Rating agency Icra has downgraded the 'A1' rating assigned to the Rs 5 crore commercial paper (CP) programme of Falcon Tyres (FTL) to 'A2+', indicating high safety. The relative safety is marginally lower than in 'A1' rating. FTL, promoted by the M R Chhabria group, makes two and three-wheeler tyres and markets them under the 'Dunlop' brand name.
In 2000-01, FTL achieved net sales of Rs 88.84 crore and net profit of Rs 1.75 crore (provisional unaudited figures). Original equipment manufacturers (OEMs) and the replacement market constitute the key market segments for FTL.
Sales remained stagnant during the year due to a combination of factors such as increased competition, lower production due to labour unrest and sluggish demand from its mainstay scooter segment. Demand was also low from mopeds, scooterettes and the auto segments.
At a time when motorcycle sales have been growing at the cost of scooter sales, FTL faced a capacity constraint in motor cycle tyres. Although replacement market sales grew at a healthy rate of 27 per cent during 2000-01, it could not compensate for lower OEM sales.
The company plans to increase the capacity of its motor cycle tyres during the current year to cater to the increased demand, although funding for the project is yet to be tied up.
The two/ three-wheeler tyre segment is expected to face increased competition from the bigger tyre companies since the segment has shown better growth compared with other segments of the tyre industry in the past one year. Icra expects this to adversely affect smaller companies such as FTL.
The firm's operating margins (OPBDIT/ OI) have been consistently declining since 1997-98. Specific factors which contributed to the decline in 2000-01 include higher raw material prices, higher employee costs and high marketing overheads. There has also been an intense pressure on realisation on sales to OEMs.
FTL's liquidity was strained in 2000-01 due to build up of debtors, higher inventory holdings and inadequate bank limits. The company has been hard pressed to get adequate funding from banks on account of group concerns.
The rating factors in Icra's favourable outlook on demand from the motor cycle segment of the two-wheeler industry, FTL's strength in terms of its long relationship with OEMs and good growth demonstrated in replacement segment.
The rating is, however, constrained by increased competitive pressures in the industry, FTL's moderate financial position and the pressure on margins, its strained liquidity position, limited financial flexibility and the funding risk on its expansion/ modernisation project.
