| Tata International Limited | ||||||
| Ratings reaffirmed at 'CRISIL AA-/Stable/CRISIL A1+ '; rated amount enhanced for Commercial Paper | ||||||
| Rating Action | ||||||
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| 1 crore = 10 million | ||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has reaffirmed its ‘CRISIL AA-/Stable/CRISIL A1+' ratings on the bank facilities and commercial paper programme of Tata International Limited (TIL).
The ratings continue to take into account the strong parentage of Tata Sons Private Limited (CRISIL AAA/FAAA/Stable/CRISIL A1+’), which holds 54% (directly 46%) in TIL. The rating also factors the company’s established market position in trading, distribution and manufacturing businesses, established global presence supported by well established relationships with customers and suppliers, and strong distribution network. These strengths are however partially offset by modest operating profitability, weak albeit improving financial risk profile, and exposure to inherent risks, including vulnerability to government regulations.
TIL’s business risk profile is improving due to sustained improved operating performance as reflected in its increasing scale of operations, better risk management practices and established market position. Recovery in economic activity and increase in trading volume across all business segments are expected to drive healthy growth of over 25% year-on-year in revenues to over Rs. 22000 crores in fiscal 2022. TIL has already achieved Rs 20441 crore revenue in first 9 months of the current fiscal.
Adequate risk management measures in place will ensure operating profitability margins to stabilize at 2% over the medium term, compared to 1% in fiscal 2020 and 2% in fiscal 2021. Shift in strategy towards increasing proportion of pre-selling and back-to-back sales will be the key drivers for sustenance of improved profitability. Cost optimization measures such as discontinuation of loss-making units and consolidation of manufacturing units will help sustain operating profitability as well. This, along with better cash accruals and substantial proceeds generated from proposed monetization of non-core assets and investments will be critical to reduce debt, and help improve debt metrics to modest levels over the medium term, from sub-par levels at present. |
Analytical Approach For arriving at the ratings, CRISIL Ratings has combined the business and financial risk profiles of TIL and its wholly owned subsidiaries.
CRISIL Ratings has also applied its parent notch-up framework factoring in the support from Tata Sons, which holds 54% in TIL and has shown a track-record of support. Adequate support is expected in case of any exigency as TIL is strategically important to the parent.
Furthermore, CRISIL Ratings has accorded 50% equity content to the perpetual non-convertible debentures (NCDs) issued in fiscal 2020. This implies that in CRISIL Ratings' analysis of the capital structure and financial ratios, 50% of the principal amount is treated as equity and the remaining as debt. The rationale for an 'intermediate equity content' stems from the long tenure of the instrument and flexibility to defer dividend distribution at company’s discretion. Furthermore, the instrument also has similar characteristics as debt, including high fixed coupon, step-up of coupon up to 300 basis points (bps; 100 bps equals 1 percentage point), and first-call option after three years.
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:
The company receives operational, managerial, and financial support from Tata Sons. Equity infusion by the parent and group companies of Rs 178 crore received during fiscal 2021 and need-based support is expected in the medium term as well. The support is expected to continue due to the strategic importance and ownership structure. TIL has been identified as a core company under the vertical investment and trading is expected to remain a strategically important company for the overall Tata group. Recently, Tata Sons subscribed to rights issue of TIL resulting in increase in its stake from 42% to 46% (54% including indirect stake of 8%) which is expected to sustain in the medium term. Strong parentage is also reflected in the ability of TIL to raise funds at attractive rates. Further, TIL is also expected to receive equity infusion from parent to fund future growth. The quantum of this expected infusion along with its timing will remain key monitorables.
TIL has a well-diversified product portfolio with 74% of the revenues stemming from export markets. TIL primarily trades in metals (steel products-53% revenue contribution), minerals (coal, ferro alloys and base metals-20% revenue contribution), and agri commodities (sugar, pulses, and palm oil-8% revenue contribution) and also acts as the distribution arm (13% of overall revenues) of Tata Motors Ltd (Tata Motors, rated ‘CRISIL AA-/Stable/CRISIL A1+’), in Africa, primarily for its commercial vehicle segment. TIL offers a whole range of services apart from sale of these vehicles such as after-sales, retail financing and leasing. Given its strong foothold in Africa, the group has been able to garner distribution business from non-Tata companies such as John Deere India Put Lord, Force Motors (CRISIL AA/Stable/ CRISIL A1+). JCB etc. as well. TIL is also one of India’s largest exporters of leather footwear with 5% market share. They have a reputed customer base, with associations with major global brands such as Clarks, Zara, H&M, and Marks & Spencer etc. TIL is diversified in terms of geography as well, with presence in the African continent (14%), Hong Kong (21%), Singapore (19%) and UAE (19%), which makes the company immune to weak economic cycles in any particular country.
Revenue and operating margin expectation for fiscal 2022 is over Rs. 22000 crores and 2% respectively, driven by improvement across business verticals due to revival in economic activities globally, aided by a low base in fiscal 2021. In fiscal 2020, inventory related losses of Rs.89 crores impacted net profits, which were at Rs.94 crore. With reducing proportion of stock and sale methods, improved risk management practices and cost rationalization measures, operating margin is expected to sustain at 2% level from current fiscal onwards. As a result, net cash accruals will improve to over Rs. 200 crore henceforth, from Rs. 73 crore in fiscal 2021.
Further, operating performance will also be supported by focussed approach towards key business verticals and planned monetization over fiscals 2022 to 2024, which is expected to bring in Rs. 900-1000 crores. These proceeds will be mainly utilized towards reducing debt levels. Further, expected equity infusion from Tata Sons will help support liquidity. Timely monetization of these assets will remain a key sensitivity.
Further, TIL has adequate risk management policies focused towards reducing various risks typically faced by trading companies. Reduction in foreign exchange risk will be driven by shifting from directional call policies towards pre-selling and order backed sales while simultaneously partaking in hedging and credit insurances. TIL’s diversified portfolio and ease of liquidation in the underlying traded commodities also helps in mitigating inventory risks while their large supplier and debtors aid in counterparty concentration threats as well.
Weaknesses:
Financial risk profile has remained sub-par over the years largely due to erosion of networth due to write offs of investments done on behalf of other group companies in fiscals 2020 and 2021, and inventory losses in fiscal 2021.
In fiscal 2018, TIL divested its entire stake in its Mauritian subsidiary for a total consideration of ~Rs.318 crore, and netted a gain of ~Rs.53 crore. Rs.60 crores was received during fiscal 2018 and the balance amount is pending. TIL no longer has control over the asset, but does retain control over the transferability of mining rights relating to a chrome ore mine based in Madagascar. However, owing to the covid pandemic, the buyer of the mine was unable to make payments, resulting in TIL making a provision of Rs.298 crore for receivable on account of sale of mining rights in fiscal 2020.
With infusion of Rs. 330 crores equity via a rights issue (including Rs 178 crore from the Tata Sons group), further deterioration in net worth was arrested, though net worth was at negative Rs.94 crore at March 31, 2021, However, with better cash generation, net worth is expected to improve gradually over the medium term. Debt levels have reduced from Rs.4149 crore at March 31, 2020 to Rs.3986 crore at March 31, 2021, and are expected to stabilize at Rs.3700-3800 crore over the medium term. Interest cover too will improve to over 2.9 times over the medium term, from 2.15 times in fiscal 2021, supported by stabilization in profitability, and moderately lower debt levels.
That said, material debt reduction and improvement in net worth will critically depend on monetization of non-core assets and investments over the medium term. Unless this happens, meaningful improvement in other debt metrics such as total outside liabilities to tangible net worth (TOL/TNW – estimated at 22 times in fiscal 2022) is unlikely, and will remain a monitorable
The commodity trading business is susceptible to significant risks, primarily due to fluctuations in commodity prices and foreign exchange rates, besides other operational risks. Furthermore, high concentration in metal and minerals trading exposes it to sharp fluctuations in prices, thereby adversely impacting profitability. Change in strategy to reduce proportion of stock and sale is likely to reduce the price risk partly going forward. Government regulations also play a significant role as any change in duty structures or regulations on trade of any commodity could impact revenue and profitability.
As on March 31, 2021, TIL had foreign currency-denominated liabilities of Rs 492 crores (Rs 547 crore as on March 31, 2020). Due to significant exposure of foreign currency, the company is exposed to fluctuations in forex rates. While the company hedges 70-75% of its forex exposure through forward contracts, profitability remains exposed to the remaining unhedged portion. The forex losses (including hedging costs) reduced significantly to Rs. 14 crores in fiscal 2021 (Rs 53 crore during fiscal 2020) due to lower volatility during the fiscal. However, the company will remain susceptible to forex fluctuations which may lead to higher expenses over the medium term. Higher-than-expected forex variation costs (including hedging costs) will remain a key rating sensitivity factor. |
Liquidity: Strong Liquidity is strong with average utilization of the fund-based limit of crore of 69% over twelve months through June 2021. Improving cash accrual and cash surpluses of over Rs. 600 crores, and unutilized bank lines should be sufficient to meet interest obligation as well as incremental working capital requirement, over the medium term. Timely funding support from parent and ability to raise funds, largely due to Tata Sons parentage, in timely manner also supports liquidity position. |
Outlook: Stable CRISIL Ratings believes TIL will continue to benefit from its diversified trading portfolio and continued support from parent Tata Sons. |
Rating Sensitivity factors Upward factors
Downward factors
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About the Company TIL is a trading and distribution company with a network of offices and subsidiaries spanning more than 29 countries in Africa, Europe, Middle East, Latin America and Asia. The group has a strong employee base with over 6000 employees and has formed strategic alliances and partnerships with market leaders, and set its mark in international trade. The group’s operations into three primary verticals, namely Trading, Distribution and Manufacturing. |
About Tata Sons Tata Sons is the principal investment holding company of the Tata group. Around 66% of Tata Sons' share capital is held by public charitable trusts. It holds core equity stakes in major group companies, including TCS Ltd, Tata Steel Ltd, Tata Motors , The Tata Power Company Ltd (CRISIL AA/Stable/CRISIL A1+) Tata Chemicals Ltd (CRISIL A1+), Tata Investment Corporation Ltd ('CRISIL AAA/Stable'), TTSL, Tata Capital Ltd (‘CRISIL AAA/Stable/CRISIL A1+), Tata AIA Life Insurance Company Ltd, Tata Industries, Tata Sky Ltd ('CRISIL AA/Stable/CRISIL A1+'), and Tata Projects Ltd ('CRISIL A1+'). Tata Sons is registered as a core investment company with the Reserve Bank of India.
In nine months ending December 31, 2021, TIL generated revenue of Rs. 20441 crores and profit before tax of Rs. 132 crores as compared to revenue of Rs. 12240 crores and profit before tax of Rs. 11 crores in the corresponding period last fiscal. |
Key Financial Indicators
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Any other information: Not applicable |
| Note on complexity levels of the rated instrument: CRISIL Ratings' complexity levels are assigned to various types of financial instruments. The CRISIL Ratings' complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL Ratings' 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)
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Annexure – List of entities consolidated
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| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| All amounts are in Rs.Cr. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annexure - Details of Bank Lenders & Facilities | ||||||||||||||||||||||||||||||||||||||||||||||||
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This Annexure has been updated on 07-Mar-22 in line with the lender-wise facility details as on 19-Oct-21 received from the rated entity.
Criteria Details
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