Detailed Rationale

CRISIL Ratings has reaffirmed its 'CRISIL AA+/Stable/CRISIL A1+’ ratings on the bank loan facilities of Tube Investments of India Ltd (TI, part of Murugappa group). CRISIL Ratings has also withdrawn its ‘CRISIL A1+’ rating on the commercial paper programme of TI at the request of the company. There is no outstanding against the rated commercial paper programme and the withdrawal is in line with CRISIL Ratings’ policy relating to the same.

 

The ratings continue to reflect TI’s healthy business risk profile with diversified revenue streams, leading market position in most businesses and established operating capabilities. The ratings are also supported by the company’s strong 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 sluggish bicycle sale volumes and partial vulnerability of TI’s revenues and operating profitability to intense competition and cyclicality in the automobile and industrial sectors. Also, TI’s e-mobility and contract manufacturing and development (CDMO) ventures are still in gestation and are expected to incur losses in the initial years.

 

After expanding at a healthy 19% year-on-year (y-o-y) in fiscal 2023, consolidated revenue of the company grew 10% in the first nine months of fiscal 2024. Engineering and metal formed businesses witnessed healthy demand and grew ~5% y-o-y during the period. CG Power business (industrial system and power system) continued to perform strong and augmented 14% y-o-y in the first nine months of fiscal 2024. Demand for industrial gears also remained robust leading to 18% y-o-y growth in the segment. The electric vehicle (e-vehicle) and medical businesses also started contributing to the overall revenue and together generated Rs 269 crore for the first nine months of fiscal 2024. Revenue in fiscal 2024, is expected to grow at a healthy pace of 10-11% and 6-7% in the medium term, driven by legacy business growth, and ramp up of revenues in new verticals. The e-vehicle business of the company has received satisfactory market response for its product. TI, till date has launched electric 3W (e-3W) and electric trucks (e-trucks) in the market and commercial sales of e-3W has witnessed improvement during the recent months.

 

Operating profit margin in the first nine months of fiscal 2024 remained healthy at 12.1%,but moderated from 12.5% in the corresponding period of the previous fiscal due to higher losses incurred in the e-vehicle business. Operating profit margin is expected to remain at 12.0-12.5% in the medium term driven by the legacy business and controlled losses in newer business segments.

 

The solid financial position of the company continues to benefit from strong annual cash generation, and moderate debt on its balance sheet. Debt protection metrics such as interest coverage debt/earnings before interest, depreciation and tax (EBITDA) and total outside liabilities to tangible net worth (TOL/TNW) remained robust at ~30 times, 0.32 time, and 0.89 time, respectively, in fiscal 2023. Total consolidated debt in TI remained stable at Rs 674 crore compared to Rs 629 crore on March 31, 2023. Majority of this debt was in the form of short-term working capital borrowings.

 

Overall capital spending during fiscal 2024 is estimated at ~Rs.1200-1300 crore and may step up to ~Rs 2000 crore per annum over the medium term due to investments planned for newer businesses including e-vehicles as well as semi-conductors (through its subsidiary, CG Power). However, no material debt raise is expected, due to strong cash generating ability, and sizeable cash surpluses available in most companies. Therefore, despite higher capex spend, debt protection metrics will continue to be robust over the medium term.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of TI and all its subsidiaries due to strong demonstration of operational and financial support, and diversity they add to TI’s credit profile. CRISIL Ratings has also amortised the goodwill on acquisition of Shanthi Gears Limited (SGL) of around Rs 280 crore over a period of 10 years commencing November 2012, and goodwill on acquisition of CG Power (Rs 285 crore) and intangible assets (Rs 587 crore) over 10 years commencing November 2020.

 

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:

• Healthy business risk profile marked by diversified revenue streams, and leading market positions in key business segments, as well as established operating capabilities: TI has a strong presence in the bicycle manufacturing (5% of consolidated revenue in fiscal 2023), engineering (30%) and metal forming (10%) businesses. Besides CG Power (45% of revenues), gear and gear products (3%) have also helped revenue grow and added diversity. The company is among the top-three players in most of the business segments it operates in. For instance, TI enjoys healthy presence in the large diameter tubes business, is the second largest player in the domestic automobile chains business and the domestic bicycles business. Besides, SGL enjoys leadership position in the special gears and gearboxes segment, while CG Power, has also emerged as the market leader in the transformer, switchgear and motor segments.

 

The engineering and CG Power businesses that contribute ~75% to the total consolidated revenue of TI have continued to witness healthy demand in fiscal 2024, which is expected to sustain over the medium term. The bicycle business continued to face headwinds due to declining demand and strong competition from cheaper imported bicycles in the domestic market. Strong demand from automobile original equipment manufacturers (OEMs) is driving revenue in the engineering and metal forming businesses, while demand from a host of industries is driving demand for CG Power business.

 

Some of the businesses that commenced operations in fiscals 2022 and 2023 started contributing to the overall revenue in fiscal 2024. TI has launched its e-3W and e-trucks through TICMPL and both the products have been well received by the market. Currently e-3Ws are launched only in Tamil Nadu, Karnataka, Telangana and Kerala but are soon to be launched in other parts of India. The company is in the process of increasing its dealership from 40 currently to 75 within the next few months. TI will also launch its electric tractors and electric small commercial vehicles (e-SCVs) in the next few quarters. TI, through TICMPL, also acquired 50% stake in Jayem Automotive Pvt Ltd, engaged in design, development, testing and manufacturing of a wide range of automotive components, systems and prototypes. TICMPL formed another subsidiary, TIVOLT Electric Vehicles Pvt Ltd which will be involved in the development and manufacturing of SCVs. In the first nine months of fiscal 2024, the e-vehicle segment has generated a revenue of Rs 149 crore.

 

TI had also diversified into the healthcare space through TI Medical Pvt Ltd (erstwhile Lotus Surgicals Pvt Ltd) in fiscal 2023. The segment generated a revenue of Rs 120 crore for the first nine months of fiscal 2024. The other newer businesses of TI viz CDMO (3XPER Innoventure Pvt Ltd), mobile camera module (Moshine Electronics Pvt Ltd), micro gas turbines (Aestrovolis Energy Pvt Ltd) and X2 Fuels Energy Pvt Ltd are still in the initial stages and are expected to start contributing by fiscals 2025 and 2026. TI, through CG Power, has also announced its entry into semiconductor testing and assembly business recently. The facility is expected to come up in Sanad, Gujarat and commence operations in fiscal 2026.

 

• Solid financial risk profile, and healthy financial flexibility, including due to its position as one of the leading companies of the Murugappa group: TI’s solid financial position continues to benefit from strong annual cash generation, and moderate debt on its balance sheet, leading to robust debt metrics. With strong cash generation, CG Power paid off all its debt in fiscal 2023. TI’s consolidated debt remained stable at Rs 674 crore as on December 31, 2023, compared to Rs 629 crore on March 31, 2023. The debt was mostly in the form of working capital loans.

 

TI, through its subsidiary, TICMPL has raised Rs 1200 crore from multiple private equity funds to fuel its growth plans in the e-mobility business in fiscal 2024. TI is expected to incur capital expenditure (capex) of Rs 1300 crore in the current fiscal, which is expected to step up to ~Rs 2000 crore from next fiscal. Majority of the capital allocation would be towards the newer businesses of TI (e-vehicle, CDMO etc) and for an outsourced semi-conductor assembly and testing facility by CG Power (Rs 7600 crore over 5-6 years). However, no material debt raise is expected, due to strong cash generating ability, and sizeable cash surpluses available in most companies. Hence, debt protection metrics will continue to be robust over the medium term. That said, any significant debt funded acquisitions leading to moderation in debt metrics, for instance debt/EBITDA of 2.00-2.25 times, will remain monitorable.

 

CG Power has sizeable contingent liabilities relating to tax disputes under its previous promoters. The current management does not anticipate any material outgo and has taken legal recourse. The outcome will remain a monitorable.

 

TI’s financial flexibility has also increased over time, supported by strong cash generation, and aggressive debt reduction. Besides, the value of its stake in SGL and CG Power combined is over Rs 43,000 crore (March 15, 2024), enhancing its fund-raising ability. Also, TI continues to benefit from the Murugappa group’s strong relationships with the lending community, which facilitates debt raising at competitive rates.

 

Weaknesses:

• Sluggish bicycle volume sales: TI is the second largest player in the domestic bicycles market and enjoys market leadership in the growing specials segment. TI’s bicycle sale volumes have remained under pressure in the current fiscal as well, due to intense competitive pressures and tepid demand. The overall bicycles industry is itself estimated to have witnessed a decline in volumes since fiscal 2022 and may continue to remain sluggish in the near term. TI, in a bid to improve margins has exited the institutional business and is focussing more on retail and healthcare segment. The company is also exploring European markets where there is continuous demand for bicycle due to prevalence of clean mobility options. Operating margins in the cycle business are continuing to be impacted due to lower volumes, given sluggish demand, but may improve should exports gather pace

 

• Part vulnerability to intense competition and cyclical slowdown, especially from the automobile and industrial sector: TI has in the past, seen its operating profitability declining to ~9-11% due to tepid demand from the automobile segment and fall in the overall industrial capex. While TI’s operating profitability is now more stable compared to other businesses, with the acquisition of CG Power  and share of automobile sector in overall revenues has also reduced over time to ~30-35%, from 50% in fiscal 2020, it does remain partly vulnerable to cyclical demand downturns. Besides, some segments such as transformers, gears, strips, chains, bicycles are seeing intense competition.

 

• Initial gestation losses at most new businesses: TI has made sizeable investments in new business verticals in the e-mobility space, as well as moderate investments in healthcare. Barring the medical equipment business, which was already operating profit generating at the time of acquisition, other acquisitions under TICMPL and the CDMO business will see material gestation losses in initial years. Continued investments will be required to grow these businesses to scale, as well as to fund the losses, which will limit improvement in TI’s overall return on capital employed (RoCE).

 

ESG Profile of TI:

CRISIL Ratings believes that TI Environment, Social, and Governance (ESG) profile supports its already strong credit risk profile. TI’s commitment to ESG principles will play a key role in enhancing stakeholder confidence.

 

The auto component and heavy engineering units have a significant impact on the environment owing to moderate emissions, water consumption and waste generation. The sector’s social impact is also sizeable considering the impact of operational activities on the company’s own employees. The company is focusing on mitigating environmental and social risks.

 

Key ESG highlights:

• Company intends to reduce waste generation based on 3R principles (Reduce, Reuse & Recycle) by 2030
• More than 80% facilities of TI are ensuring zero liquid discharge, and the rest of the plants are in the process of implementation.
• The company is committed to providing a safe and positive work environment. Employees have access to several forums where they can highlight matters or concerns faced at the workplace.
• Lost time injury frequency rate has improved from 0.025 in fiscal 2022 to 0.023 in fiscal 2023
• The governance structure is characterized by 50% of its board comprising independent directors. Position of the Chairman and Chief Executive Officer (CEO) are split. It has a committee at the Board level to address investor grievances and put out extensive disclosures.

 

There is growing importance of ESG among investors and lenders. The commitment of TI to ESG principles will play a key role in enhancing stakeholder confidence, given the high share of financial institution’s shareholding and access to both domestic and foreign capital markets.

Liquidity: Strong

TI’s liquidity remains strong, supported by healthy annual cash generation, low debt on its balance sheet and sizeable cash surplus of over Rs.2500 crore as on December 31, 2023. Accruals on a consolidated basis are expected to be over Rs 1600 crore in the near-to-medium term and beyond; this will be sufficient to fund nominal repayments as well as annual capex requirement of Rs 1300-2000 crore over the next 2-3 fiscals. The company also has access to moderately utilised working capital limits. Besides, as a leading company of the Murugappa group, TI enjoys healthy reputation among the financial community, which enables it to raise funds at attractive rates. Also, the company’s financial flexibility benefits from its sizeable holding in SGL and CG Power valued over Rs 43,000 crore (on March 17, 2024), which enhances its ability to raise funds, if required.

Outlook: Stable

CRISIL Ratings believes TI’s overall credit profile will remain healthy supported by well-diversified revenue profile, healthy market positions in most established businesses, and  strong financial risk profile. Debt metrics are expected to remain healthy over the medium term, with strong cash generation and healthy surpluses, obviating the need for additional debt.

Rating Sensitivity factors

Upward factors:

• Sustained strong leadership position in key verticals and better-than-anticipated revenue growth, across verticals including new businesses lines
• Improvement in  operating profitability to 13-14%%, leading to better-than-expected cash generation
• Sustenance of strong financial risk profile and debt metrics, despite organic and inorganic expansions

 

Downward factors:

• Sluggish business performance, impacting operating profitability, and cash generation   
• Significant rise in borrowings to fund higher capex or large acquisitions impacting debt metrics materially; for instance debt to EBITDA of 2.00-2.25 times on a sustained basis
• Large outflow to meet contingent and other liabilities related to CG Power depleting consolidated cash surpluses

About the Company

TI, part of the Rs 74,000 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% of SGL, which manufactures specialized gears and gear boxes; and 80% in CCPL and GCPL which are into manufacturing of components for premium bicycle segment. The company also holds 58% stake in CG Power, which manufactures switchgears, transformers and industrial products.

 

Other group companies include EID Parry (India) Ltd (rated ‘CRISIL AA/Stable/CRISIL A1+), Coromandel International Ltd (rated ‘CRISIL AAA/Stable/CRISIL A1+),  Cholamandalam Investment and Finance Company Ltd (rated, ‘CRISIL A1+’), Cholamandalam  MS General Insurance Company (rated ‘CRISIL AA/Stable’), Chola MS Risk Services Ltd, Carborundum Universal Ltd (rated ‘CRISIL AA+/Stable/CRISIL A1+), Sterling Abrasives Ltd (rated ‘CRISIL A+/Stable’) and Parrys Sugar Refinery India Pvt Ltd (rated ‘CRISIL A+/Stable/CRISIL A1'). The group’s holding company is Ambadi Investments Pvt Ltd.

 

In the first nine months of fiscal 2024, the company reported a profit after tax (PAT) of Rs 1449 crore (Rs 848 crore in corresponding quarter of fiscal 2023), on net revenue of Rs 12,400 crore (Rs 11,186 crore).

Key Financial Indicators (TI Consolidated)

As on/for the period ended March 31	Unit	2023	2022
Operating income	Rs.Crore	14965	12447
PAT	Rs.Crore	1325	991
PAT/ Operating income	%	8.5	7.9
Adjusted debt/adjusted networth	Times	0.13	0.30
Interest coverage	Times	29.92	19.11

    Note – Financial Summary is based on CRISIL Ratings workings; this considers analytical approach taken by CRISIL Ratings.

Any other information: Not Applicable

Annexure - Details of Instrument(s)

ISIN	Name of the instrument	Date of Allotment	Coupon Rate (%)	Maturity Date	Issue size (Rs.Crore)	Complexity Level	Rating assigned with outlook
NA	Cash Credit*	NA	NA	NA	750	NA	CRISIL AA+/Stable
NA	Letter of Credit@	NA	NA	NA	750	NA	CRISIL A1+

*Interchangeable with short-term buyer’s credit, packing credit, and working capital demand loan                

@Interchangeable with bank guarantee

 

Annexure - Details of Rating Withdrawn

ISIN	Name of the instrument	Date of Allotment	Coupon Rate (%)	Maturity Date	Issue size (Rs.Crore)	Complexity Level	Rating assigned with outlook
NA	Commercial Paper	NA	NA	7-365 days	525	Simple	Withdrawn