Rating Rationale
July 13, 2022 | Mumbai
Empire Industries Limited
Rating reaffirmed at 'CRISIL A-/Stable'; Rated amount enhanced for Fixed Deposits
 
Rating Action
Rs.96 Crore (Enhanced from Rs.86 Crore) Fixed DepositsCRISIL A-/Stable (Reaffirmed)
1 crore = 10 million
Refer to Annexure for Details of Instruments & Bank Facilities

Detailed Rationale

CRISIL Ratings has reaffirmed its rating on the fixed deposit programme of Empire Industries Limited (EIL) at 'CRISIL A-/Stable'.

 

The rating continues to reflect EIL’s established track record in virtrum glass segment, diversified businesses segments and healthy cashflows from lease rentals business and robust financial risk profile marked by strong networth and comfortable capital structure. These rating strengths are partially offset by its large working capital requirements, volatile profitability due to trading business and average debt protection metrics.

 

CRISIL Ratings had migrated its rating on the fixed deposit programme of EIL to 'CRISIL A-/Stable' from 'FA/Stable' on 24th June 2022. The rating migration follows the revision in CRISIL Ratings’ rating scale for fixed deposit (FD) programmes, which is now aligned with the SEBI-standardised 20-point long term scale. Previously, CRISIL Ratings used a 14-point scale for assigning ratings to the FD programmes of issuers. This alignment is in compliance with the regulatory guidelines as per circular issued by the Securities and Exchange Board of India (SEBI) on July 16, 2021 and the subsequent SEBI circular dated April 1, 2022, for standardizing the rating scales used by the Credit Rating Agencies.

Analytical Approach

Unsecured loans from Promoter Directors, outstanding at Rs 1.1 crore as on March 31, 2022, have been treated as debt.

Key Rating Drivers & Detailed Description

Strengths:

Diversified businesses segments:

Extensive industry experience of more than 6 decades of the key promoter, Mr. SC Malhotra, has led to EIL diversifying its business from operating a vitrum glass manufacturing division in 1960s to various business segments such as trading of food products, trading of machine tools and industrial equipment, export of   products and services ,   providing vending machine services, lease rentals from its commercial properties and real estate development. Strong understanding of the market dynamics in diverse segments and strong relationships with customers and suppliers will continue to support its business risk profile.

 

Established track record in vitrum glass segment:

Strong track record in vitrum glass manufacturing has resulted in established long-standing relationships with reputed pharmaceutical companies such as GlaxoSmithKline Pharmaceuticals Ltd (GSK), Pfizer Ltd, Merck Ltd and Cipla Ltd which leads to repeat business. On the back of constant process upgrades and capacity expansion  , revenue from the manufacturing division have increased to Rs 211 crore in fiscal 2022 from Rs 146 crore in previous fiscal. Revenues are expected to grow at a steady pace supported by established customer network and strong demand prospects.

 

Healthy cashflows from lease rentals business:

Bulk of EIL’s cashflows are derived from lease rentals received from its commercial properties in Mumbai, aided by healthy occupancy rates and prime location of the properties. Reputed clientele has resulted in timely collection of rents throughout fiscal 2021 and 2022, albeit rent discounts were given to few clients during FY 2020-21. Most of the rental income is unencumbered and these cash inflows supports the working capital requirements in other segments. While strong operating profitability across lease rentals division continues to support the other segments.

 

Comfortable capital structure:

EIL’s capital structure is marked by strong networth of Rs 255 crore and moderate total outside liabilities to adjusted networth (TOLANW) ratio of 1.8 time as on March 31, 2022. The capital structure is expected to remain comfortable over the medium term supported by healthy accretion to reserves as well as scheduled term loan repayments. EIL’s management has a committed stance of maintaining gearing below 1.5 times at all times.

 

Weaknesses:

Volatile profitability due to trading division:

Overall profitability has remained volatile between 8.8-13.8% over the past four fiscals ended March 2022. While profitability in lease rental and real estate development divisions improved during fiscal 2022, losses reported in the trading division continued to pressure margins. In addition, margins in manufacturing division also moderated in fiscal 2022 due to increase in natural gas prices. EIL discontinued its export trading division (prawns/shrimp) in fiscal 2022 which should support the company improve its margin profile, however, improvement and sustenance of profitability remains a key monitorable.

 

Working capital intensive operations:

EIL’s operations are working capital intensive, as reflected in gross current assets of 195 to 200 days over past 4 fiscals ended March 2022. This is due to large credit of 80-100 days provided to its customers and inventory of 80-130 days maintained for manufacturing and trading divisions. Higher inventory levels are also partly attributed to work-in-progress inventory for real estate. The working capital requirement are partially funded by creditors to 30-50 days. Although working capital management is expected to slightly improve as the company discontinued its exports of prawns/shrimp division, overall continuing operations are expected to remain working capital intensive over the medium term.

 

Average debt protection metrics:

Debt protection metrics were average, with interest coverage ratio of 2.5 times and net cash accruals to total debt of 0.17 times for fiscal 2022 (as against 1.9 times and 0.14 times for previous fiscal). The interest coverage is expected to improve over the medium term supported by term loan repayments and recovery in profitability.

Liquidity: Strong

Liquidity remains adequate, marked by healthy cash generation and moderate bank limit utilization. Expected net cash accrual of more than Rs 40 to 45 crore per fiscal in fiscals 2023 and 2024, should comfortably cover the annual repayment obligation of Rs 16.6 crore. The fixed deposit repayments are managed from renewals and fresh issuances every year. Fund-based bank limit was utilized moderately at an average of 18% during the 12 months through March 2022. EIL also had cash and cash equivalents of Rs 50 crore (of which Rs 6.5 Cr were encumbered) as on March 31, 2022. Current ratio was moderate at 1.7 times as on March 31, 2022. Internal cash accrual, cash and cash equivalents, and unutilised bank lines should be sufficient to meet repayment obligation as well as incremental working capital requirement over the medium term. With a gearing of 0.94 time, EIL has sufficient gearing headroom, to raise additional debt to meet its capex or working capital requirement.

Outlook: Stable

CRISIL Ratings believes EIL will continue to benefit from extensive experience of its promoters, established relationship with customers and suppliers and stable cashflows arising out of lease rentals business.

Rating Sensitivity factors

Upward factors

  • Sustained improvement in scale of operation and operating margin leading to cash accruals of above Rs 50 Cr
  • Reduction in working capital cycle leading to improved liquidity, while sustaining its capital structure and recovery in interest coverage to above 3 times

 

Downward factors

  • Significant decline in revenue or profitability, especially from lease rental division, leading to significantly lower cash accruals
  • Larger debt-funded capital expenditure or increase in its working capital requirements, weakening the liquidity and gearing above 1.5 times

About the Company

EIL, incorporated on 1900 and promoted by Mr. S C Malhotra and family, is a public limited company operating in diverse business segments such as vitrum glass manufacturing, trading division involving imports and exports of marine food, trading of machine tools/industrial equipment and related services, vending machine services and diversified real estate businesses including renting commercial properties and real estate development projects. It is listed on the Bombay Stock Exchange.

Key Financial Indicators

As on / for the period ended March 31

 

2022*

2021

Operating income

Rs crore

546

490

Reported profit after tax

Rs crore

24

13

PAT margins

%

4.39

2.65

Adjusted Debt/Adjusted Net worth

Times

0.87

0.94

Interest coverage

Times

2.56

1.91

*based on provisional financials

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)

ISIN

Name of instrument

Date of

Allotment

Coupon

Rate (%)

Maturity date

Issue Size

(Rs. Cr)

Complexity levels

Rating Assigned

with Outlook

NA

Fixed Deposit Programme

NA

NA

NA

96

Simple

CRISIL A-/Stable
Annexure - Rating History for last 3 Years
  Current 2022 (History) 2021  2020  2019  Start of 2019
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fixed Deposits LT 96.0 CRISIL A-/Stable 24-06-22 CRISIL A-/Stable 16-08-21 F A/Stable 30-11-20 F A/Stable   -- --
All amounts are in Rs.Cr.

   

Criteria Details
Links to related criteria
CRISILs Approach to Financial Ratios
Rating criteria for manufaturing and service sector companies
CRISILs Bank Loan Ratings - process, scale and default recognition
CRISILs criteria for rating debt backed by lease rentals of commercial real estate properties
CRISILs criteria for rating fixed deposit programmes

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