| Century Enka Limited | ||||||
| Ratings Reaffirmed | ||||||
| Rating Action | ||||||
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| 1 crore = 10 million | ||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has reaffirmed its ‘CRISIL A+/Stable/CRISIL A1+’ ratings on the bank facilities of Century Enka Limited (CEL).
The operating performance for fiscal 2022 is expected to improve significantly and revenues are estimated grow by over 50% on account of higher realisations owing to rising trend in Nylon Tyre Cord Fabric (NTCF) prices, stable demand from tyre manufacturers and recovery in demand in the later part of the fiscal for Nylon Filament Yarn (NFY), which caters to garment industry. Growth over the medium term would be driven by healthy demand from tyre industry and growth in readymade garment industry. The operating profit is expected to be in excess of Rs 200 crore in fiscal 2022 due to favorable raw material prices, healthy volumes and higher realisation due to healthy demand. The financial risk profile is expected to remain strong backed by healthy net worth, low gearing, comfortable debt protection metrics and strong liquidity. The company is incurring capex of around Rs ~310 crore which would be mainly funded through internal means and minimal debt is expected to be availed.
For the nine months ending December 31, 2021, the company reported revenues and operating profit of Rs 1522 crore and 193 crore compared to Rs. 776 crore and Rs 48 crore respectively, for the corresponding period in fiscal 2021.
The operating income was Rs 1225 crore in fiscal 2021 (Rs 1445 crore in fiscal 2020) due to impact of the pandemic in the first half of fiscal 2021. The operating performance significantly recovered in the second half and the revenue de-growth for the fiscal was limited to 15%. Despite the de-growth in revenue, operating profit went up to Rs 123 cr from Rs 113 crore helped by inventory gains on low-cost inventory procured at the beginning of the fiscal. The financial risk profile remained healthy with low gearing at 0.01 time, comfortable interest cover of over 86 times and high liquid investments to the tune of Rs 362 crore as on March 31, 2021.
The ratings continue to reflect the company’s healthy financial risk profile and market leadership in NTCF business. These strengths are partially offset by susceptibility of operating margin to volatility in input prices (especially caprolactam) and increasing radialisation in the tyre industry. |
Key Rating Drivers & Detailed Description Strengths:
Financial risk profile is expected to remain healthy with gearing below 0.1 time and strong debt protection metrics of more than 25 times over the medium term. Though the company is incurring capex of Rs ~310 crore between current and next fiscal, it is not expected to have any major impact on the financial risk of the company as it would be mainly funded through internal means with low dependence on debt.
Gearing was strong at 0.01 time with healthy net worth of Rs 1151 crore as on September 30, 2021. Liquidity is strong, backed by liquid investments (including cash and cash equivalents) of around Rs 323 crore as on September 30, 2021.
CEL, with a market share of 23%, is the one of the top three players in the domestic NTCF industry with SRF Limited (rated CRISIL AA+/Stable/CRISIL A1+) being the market leader. It has backward integrated into manufacturing nylon chips, which has helped to maintain operating margin in the range of 8-12% in the recent three fiscals. The company also has strong relationship with clients including tyre manufacturers such as Apollo Tyres Ltd (rated ‘CRISIL AA+/Stable/CRISIL A1+’), MRF Ltd, and Ceat Ltd.
The overall demand for NTCF is expected to remain stable in the long term as pick-up of radialisation trend in the light commercial vehicle and medium heavy commercial vehicle (LCV/MHCV) segments would be partially offset by overall growth in India’s tyre market.
Weaknesses:
Cost of production and profit margin are affected by movement in crude oil prices as the company uses petrochemical-based raw material, mainly caprolactam. Hence, operating margin has fluctuated between 8% and 15% over the five fiscals through 2021. For instance, the operating margin declined from 15.6% in fiscal 2017 to 8.2% in fiscal 2018 on account of fluctuation in caprolactam prices. In the current fiscal, increase in raw material prices was offset by higher realisations on account of strong demand from end user industries.
Furthermore, in NTCF, with domestic prices following import price parity, large-scale dumping in the Indian market by Southeast Asian players has exerted pressure on margins in the past. Imposition of custom duty on NTCF imports has helped domestic players to maintain prices. Sustenance of the custom duties and company’s ability to maintain healthy operating profitability by adequately passing on the raw material prices changes, will remain key monitorables.
Adoption of radial tyres is expected to accelerate over the medium term, in line with global trends. The radialisation in truck and bus tyres (largest category for NTCF) is set to have increased to around 50% in fiscal 2020 from 33% in fiscal 2015 and is likely to reach 60-62% by fiscal 2025. This warrants players to enter the polyester tyre cord fabric (PTCF) and steel tyre cord fabric (STCF), used in radial tyres. The market leader, SRF Ltd, caters to PTCF (used in radial tyres) demand in India, while CEL is currently undertaking capex to set up PTCF facilities which are expected to operationalize by end of fiscal 2024. |
Liquidity: Strong Liquidity is strong due to healthy expected cash accrual of over Rs 130 crore per fiscal over the medium term, against maturing debt obligation of Rs 3-14 crore in fiscal 2022-2024. The company had liquid investments (including cash and cash equivalents) of Rs 323 crore as on September 30, 2021; these are expected to remain at a similar level over the medium term. The company is currently incurring capex of Rs ~310 crore which is majorly expected to funded from internal accruals and available liquidity. Financial flexibility is further supported by unutilised bank limits. |
Outlook: Stable CRISIL Ratings believes CEL will continue to benefit from its established market position and healthy financial risk profile over the medium term. |
Rating Sensitivity factors Upward factors:
Downward factors:
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About the Company Set up in 1965 by the BK Birla group and Enka International (part of the Netherlands-based Akzo Nobel group), CEL manufactures industrial and textile yarn and fabric, such as NTCF and NFY. The NTCF is used as a reinforcement material in Bias/Cross ply tyres which are primarily used in trucks, buses, 2/3-wheelers, and for off the road (OTR) vehicles like mining, forestry, farming, heavy earth moving. NFY is mainly used in sarees, dupattas, dress material and ethnic dresses.
For the nine months ending December 31, 2021, the company reported revenues and operating profit of Rs 1522 crore and 193 crore compared to Rs. 776 crore and Rs 48 crore respectively, for the corresponding period in fiscal 2021. |
Key Financial Indicators*
*CRISIL adjusted numbers |
Any other information: Not applicable |
| Note on complexity levels of the rated instrument: CRISIL Ratings' complexity levels are assigned to various types of financial instruments. The CRISIL Ratings' complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL Ratings' complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments. |
Annexure - Details of Instrument(s)
*Interchangeable with Working Capital Demand Loan and other non-fund based facilities #Interchangeable with other fund based facilities $Interchangeable with Buyers credit ^Fully interchangeable with Buyers credit, Bank Guarantee to the extent of Rs.10 crore and also interchangeable with Working Capital Demand Loan of Rs. 40 crores and Overdraft of Rs.20 Crores |
| Annexure - Rating History for last 3 Years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| All amounts are in Rs.Cr. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annexure - Details of Bank Lenders & Facilities | ||||||||||||||||||||||||||||||||||||||||||||||||||||
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This Annexure has been updated on 25-Feb-2022 in line with the lender-wise facility details as on 25-Feb-2022 received from the rated entity.
*Interchangeable with Working Capital Demand Loan and other non-fund based facilities
#Interchangeable with other fund based facilities
$Interchangeable with Buyers credit
^Fully interchangeable with Buyers credit, Bank Guarantee to the extent of Rs.10 crore and also interchangeable with Working Capital Demand Loan of Rs. 40 crores and Overdraft of Rs.20 Crores
Criteria Details
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