Rating Rationale

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/FAAA/Stable/CRISIL A1+'), Hero MotoCorp Ltd ('CRISIL AAA/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% in 15.9% in fiscal 2016 and 2017 respectively, from levels of about 7% in fiscal 2013. However operating profitability moderated to about 12.5% in fiscal 2018, due to increase in prices of crude based raw materials (while rubber prices also remained high in first half of fiscal 2018) 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 have improved to 110 days in fiscal 2018 (vs. higher base of 126 days in fiscal 2017) as the company had stocked up natural rubber during fiscal 2017, owing to uncertainty surrounding goods and services tax bill. Company also imports some of its raw material requirements to ensure stable supply for operations. 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 continues to be comfortable at 0.53 times as on March 2018, although part debt funding of the planned capex is expected to increase the long term debt over the medium term. Interest coverage and net cash accruals to total debt are also healthy at 8.16 times and 0.45 times respectively for fiscal 2018. TVS Srichakra will undertake capital expenditure (capex) of about Rs.150-200 crore annually, over the next three years, to augment capacity and enhance level of automation at its facilities. Nevertheless, 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.

Weakness
* 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.

* 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 for the aftermarket segment, which could intensify competitive pressures, and lead to a moderation in profitability over the medium term.

Liquidity
TVS Srichakra has adequate liquidity driven by expected cash accruals of more than Rs. 170 crore per annum over the medium term and access to adequate bank limits of Rs 320 crore (including commercial paper for Rs 300 crore), utilized to the tune of 76% on an average over the 12 months ended November 2018. Company has further enhanced its limits to Rs 370 crore in December 2018. The company has low repayment obligations around Rs. 10 crore each in FY19 and FY20. CRISIL believes the company has sufficient accruals to meet its repayment obligations, part-fund its capex as well as investment requirements in subsidiaries. With a moderate gearing of 0.53 times as of March 31, 2018, TVS Srichakra has sufficient gearing headroom, to raise additional debt for its capex requirements of RS 150-200 crore per annum.