Rating Rationale
November 30, 2020 | Mumbai
Empire Industries Limited
'FA/Stable' assigned to FD
 
Rating Action
Rs.82 Crore Fixed Deposits FA/Stable (Assigned)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has assigned its 'FA/Stable' rating to the fixed deposit programme of Empire Industries Limited (EIL).
 
The rating reflects 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, healthy capital structure and sound debt protection metrics. These rating strengths are partially offset by its large working capital requirements, scalability in vitrum glass division post heavy capex and modest profitability in manufacturing and trading business.

Key Rating Drivers & Detailed Description
Strengths:
* 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 Limited, Merck Limited and Cipla Limited which leads to repeat business. On the back of constant upgrades in its production facilities, revenue from the manufacturing division have seen a steady growth.
 
* 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, 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 has led to steady increase in revenues from Rs 296 crore in fiscal 2015 to Rs 575 crore in fiscal 2020.
 
* 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. Most of the rental income is unencumbered and these cash inflows supports the working capital requirements in other segments.
 
* Robust financial risk profile:
EIL's capital structure is marked by strong networth of Rs 233 crore and moderate total outside liabilities to adjusted networth (TOLANW) ratio of 2.36 time as on March 31, 2020. Debt protection metrics were adequate, with interest coverage ratio of 2.95 times. The financial risk profile is expected to remain robust over the medium term supported by term loan repayments and healthy accretion to reserves.
 
Weaknesses:
* Large working capital requirements:
EIL's operations are working capital intensive, as reflected in gross current assets of 200-230 days over past 4 fiscal ended March 2020. This is due to large credit of 90-100 days provided to its customers and inventory of 90-120 days maintained for manufacturing and food trading divisions. The working capital requirement are partially funded by creditors to 45-60 days. The working capital requirements are expected to remain at similar levels over the medium term.
 
* Modest profitability across trading and manufacturing divisions:
Despite large capital employed across manufacturing and trading divisions, profitability has remained at modest levels. While strong operating profitability across lease rentals division continues to support the other segments, any delay in rentals could impact the operations across business divisions.
 
* Scalability in vitrum glass division post heavy capex
EIL incurred large capex of Rs 60 crore (75% debt-funded) in fiscal 2020 towards capacity enhancement, technological upgradations and debottlenecking processes. Timely ramp-up in operations in the division along with higher efficiency levels expected as a result of process improvements will remain a key monitorable factor over the medium term.
Liquidity Adequate

Liquidity remains adequate, marked by healthy cash generation and moderate bank limit utilization. Expected net cash accrual of more than Rs 30 crore per fiscal in fiscals 2021 and 2022, should comfortably cover the annual repayment obligation of Rs 11 crore and Rs 13 crore, respectively. The fixed deposit repayments are managed from renewals and fresh issuances every year. Fund-based bank limit of Rs 93 crore was utilized moderately at an average of 47% during the 12 months through August 2020. EIL also had cash and cash equivalents outstanding at Rs 34.6 crore as on March 31, 2020. Current ratio was moderate at 1.58 times as on March 31, 2020. 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.

Outlook: Stable

CRISIL 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 factor
* 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 financial risk profile

Downward factors
* Significant decline in revenue or profitability, leading to significantly lower cash accruals
* Larger debt-funded capital expenditure weakening the capital structure with gearing above 1.5 times
* Substantial increase in its working capital requirements weakening its liquidity profile.

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 Unit 2020 2019
Operating income Rs crore 574.8 534.7
Reported profit after tax Rs crore 34.2 45.4
PAT margins % 5.9 8.5
Adjusted Debt/Adjusted Networth Times 1.25 0.95
Interest coverage Times 2.95 4.73

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments and are included (where applicable) in the Annexure -- Details of Instrument in this Rating Rationale. For more details on the CRISIL complexity levels, please visit www.crisil.com/complexity-levels.
Annexure - Details of Instrument(s)
ISIN Name of instrument Date of allotment Coupon rate (%) Maturity date Issue size (Rs.Crore) Complexity levels Rating assigned
with outlook
NA Fixed Deposit Programme NA NA NA NA Simple FA/Stable
Annexure - Rating History for last 3 Years
  Current 2020 (History) 2019  2018  2017  Start of 2017
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fixed Deposits  FD  82.00  FA/Stable    --    --    --    --  -- 
All amounts are in Rs.Cr.
Links to related criteria
CRISILs Approach to Financial Ratios
CRISILs Bank Loan Ratings - process, scale and default recognition
CRISILs criteria for rating debt backed by lease rentals of commercial real estate properties
Rating criteria for manufaturing and service sector companies
The Rating Process

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