CRISIL has assigned its bank loan ratings of ‘AA-/Stable/P1+’ to the various bank facilities of Inox Air Products Ltd (Inox), and has reaffirmed its rating on the company’s short-term debt programme at ‘P1+’. The ratings reflect Inox’s established position in the industrial gases market, and its adequate and improving financial risk profile. These rating strengths are partially offset by Inox’s exposure to risks inherent to the highly-competitive and capital-intensive industrial gases industry, and cyclical nature of its end user industries.

Inox has a strong presence in northern and western India, where it has very few competitors. It is the leader in the domestic market in merchant sales of industrial gases, with a market share of around 23 per cent, and also the third largest player in the overall industrial gases market, with a market share of 17 per cent. Inox is likely to consolidate its market position with new on-site projects, which were implemented in the past two years for clients such as Essar Steel, Ispat Industries, and JSW Steel, and the project for Steel Authority of India Ltd (SAIL), which is expected to be implemented by September 2008. Further, Inox derives significant management and technological support from Air Products (rated ‘A/Stable/A-1’ by Standard & Poor’s), a major player in the global industrial gases industry.

Inox has an adequate and improving financial risk profile: its operating margins are estimated to have improved to 45 per cent in 2007-08 (refers to financial year, April 1 to March 31), from 20.38 per cent in 1999-2000. Its profit after tax (PAT) margins are estimated to have increased to 24 per cent from 10.64 per cent over the same period. Although the company’s debt levels have increased substantially from 2004-05 onwards due to additional borrowings for funding large on-site projects, its gearing is estimated to have remained stable at 1.12 times as on March 31, 2008. Further, its debt protection indicators have remained comfortable, with interest coverage and net cash accruals to total debt ratios estimated at 8 times and 0.28 times, respectively, for 2007-08. Moreover, the company’s cash accruals are expected to be comfortable enough to meet its repayment obligations over the medium term.

The consumption of industrial gases is linked to the index for industrial production (IIP); the IIP typically mirrors growth in the engineering and manufacturing sectors that are inherently cyclical in nature. In addition, the business of on-site sales is highly capital intensive involving large capital expenditure (capex), long gestation periods, and long payback times, which could have an adverse impact if the implementation of on-site projects were to coincide with a downturn in the industry. The players in the organised segments are susceptible to competition from the unorganised segment as there is little product differentiation in the offerings of various players.

Outlook: Stable
CRISIL believes that Inox would continue to post healthy growth in its topline at a compounded annual growth rate (CAGR) of over 20 per cent over the next two years and achieve healthy profitability, resulting in stronger cash accruals. With the repayment of term loans taken for funding large ongoing and recently completed on-site projects, the company’s overall financial risk profile is also expected to improve due to strengthening of gearing and debt protection indicators.

The outlook may be revised to ‘Positive’ if Inox improves its capital structure and current ratio on a sustained basis, despite new investments in on-site projects. Conversely, the outlook may be revised to ‘Negative’ in case of significant weakening of the company’s capital structure from current levels (due to a large increase in debt to fund future projects), or due to time and cost overruns in the implementation of the ongoing debt-funded projects. In addition, a deterioration in profitability margins, which causes Inox’s cash accruals and hence its liquidity position to decline, could also lead to a negative outlook.

About the company
Inox is a joint venture between the Jain family and Air Products, with each partner holding a 49.74 per cent stake. Air Products manufactures and supplies oxygen, nitrogen, hydrogen, argon, specialty gases, and equipment for gas processing applications to a broad customer base involved in the electronics, steel, energy, process, and healthcare industries. Inox also manufactures air separation plants and nitrogen plants. For 2006-07,Inox reported a PAT of Rs.837.51 million (Rs.659.87 million for 2005-06) on net sales of Rs.3.70 billion (Rs.3.18 billion).