ICRA assigns high safety rating to NCD programme of TVS Srichakra

By Our Corporate Bureau

The Investment Information and Credit Rating Agency (ICRA) has assigned MAA minus rating, indicating high safety, to the Rs. 6 crore non-convertible debenture (NCD) programme of TVS Srichakra (TSL). The rating agency has also reaffirmed the LAA minus rating and A1 plus rating assigned to the Rs. 3 crore NCD and Rs. 8 crore commercial paper programme respectively of TSL.

The rating factors in robust growth in the motor cycle segment of the two wheeler industry, TSL's strength in terms of its long relationship with original equipment manufacturers (OEMs), low financial risk and comfortable liquidity. The rating is however constrained by increased competitive pressures in the industry leading to pressure on margins. The financial strength of promoter companies also provides TSL with adequate financial flexibility.

TSL, belonging to TVS Group, is one of the leading companies in the domestic two and three wheeler tyre industry. It sells tyres to OEMs and in the replacement and export markets. In 2000-01, TSL achieved gross sales of Rs. 159.91 crores and net profit of Rs. 6.49 crores. Sales grew only by three per cent during 2000-01 as compared with the previous year due to a combination of factors such as sluggish offtake from the scooter segment, reduced offtake from a key OEM customer and increased competition in the replacement market.

Demand was also low from mopeds, scooterettes and the autorickshaw segment. TSL exports specialised industrial and farm tyres to Europe and the U.S. Export sales grew at a comfortable rate of 13% in 2000-01 on account of expansion of customer base and introduction of new sizes.

Motor cycle sales in the country have grown at a CAGR of 22 per cent in the past five years. TSL is well positioned to take advantage of this growth in the future in view of sufficient installed capacity for motor cycle tyres. Despite minor setbacks in the OEM segment, TSL continues to be the market leader in this segment. ICRA expects the market leadership position of TSL to continue in the short to medium term in view of established relationship with OEMs and strong product development skills. TSL has also been investing in brand building activity for replacement market, which is expected to help improve its market position in the medium term.

TSL's operating margin (OPBDIT/OI) declined from 14.79 per cent in 1999-00 to 10.57 per cent in 2000-01 and 9.29 per cent in Q1 2001-02, due to higher raw material prices, pressure on realisation from OEMs and high marketing overheads.

Despite decline in profitability, TSL's return on capital employed (19.34 per cent in 2000-01) continues to be high and is a source of comfort. TSL's overall gearing has declined consistently from 1.45 times as on March 31, 1997 to 0.60 times as on March 31, 2001 due to decline in debt levels and comfortable accretion to reserves. Its coverage and liquidity levels are also comfortable.

Tata Metaliks

ICRA has upgraded the rating assigned to the Rs. 19.74 crore debenture programme of Tata Metaliks (TML) from LBBB to LBBB plus. The revised rating indicates moderate safety. However, the relative degree of safety regarding timely servicing of interest and principal, as per terms, has improved since the last rating was assigned. The rating takes into account the improved market position of TML and its lower financial risk profile on account of debt repayment and efficient working capital management.

TML, which mainly operates in the eastern region, has established itself as a prime supplier of premium grade pig iron. The consistency in quality of its product has given it a competitive edge in the market. The operating efficiencies have also shown a continued improvement over the years. It has significantly reduced its working capital requirements by adopting a 'zero credit' policy for sales. The additional funds generated from a reduction in debtor levels helped TML finance relining of its blast furnace in 2000-01.

The profitability of the company also improved sharply in the same year. The profit after tax increased from Rs. 3 crores in 1999-2000 to Rs. 8.50 crores in 2000-01, on account of lower cost of coke, the primary raw material, and improved realisations on sale of pig iron. The improved profitability and lower fund requirements for working capital helped TML reduce its debt volume, leading to a lower gearing (0.49 times) as on March 31, 2001 as against 0.86 times as on March 31, 2000.

However, there are concerns on the sustainability of higher realisations on the sale of pig iron, especially in view of the slowdown in the global economy and the possibility of an imbalance in the domestic demand-supply scenario. Nevertheless, the rating agency expects TML's improved financial risk profile along with a relative improvement in its market position to positively impact its debt servicing ability in the long term.

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