Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AA+/Stable/CRISIL A1+’ ratings on the bank facilities and commercial paper of Tube Investments Of India Limited (TI).

 

CRISIL’s Ratings continue to reflect TIL’s healthy business risk profile with diversified revenue streams and leading market positions 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 TIL’s revenues and operating profitability to intense competition and cyclicality in the automobile and industrial sectors. Also, TIL’s electric vehicles and contract manufacturing and development (CDMO) ventures are still in gestation stage, and are expected to incur losses in the initial 2-3 years.

 

The ratings is also supported by TIL strong liquidity with liquid surplus of ~Rs.1650 crore as on March 31, 2023 and almost negligible long term debt.

 

TIL’s operating revenue grew by 19% on-year reaching ~Rs 15,000 crore in fiscal 2023. Strong growth across TIL’s engineering and metal forming verticals, as well as the power and industrial businesses housed under CG Power and Industrial Solution Ltd (CG Power), and the industrial gears business under Shanti Gears Ltd (SGL) contributed to the healthy revenue growth in fiscal 2023. Mobility business was the only segment which saw degrowth in business by 17% on-year due to tepid domestic demand for bicycles. CG Power, which was acquired by TIL in November 2020, contributed 45% of the total consolidated revenues of TIL in fiscal 2023, and is expected to contribute to over 50% of TIL’s revenues over the medium term. Due to moderation in steel prices which will be passed on in form of lower realisations, TIL’s overall revenue is expected to grow at 5-7% in the near to medium term, led by the engineering and CG Power businesses.

 

TIL’s operating capabilities have benefited from the turnaround of operations at CG Power, and high utilisation of own capacities across the domestic gear, engineering and metal forming verticals; ergo, its operating profitability improved to 12.8% in fiscal 2023 compared to 12% in fiscal 2022. Return on capital employed improve to above 30% in fiscal 2023, driven by better absolute operating profits. Operating margins are expected to stabilise at 11.5-12% over the medium term, notwithstanding initial losses expected at the new electric vehicle and contract manufacturing businesses. However, annual cash generation will continue to be robust at over Rs.1400 crores.

 

TIL’s already solid financial position continues to benefit from strong annual cash generation, and moderate debt on its balance sheet. Debt protection metrices like interest coverage debt/earnings before interest, depreciation and tax (EBITDA) and ratio of total outside liabilities to tangible net worth (TOL/TNW) remained robust at ~30 times, 0.32 times, and 0.89 times respectively in fiscal 2023. With strong cash generation, CG Power also paid off all its debt in fiscal 2023. Total consolidated debt in TI declined to Rs 629 crore at March 31, 2023, from Rs 804 crore at March 31, 2022. The debt was mostly in the form of working capital borrowings.

 

During fiscal 2023 and the first half of fiscal 2024, TIL entered into several newer business segments specially into electric vehicle, medical business and CDMO businesses primarily through acquisitions. TI Clean Mobility Pvt Ltd (TICMPL) which is a subsidiary of TIL, houses the electric vehicle manufacturing business. TICMPL raised Rs. 1200 crores from venture capital firms and other investors, of which Rs 400 crore was raised during fiscal 2023 and Rs. 800 crore was raised in first half of fiscal 2024 through compulsory convertible preference shares (CCPS). Capital spending at TIL and CG Power is expected to be stepped up; besides TIL will also be enhancing investments in the new businesses – electric vehicle and CDMO. Overall, capital spending is estimated at ~Rs.1200-1300 crore per annum over the next 3 years, compared with ~Rs.750 crores in fiscal 2023. However, no material debt raise is expected, due to strong cash generating ability, and also sizeable cash surpluses available in most companies, including through CCPS raised. Hence, debt protection metrics will continue to remain at robust levels over the medium term.

Analytical Approach

For arriving at its ratings, CRISIL Ratings has combined the business and financial risk profiles of TIL 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 SGL of around Rs. 280 Crore over a period of ten years commencing November 2012, and goodwill on acquisition of CG Power (Rs.285 crores) and intangible assets (Rs.587 crores) over a period of 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: TIL 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) and gear and gear products (3%) have also helped revenue grow besides adding diversity to revenues. The company is among the top-three players in most of the business segments it operates in. For instance, TIL also enjoys healthy presence in the large diameter tubes business, is the second largest player in the domestic automobile chains business and also the domestic bicycle 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 which contributed ~75% of the total consolidated revenue of TIL witnessed healthy demand in fiscal 2023, and continue to witness steady demand in fiscal 2024 as well. The bicycle business has continued to face headwinds due to declining market demand and strong competition from the cheaper imported bicycles in the domestic market. Strong demand from automobile OEMs are driving revenues in the engineering and metal forming businesses, while demand from a host of industries is driving demand for CG Power as well as the engineering vertical.

 

During fiscal 2023, TIL entered into new business segments primarily through acquisitions. TIL entered into electric vehicle business through acquisition of Cellestial E-Mobility Pvt Ltd (Cellestial) and IPLTech Electric Pvt Ltd (IPLTech) through its subsidiary, TICMPL. Cellestial and IPLTech are involved in the manufacturing of electric tractors and electric trucks respectively. TIL has also launched its electric three wheelers (e-3W) during the fiscal through TICMPL. E-3Ws have been already homologated and the sale has been already started though dealers. TIL, through TICMPL, also acquired 50% stake in Jayem Automotive Pvt Ltd (JAPL) in fiscal 2023. JAPL is engaged in design, development, testing and manufacturing of a wide range of automotive components, systems and prototypes. TIL also formed another subsidiary, TIVolt Electric Vehicle Pvt Ltd, which will be involved in manufacturing of small commercial vehicles (SCVs).  Besides this, TIL has also diversified into the healthcare space. During  fiscal 2023, TI acquired 67% stake in Lotus Surgicals Pvt Ltd (Lotus) which is into manufacturing of medical consumables and surgical equipment. TIL has also entered into CDMO business of active ingredients for pharmaceuticals through its subsidiary, 3XPER Innoventure Ltd. The initial investment has been made by TIL into the business in fiscal 2024. TI is also present in research and development of mobile camera module, micro gas turbines and clean fuel technology through stake in Moshine Electronics Pvt Ltd (mobile camera module), Aestrovolis Energy Pvt Ltd (micro gas turbines) and X2 Fuels and Energy Pvt Ltd (clean fuel technology).

 

The business in these companies are at a nascent stage and will require few years to stabilize operations.  Hence over the next 2-3 years, there will be modest contribution towards overall revenue of TIL, and gestational losses. Besides, investments will continue in these businesses as well. Successful ramp up of these businesses will lend further diversity to TIL’s overall business risk profile.

 

TIL’s operating capabilities have benefited from the turnaround of operations at CG Power, and high utilisation of own capacities across the domestic gear, engineering and metal forming verticals; ergo, its operating profitability improved to 12.8% in fiscal 2023 compared to 12% in fiscal 2022 Return on capital employed improve to above 30% in fiscal 2023, driven by better absolute operating profits. Operating margins are expected to stabilise at 11.5-12% over the medium term, factoring initial gestation losses expected at the new businesses.

 

• Solid financial risk profile, and healthy financial flexibility, including due to its position as one of the leading companies of the Murugappa group: TIL’s already 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 also paid off all its debt in fiscal 2023. Total consolidated debt in TI declined to Rs 629 crore at March 31, 2023, from Rs 804 crore at March 31, 2022. The debt was mostly in the form of working capital limits. During  fiscal 2023 and the first half of fiscal 2024, TI entered into several newer business segments specially into e-mobility, surgical equipment and CDMO. businesses primarily through acquisitions. This led to some moderation in TIL’s own cash surpluses, which still were healthy at over Rs.400 crores at end of fiscal 2023

 

To fuel its growth plans in the electric vehicle business under TICMPL, Rs 400 crore was raised through CCPS from venture capital firms and other investors during fiscal 2023. TICMPL further raised Rs 800 crore through CCPS from the same investors in the first half of fiscal 2024 taking the total fund raise to Rs. 1200 crore. Capital spending at TIL and CG Power is expected to be stepped up; besides TIL will also be enhancing investments in the new businesses. Overall, capital spending is estimated at ~Rs.1200-1300 crore per annum over the next 3 years, compared with Rs.750 crores in fiscal 2023. However, no material debt raise is expected, due to strong cash generating ability, and also sizeable cash surpluses available in most companies. Hence, debt protection metrics will continue to remain at robust levels over the medium term. That said, any material debt funded acquisitions leading to moderation in debt metrics, for instance debt/EBITDA of over 2-2.25 times, will remain a monitorable.

 

TIL’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 37,600 crores (October 12, 2023), enhancing its fund raising ability. Also, TIL 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: TIL is the second largest player in the domestic bicycles market and enjoys market leadership in the growing specials segment. TIL’s bicycle sale volumes have come under pressure in the last two fiscals, 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. TIL, in a bid to improve margins has exited the institutional business and is focussing more on retail segment. The company is also exploring export markets where there is a demand for bicycle due to prevalence of clean mobility options in these markets. Operating margins in the cycle business are continuing to be impacted in medium term, due to lower volumes, given sluggish demand.

 

• Part vulnerability to intense competition and cyclical slowdown, especially from the automobile and industrial sector: TIL has in the past seen their operating profitability declining to ~9-11% due to tepid demand from the automobile segment and decline in the overall industrial capex. While TIL’s operating profitability is now more stable compared to other business, 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: TIL has made sizeable investments in new business verticals in the e-mobility space, as well as moderate investments in the healthcare space. Barring the medical equipment business under Lotus, 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 TIL’s overall ROCE.

Liquidity: Strong

TIL’s liquidity is strong, supported by healthy annual cash generation, low debt on its balance sheet and sizeable cash surpluses of over Rs.1600 crores as on March 31, 2023. Accruals on a consolidated basis were over Rs 1600 crore in fiscal 2023 and expected to be over Rs 1500 crore in fiscal 2024 and beyond; this will be sufficient to fund nominal repayments as well as annual capex requirement of Rs 1200-1300 crore over the next 2-3 fiscals. The company also has access to moderately utilized 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 at over Rs.37,600 crores (at October 12, 2023), which enhances its ability to raise funds, if required.

 

ESG Profile of TIL:

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

 

The auto component and heavy engineering have a moderate impact on the environment owing to moderate emissions, water consumption and waste generation. The sector’s social impact is also moderate 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 intend to reduce waste generation based on 3R principles (Reduce, Reuse & Recycle) by 2030
• More than 80% facilities of TIL are ensuring zero liquid discharge, and the rest of the plants are in process of implementation.
• The Company is committed to provide 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 (LTIFR) 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 also put out extensive disclosures.

 

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

Outlook: Stable

CRISIL Ratings believes TIL’s overall credit profile will remain healthy supported by well-diversified revenue profile, healthy market positions in most established businesses, and its 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 to additional debt.

Rating Sensitivity factors

Upward Factors:

• Better than anticipated revenue growth, driven by diverse revenue streams, and improvement in market position in key verticals
• Sustenance of operating profitability at over 12%, 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 over 2-2.25 times on sustained basis
• Large outflow to meet contingent and other liabilities related to CG Power depleting cash surpluses

About the Company

TIL, part of the 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. TIL has also ventured into manufacturing of electric vehicles through its subsidiary, TICMPL. TIL also acquired 67% stake in Lotus Surgicals Pvt Ltd which is involved in manufacturing of medical surgical devices. Contract Development and Manufacturing business (CDMO) will be done under the subsidiary 3Xper Innoventure Ltd. 

 

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 parent company is Ambadi Investments Pvt Ltd.

 

In the first three months of fiscal 2024, the company reported a profit after tax (PAT) of Rs.284 crore (Rs.247 crore in corresponding quarter of fiscal 2023), on net revenues of Rs.3898 crore (Rs.3798 crore in corresponding quarter of fiscal 2023).

Key Financial Indicators (TIL Consolidated)

As on/for the period ended March 31		2023	2022
Operating Income	Rs Crore	14992	12570
PAT	Rs Crore	1276	991
PAT/ Operating Income	%	8.5	7.9
Adjusted debt/adjusted net worth	Times	0.13	0.30
Interest coverage	Times	29.92	19.11

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

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	Commercial Paper	NA	NA	7-365 days	525	Simple	CRISIL A1+
NA	Cash Credit**	NA	NA	NA	400	NA	CRISIL AA+/Stable
NA	Letter of Credit@	NA	NA	NA	300	NA	CRISIL A1+

@Interchangeable with bank guarantee