Tilling Ahead

TIL Limited Rs 100 million Commercial Paper programme Rating A1

Rating

An A1 (pronounced as A one) has been assigned to the Rs 100 million Commercial paper programme of TIL limited, indicating highest safety. The prospect of timely payment of debt/obligation is the best.

Background and Business

TIL Limited (TIL) started its operations in 1994 as Tractors India Limited, a dealer of earthmoving equipment manufactured by Caterpillar Tractor Company of USA (Caterpillar). In 1950 , the company expanded its range of dealerships to include cranes supplied by Coles Cranes of UK. In 1955, it became a public limited company. The manufacture of cranes commenced at TILs Kamarhatty plant (Calcutta) in 1960, through a joint venture with Coles Cranes named Coles Cranes India Limited. This venture was subsequently merged with TIL. Globally, Coles Cranes UK was taken over by Grove Limited (Grove), a leading manufacturer of cranes in the world. TIL subsequently tied up with Grove in 1992-93. The manufacture of forklifts began in 1996-97 at TILs Sahibabad (UP) plant and the technology for these was obtained from Boss UL (Boss).

 

In 1993, TIL set up a unit for manufacturing diesel generator sets (dg sets) at Pondicherry. TIL also markets dg sets manufactured by Caterpillar and Hindustan Power Plus Limited (HPP), a joint venture between Caterpillar and Hindustan Motors Limited (HM).

In 1984, the company acquired Spundish Engineers Limited (SEL), a loss making chemical process manufacturing unit in Bombay. On account of mounting losses of SEL and falling crane realisations at TIL, TIL posted a loss of Rs 39.8 million in 1988-89. This resulted in closure of SEL, implementation of a voluntary retirement scheme and restructuring of the organisation into profit centres thus enabling TIL to turnaround by 1989-90.

Currently, TIL comprises three strategic business groups namely Material Handling Group, Construction Equipment Group and Power Systems Group. It has 4 factories (Calcutta, Sahibabad (UP), Pondicherry and Mumbai) and 31 sales/product support offices. In 1995, TIL set up a subsidiary named Myanmar Tractors & Trading Company Limited (MTTL) to cater effectively to the growing demand in Myanmar and, in 1996-97, it converted it into a wholly owned subsidiary. MTTL is involved in marketing and providing product support to products manufactured by Caterpillar and HM. MTTL is a profit making company with a PAT of US $ 1.16 million in 1996-97.

Operating Performance

Material Handling Group

In India, TIL is the market leader in the mobile crane category with over 70 per cent market share. It offers the widest range including the small capacity forklifts as also the large capacity rough terrain cranes and reachstackers.

Cranes manufactured by HMG are used in all the basic infrastructure sectors such as coal mines, steel plants, aluminium smelters, oilfields, ports, defence, petrochemicals, construction and engineering. Government agencies (including PSUs) account for about 75 per cent of the cranes sold by TIL, with the defence sector being the largest customer.

While popular models such as lower tonnage rough terrain cranes and forklifts are manufactured regularly, the models of larger tonnage and sophisticated cranes such as reachstackers are made to order. With increasing competition, TIL has shortened the delivery time for its cranes and in 1996-97, nearly 75 per cent of the cranes were delivered within 60 days of the placement of the order as against 4-5 months previously. Competition is mainly from Escorts and Voltas. However, these players are present only in specific segments and for lower tonnage.

TIL also markets some low-volume, sophisticated cranes of its technical collaborators, Grove and Boss. To take advantage of the increasing opportunities available, TIL plans to expand its product range to include higher tonnage rough terrain cranes, forklifts and manlifts. The introduction of all new types of products will be initially in the form of imports from its technical collaborators, excepting for extensions of its existing products.

The Materials Handling Group accounted for 28 per cent of net sales in 1996-97. Net sales of Materials Handling Group has grown at a CAGR of 13.35 per cent in the last three years. The contribution of this division is much higher than that of other divisions mainly because of the value addition achieved through manufacturing. The receivables as days of gross sales is high at 175 days mainly because 75 per cent of the sales is to PSUs where it has to extend a long credit period.

Construction Equipment Group

TIL has exclusive dealership for providing product support to earthmoving equipment sold by Caterpillar and Hindustan Motors in northern and eastern India, Nepal, Bhutan and Myanmar. Construction Equipment Group also provides product support to cranes manufactured by Materials Handling Group.

Product support essentially comprises refurbishment/ repair and modifications of earthmoving equipment using sophisticated diagnostic tools and spare parts provided by Caterpillar.

For large projects, TIL enters into a contract for providing on site support during the implementation of the project. Product support is provided from TILs workshops at Calcutta, Sahibabad, Asansol and Dhanbad and 16 outlets/branches.

The Construction Equipment Group accounted for 40 per cent of net sales in 1996-97. Net sales of Construction Equipment Group has grown at a CAGR of 15.4 per cent in the last three years. The receivables at 152 days of gross sales is high because of client profile consists mainly of Government agencies.

Power Systems Group

Power Systems Group is involved in the manufacture and sale of dg sets, in the 180 KVA - 2000KVA range, using diesel engines supplied by Caterpillar and HPP. TIL is a relatively new entrant in this field (with an estimated 15 per cent market share) and faces stiff competition from well established assemblers who source engines mainly from Kirloskar Cummins Limited or Greaves Cotton Limited.

TIL has exclusive dealership for diesel engines manufactured by Caterpillar and HPP in eastern and northern India. These engines are sold in the replacement market. In certain case, TIL sells under their own brand. TIL also has exclusive dealership for providing product support to higher capacity dg sets sold by Caterpillar in the designated geographical regions.

This division accounted fro 32 per cent of net sales in 1996-97. Net sales of Power Systems Group has grown at a CAGR of 57.76 per cent in the last three years. However contribution of this division is very low in the range of 7-12 per cent indicating the highly competitive nature of this business.

Financial Performance

Operating income has shown a healthy increase from Rs 840 million in 1992-93 to Rs 2335 million in 1996-97 at a CAGR of 29 per cent. Most of the growth can be attributed to trading, including product support, which has increased substantially during the period as represented by the ratio of gross sales from manufacturing to gross sales from trading which declined from 1.08 in 1992-93 to 0.50 in 1996-97. Operating profit margin of the company has, however declined from 15.8 per cent to 9.8 per cent, during this period, on account of extremely competitive nature of the market.

The decline in operating profit margin was offset by a decline in interest and finance charges from 9.6 per cent of operating income to 5.0 per cent of OI between 1992-93 and 1996-97 which resulted in an improvement in net margin (Net profit/Operating income) to 2.7 per cent of OI in 1996-97 from 1.7 per cent in 1992-93. Return on Capital Employed i.e. Profit Before Interest Tax/(Total Debt + Tangible Net Worth) is relatively high at 22.9 per cent inspite of declining of declining operating margin.

TILs gearing (total debt/net worth) was relatively high at 1.75 as on 31st March, 1997. Bank borrowings have, traditionally, been the major source of debt, with the level of long term debt being relatively low. Interest coverage (OPBDIT/Interest) is comfortable at 1.95. TILs high gearing is a result of high level of receivables. The company has been able to attain an improvement in its working capital management. TIL has been adequately supported by its principals, Grove and Caterpillar, who are also the main suppliers, by extending a credit period of six months.

Prospects

The demand for material handling and earthmoving equipment is closely linked to the growth in the infrastructure sector. ICRA expects that the serious deficiencies in the infrastructural sector that will result in greater resources being deployed towards this sector. TILs dominant status in the material handling business will ensure that it is largely benefited by this growth. The company is in the process of tying up with number of global players for introduction of specialised material handling equipment. This will restrict entry of new competition as well as ensure that TIL continues to offer the widest range of products and services in the business segments in which it operates.

Liberalisation of the infrastructure has resulted in the entry of the private sector and MNCs in this field. A large part of the demand from the private sector is likely to be routed to TIL because of its association with global majors in the material handling business. Also, with a gradual shift in client profile towards the private sector, the receivables position is likely to improve. Further, in the last 6 months, the company has successfully reduced its receivable level from the public sector, as a result of a conscious recovery drive. The improvement in liquidity is likely to result in an improvement in profitability.

TIL plans to incur a capital expenditure of Rs 100 million in 1996-97 for modernisation and expansion of its Kamarhatty and Sahibabad plant. For the above, the company has proposals for raising ECBs of Rs 100 million. The capital expenditure programme will provide tax cover and result in higher cash accruals. Further, inflow of ECB will substantially improve the short term liquidity improve the short term liquidity position of the company. The company is also looking at cheaper avenues of funds for reducing its interest expenses.

Key Issues

TILs dominant position in the material handling business and its collaboration with global players has enabled it to expand its product range and take advantage of the growing opportunities in the market. In the Construction Equipment Group, its association with Caterpillar, in the form of exclusive dealership in the eastern and northern part of the country, has ensured a steady flow of income from product and support services and the sale of components and helped TIL to consolidate its position, in this segment.

Further, global players, such as Grove Caterpillar, have demonstrated their support to TIL by providing a steady flow of technology for introduction of new products and services as well as extended long credit periods. The competitive position of its Power Systems Group is relatively weaker due to the presence of a large number of assemblers of dg sets particularly in the northern India. However, in future, with increasing demand for higher capacity dg sets, Power Systems Group is likely to get an ensured flow of income from product and services for Caterpillars dg sets.

The companys efforts at reducing interest expenses, reduced tax outgo due to the capital expenditure programme, coupled with an expected improvement in working capital management, will provide comfortable liquidity in the short term.