By Richa Bulani

India Ratings and Research (Ind-Ra) has affirmed CEAT Limited’s Long-Term Issuer Rating at ‘IND AA’. The Outlook is Stable. The instrument-wise rating actions are as follows.

Instrument Type

Date of Issuance

Coupon Rate (%)

Maturity Date

Size of Issue (million)

Rating/Outlook

Rating Action

Term loans

-

-

FY25

INR3,250 (reduced from INR6,550)

IND AA/Stable

Affirmed

Proposed term loans*

-

-

-

INR3,300

Provisional IND AA/Stable

Assigned

Fund-based working capital limits

-

-

-

INR4,250 (reduced from INR5,000)

IND AA/Stable/IND A1+

Affirmed

Proposed fund-based working capital limits*

-

-

-

INR750

Provisional IND AA/Stable/Provisional IND A1+

Assigned

Non-fund-based working capital limits

-

-

-

INR7,430 (reduced from INR9,000)

IND AA/Stable/IND A1+

Affirmed

Proposed non-fund-based working capital limits*

-

-

-

INR1,570

Provisional IND AA/Stable/Provisional IND A1+

Assigned

* The ratings are provisional and shall be confirmed upon the sanction and execution of loan documents for the above facilities by CEAT to the satisfaction of Ind-Ra.

Ind-Ra continues to take a consolidated view of CEAT and its subsidiaries and joint ventures on account of strong operational and legal linkages among them.

KEY RATING DRIVERS

Capex to Strengthen Business Profile: CEAT will incur an INR30 billion-32 billion capex (about 55% debt-funded) over FY18-FY22 on capacity expansion projects, aimed at achieving higher margins and better product diversification. CEAT plans to expand capacity in the high-margin passenger car radial (PCR) tyre segment and is expanding its in-house two- and three-wheeler (2W and 3W, respectively) tyre capacity, which was largely outsourced in the past. Furthermore, with a high radialisation scope in the truck and bus (T&B) tyre segment, CEAT is setting up T&B production capacity and has also recently established an export-oriented, high-margin off-highway tyre (OHT) facility in Ambernath, near Mumbai.

In FY18, CEAT doubled its PCR capacity at Halol, Gujarat, to 240 tonnes per day (tpd). It also plans to set up a 208tpd TBR capacity at the same site. In FY18, it completed the construction of the greenfield 120tpd 2W and 3W tyre facility in Nagpur, and will expand it further by 140tpd by FYE22. Moreover, it completed the greenfield OHT project in Ambernath in FY18 and plans to set up a greenfield PCR tyre plant in India.

Ind-Ra expects the capex to double CEAT’s revenue in the next five-six years, to strengthen its business profile and to boost the overall profitability. Moreover, capex is imperative for the company to maintain its market share, considering major domestic tyre manufacturers have large ongoing capex to increase their market position in line with the industry growth rate.

However, such large capex plans involve high execution risk and any delay could lead to cost overruns and higher-than-expected deterioration in the credit metrics. Also, attaining a leading position in more than one market segments profitably would be the key challenge for CEAT.


Diversified Revenue Base: CEAT has successfully diversified away from the T&B segment to more profitable segments such as 2W and 3W, passenger vehicle and OHT tyre. The contribution of the T&B segment to revenue reduced to 33% in FY17 from about 60% in FY11. The 2W and 3W tyre segment’s contribution to sales volume was the highest in FY17 (68%), followed by the passenger vehicle tyre segment (23%). The 2W and 3W and passenger vehicle tyre segments’ contribution to FY17 revenue was about 30% and about 25%, respectively.

Moreover, revenue base is diversified by sales channel. The contribution of replacement, original equipment manufacturer and export to FY17 revenue was 64%, 24% and 12%, respectively.


Comfortable Liquidity to Remain: CEAT has consistently reported healthy cash flow from operations. Its average utilisation of the fund-based working capital facilities was 13.9% for the 12 months ended December 2017. Ind-Ra expects a fall in CEAT’s cash and equivalents in FY19 (from INR970 million at FYE17) in view of the capex plans. In addition, free cash flow is likely to stay negative until FY20. Nevertheless, the agency expects liquidity to remain sufficient to meet debt repayments over FY19-FY20, as the debt amortisation schedule is likely to be comfortable and the undrawn working capital facilities will provide support.

Operating Margin Susceptible to Volatile Raw Material Prices: In line with the industry trend, CEAT’s operating performance declined in FY17 and 9MFY18. EBITDA margin fell to 11.4% and 9.1% in FY17 and 9MFY18, respectively, from 14.1% in FY16, as the prices of natural rubber (main raw material) sharply rose in 2HFY17 and 1QFY18.

EBITDA margin recovered to 11.5% in 2QFY18 and 11.9% in 3QFY18 due to a decline in natural rubber prices. EBITDA margin would remain sensitive to any volatility in input prices, including those of natural rubber and crude, considering raw material costs represent about 60% of revenue. The agency expects the benefits of a fall in natural rubber prices to be offset by an uptrend in crude price in the near term. Nevertheless, CEAT’s operating margin is likely to benefit from the strengthening of the business profile in the medium term.


Moderate Weakening in Credit Metrics over FY19-FY20: Large debt drawdowns of about INR20 billion for capex over FY19-FY22 (where the bulk of the drawdown is likely in FY19-FY20) are likely to cause a temporary weakening in credit metrics. Ind-Ra expects net leverage to rise in FY19 (FY17: 1.2x) and gradually improve from FY20, with the ramp-up of expanded capacities. Considering the modular nature of capex, CEAT would start generating incremental revenue before the full completion of the projects and, thus, EBITDA interest coverage is likely to remain strong at above 5.0x over FY19-FY22 (9MFY18: 5.7x; FY17: 7.4x).

Lower Scale than Market Leaders’: CEAT’s revenue and operating margin have been considerably lower than those of market leaders: MRF Ltd and Apollo Tyres Ltd (‘IND AA+’/Stable). While MRF and Apollo Tyres hold the top three positions in at least two tyre segments, CEAT is one of the top three players in the 2W tyre segment, which represents below 15% of the industry revenue. CEAT’s operating margin is lower than those of market leaders owing to lower economies of scale and partial outsourcing of production.

Ind-Ra expects CEAT’s scale of operations and operating margins to rise over FY19-FY21; however, the pricing flexibility available to CEAT, although considerable, would still be lower than that with the top two peers.


RATING SENSITIVITIES

Positive: A substantial expansion in the scale of operations, along with a leadership position in two or more segments, leading to a significant improvement in operating margin and a large positive free cash flow on a sustained basis could lead to an upgrade.

Negative: Weaker-than-expected growth in revenue and EBITDA margin due to delays in deriving benefits from upcoming projects, higher input costs and/or pricing pressure due to a weak demand environment leading to net leverage exceeding 1.5x on a sustained basis could result in a downgrade.


COMPANY PROFILE

CEAT is a Mumbai-based manufacturer of a wide range of automobile tyres. This company was acquired by RPG Enterprises from Pirelli in 1982. It has manufacturing plants across Bhandup, Nasik, Nagpur, Ambernath and Halol. It has a joint venture in Sri Lanka. CEAT plans to set up a greenfield tyre plant in India.

FINANCIAL SUMMARY

Particulars

FY17

FY16

Revenue (INR million)

57,665

54,836

EBITDA (INR million)

6,646

7,797

EBITDA margin (%)

11.5

14.2

Interest coverage (x)

7.4

7.7

Net leverage (x)

1.2

0.7

Adjusted net leverage (x)*

1.7

1.1

Source: CEAT, Ind-Ra

* Includes dealer deposits as debt


RATING HISTORY

Instrument Type

Current Rating/Outlook

Historical Rating/Outlook

Rating Type

Rated Limits (million)

Rating

18 November 2016

27 October 2015

10 March 2015

Issuer rating

Long-term

-

IND AA/Stable

IND AA/Stable

IND AA-/Stable

IND A+/Stable

Term loans

Long-term

INR6,550

IND AA/Stable

IND AA/Stable

IND AA-/Stable

IND A+

Fund-based working capital facilities

Long-/short-term

INR5,000

IND AA/Stable/IND A1+

IND AA/Stable/IND A1+

IND AA-/Stable/IND A1+

IND A+/IND A1+

Non-fund-based working capital facilities

Long-/short-term

INR9,000

IND AA/Stable/IND A1+

IND AA/Stable/IND A1+

IND AA-/Stable/IND A1+

IND A+/IND A1+


COMPLEXITY LEVEL OF INSTRUMENTS

For details on the complexity levels of the instruments, please visit https://www.indiaratings.co.in/complexity-indicators.

SOLICITATION DISCLOSURES

Additional information is available at www.indiaratings.co.in. The ratings above were solicited by, or on behalf of, the issuer, and therefore, India Ratings has been compensated for the provision of the ratings. 

Ratings are not a recommendation or suggestion, directly or indirectly, to you or any other person, to buy, sell, make or hold any investment, loan or security or to undertake any investment strategy with respect to any investment, loan or security or any issuer.

ABOUT INDIA RATINGS AND RESEARCH

India Ratings and Research (Ind-Ra) is India's most respected credit rating agency committed to providing India's credit markets accurate, timely and prospective credit opinions. Built on a foundation of independent thinking, rigorous analytics, and an open and balanced approach towards credit research, Ind-Ra has grown rapidly during the past decade, gaining significant market presence in India's fixed income market. 

Ind-Ra currently maintains coverage of corporate issuers, financial institutions (including banks and insurance companies), finance and leasing companies, managed funds, urban local bodies, structured finance and project finance companies. 

Headquartered in Mumbai, Ind-Ra has seven branch offices located in Ahmedabad, Bengaluru, Chennai, Delhi, Hyderabad, Kolkata and Pune. Ind-Ra is recognised by the Securities and Exchange Board of India, the Reserve Bank of India and National Housing Bank. 

Ind-Ra is a 100% owned subsidiary of the Fitch Group.

For more information, visit www.indiaratings.co.in.

DISCLAIMER

ALL CREDIT RATINGS ASSIGNED BY INDIA RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTPS://WWW.INDIARATINGS.CO.IN/RATING-DEFINITIONS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE WWW.INDIARATINGS.CO.IN. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. INDIA RATINGS’ CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE.

Applicable Criteria

Analyst Names

  • Primary Analyst

    Richa Bulani

    Senior Analyst
    India Ratings and Research Pvt Ltd Wockhardt Towers, 4th Floor, West Wing, Bandra Kurla Complex, Bandra East,Mumbai - 400051
    +91 22 40001712

    Media Relation

    Mihir Mukherjee

    Manager Corporate Communications and Investor Relations
    +91 22 40356121