credit rating agency with the Securities and Exchange Board of India (“SEBI”). With a tradition of independence, analytical rigour and innovation, CRISIL sets the standards in the credit rating business. We rate the entire range of debt instruments, such as, bank loans, certificates of deposit, commercial paper, non-convertible / convertible / partially convertible bonds and debentures, perpetual bonds, bank hybrid capital instruments, asset-backed and mortgage-backed securities, partial guarantees and other structured debt instruments. We have rated over 24,500 large and mid-scale corporates and financial institutions. CRISIL has also instituted several innovations in India in the rating business, including rating municipal bonds, partially guaranteed instruments and microfinance institutions. We also pioneered a globally unique rating service for Micro, Small and Medium Enterprises (MSMEs) and significantly extended the accessibility to rating services to a wider market. Over 1,10,000 MSMEs have been rated by us.

CRISIL PRIVACY
 
CRISIL respects your privacy. We may use your contact information, such as your name, address, and email id to fulfil your request and service your account and to provide you with additional information from CRISIL.For further information on CRISIL’s privacy policy please visit www.crisil.com.

DISCLAIMER

This disclaimer forms part of and applies to each credit rating report and/or credit rating rationale that we provide (each a “Report”). For the avoidance of doubt, the term “Report” includes the information, ratings and other content forming part of the Report. The Report is intended for the jurisdiction of India only. This Report does not constitute an offer of services. Without limiting the generality of the foregoing, nothing in the Report is to be construed as CRISIL providing or intending to provide any services in jurisdictions where CRISIL does not have the necessary licenses and/or registration to carry out its business activities referred to above. Access or use of this Report does not create a client relationship between CRISIL and the user.

We are not aware that any user intends to rely on the Report or of the manner in which a user intends to use the Report. In preparing our Report we have not taken into consideration the objectives or particular needs of any particular user. It is made abundantly clear that the Report is not intended to and does not constitute an investment advice. The Report is not an offer to sell or an offer to purchase or subscribe for any investment in any securities, instruments, facilities or solicitation of any kind or otherwise enter into any deal or transaction with the entity to which the Report pertains. The Report should not be the sole or primary basis for any investment decision within the meaning of any law or regulation (including the laws and regulations applicable in the US).

Ratings from CRISIL Rating are statements of opinion as of the date they are expressed and not statements of fact or recommendations to purchase, hold, or sell any securities / instruments or to make any investment decisions. Any opinions expressed here are in good faith, are subject to change without notice, and are only current as of the stated date of their issue. CRISIL assumes no obligation to update its opinions following publication in any form or format although CRISIL may disseminate its opinions and analysis. CRISIL rating contained in the Report is not a substitute for the skill, judgment and experience of the user, its management, employees, advisors and/or clients when making investment or other business decisions. The recipients of the Report should rely on their own judgment and take their own professional advice before acting on the Report in any way.CRISIL or its associates may have other commercial transactions with the company/entity.

Neither CRISIL nor its affiliates, third party providers, as well as their directors, officers, shareholders, employees or agents (collectively, “CRISIL Parties”) guarantee the accuracy, completeness or adequacy of the Report, and no CRISIL Party shall have any liability for any errors, omissions, or interruptions therein, regardless of the cause, or for the results obtained from the use of any part of the Report. EACH CRISIL PARTY DISCLAIMS ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY, SUITABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE. In no event shall any CRISIL Party be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs) in connection with any use of any part of the Report even if advised of the possibility of such damages.

CRISIL Ratings may receive compensation for its ratings and certain credit-related analyses, normally from issuers or underwriters of the instruments, facilities, securities or from obligors. CRISIL’s public ratings and analysis as are required to be disclosed under the regulations of the Securities and Exchange Board of India (and other applicable regulations, if any) are made available on its web sites, www.crisil.com (free of charge). Reports with more detail and additional information may be available for subscription at a fee – more details about CRISIL ratings are available here: www.crisilratings.com.

CRISIL and its affiliates do not act as a fiduciary. While CRISIL has obtained information from sources it believes to be reliable, CRISIL does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives and / or relies in its Reports. CRISIL keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of the respective activity. As a result, certain business units of CRISIL may have information that is not available to other CRISIL business units. CRISIL has established policies and procedures to maintain the confidentiality of certain non-public information received in connection with each analytical process. CRISIL has in place a ratings code of conduct and policies for analytical firewalls and for managing conflict of interest. For details please refer to: https://www.crisil.com/en/home/our-businesses/ratings/regulatory-disclosures/highlighted-policies.html

CRISIL’s rating criteria are generally available without charge to the public on the CRISIL public web site, www.crisil.com. For latest rating information on any instrument of any company rated by CRISIL you may contact CRISIL RATING DESK at CRISILratingdesk@crisil.com, or at (0091) 1800 267 1301.

This Report should not be reproduced or redistributed to any other person or in any form without a prior written consent of CRISIL.

All rights reserved @ CRISIL