Detailed Rationale

CRISIL Ratings has reaffirmed its ratings on the bank facilities of Hindustan Platinum Private Limited (HPPL) at 'CRISIL A+/Stable/CRISIL A1’.

 

The ratings continue to reflect the company’s established market position in the precious metals refining business, backed by diverse clientele, extensive industry experience of the promoters, sound risk management policies and a healthy financial risk profile. These strengths are partially offset by vulnerability to volatility in precious metal prices, large working capital requirement and exposure to intense competition in the global market.

 

Revenue is expected to grow 12-15% during fiscal 2021 on account of strong demand in the chemicals business driven by strong demand from the pharma industry, enhanced capacity, and growth in the overseas business. Operating margin is expected to remain at 12-14% over the medium term. For the six months ending September 30, 2020, turnover was approximately Rs 890 crore; recording a year-on-year growth of around 19%.

 

For fiscal 2020, operating performance was in line with CRISIL Ratings’ expectations, with a year-on-year revenue growth of 8% and operating margin of 12.4% (compared to 17% in fiscal 2019). Margin was higher in fiscal 2019 on account of a one-time benefit in raw material cost because of sale of residual stock that was unaccounted for as the value of the metal could not be ascertained.

 

Further, export contribution to the overall revenue increased to 50% in fiscal 2020 from 25% during fiscal 2017. Establishment of a subsidiary in the UAE for international procurement has opened up global markets for the company and also enabled it to maintain operating efficiency through cost-efficient procurement. Acquisition of ABB Ltd’s (rated ‘A-/Stable/A-2’ by S&P Global Ratings) Humacao electrical contacts manufacturing plant in Puerto Rico would help strengthen the company’s position in the electrical contacts division.

 

HPPL is also undertaking a capital expenditure (capex) to enhance capacity at its existing plant in Navi Mumbai, which would further support the growth in scale of operations and operating efficiency.

 

HPPL is also expected to maintain healthy financial risk profile because of steady cash accruals. Healthy cash accrual in the recent fiscals have led to a significant improvement in networth and debt protection metrics. As on March 31 2020, the company had contingent liabilities of Rs 1,343 crore predominately on account of sales, excise, and other tax disputes. Crystallisation of the above liabilities and its impact on the financial risk profile of the company would be a key rating sensitivity factor.

Analytical Approach

• For arriving at its ratings, CRISIL Ratings has combined the business and financial risk profiles of HPPL, its wholly owned subsidiaries, Hindustan Platinum International Ltd (Mauritius), Hindustan Platinum P.R. LLC (Puerto Rico) and Hindustan Platinum DMCC (UAE).
• CRISIL Ratings has treated metal loans from banks and financial corporations as part of HPPL’s debt to arrive at the total outside liabilities to tangible networth ratio.

 

Please refer Annexure - Details of Consolidation, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

• Established position in the precious metals business: HPPL has established itself as a leading manufacturer and refiner of precious metal products with wide and diverse applications. It has a strong clientele in the domestic market, which includes players in the pharmaceutical, petrochemical, electrical, fertiliser, textiles, glass, and electronics industries. In the recent years, HPPL has expanded its presence in the global market through its subsidiaries, which is reflected in a 55% CAGR (compound annual growth rate) in exports in the last three fiscals.

 

• Extensive experience of the promoters: HPPL benefits from the promoters’ extensive experience of more than six decades and their technical expertise in the precious metals business should continue to support the company.

 

• Effective risk management policies: The risks related to volatility in the prices of precious metals and foreign exchange (forex) rates is mitigated through efficient risk management policies. The entire exposure is hedged through plain vanilla forward contracts, which has helped to maintain and safeguard operating profitability. For instance, despite significant volatility in precious metal prices, operating margin has remained between 10% and 14% over the past few fiscals, except for 2019 when margin improved to 17% due to a one-time benefit in raw material cost.

 

• Healthy financial risk profile: Networth is expected to strengthen over the medium term with healthy accretion to reserves. It improved to Rs 612 crore as on March 31, 2020, from Rs 348 crore as on March 31, 2017. Debt protection metrics are expected to remain moderate, with net cash accrual to adjusted debt ratio of more than 0.3 time and interest coverage ratio of over 8 times, over the medium term. HPPL is undertaking capex of Rs. 150-170 crore to enhance its manufacturing capacity, which is expected to be completed in fiscal 2022. The capex is expected to be funded through a prudent mix of debt and internal accruals. The financial risk profile is expected to remain comfortable over the medium term.

 

Weakness:

• Susceptibility to volatility in raw material prices: Raw materials account for over 75% of total operating income on an average. Sharp volatility in input prices and in demand affects revenue. Profitability, however, has not been significantly impacted because of robust hedging policies for metal prices and forex rates, and the ability to pass on price increase to customers, albeit with some lag.

 

• Working capital-intensive operations: Inventory was significant at 210 days as on March 31, 2020. Inventory level and reliance on bank borrowings are expected to remain high over the medium term. However, the risk is partially offset by the extremely liquid nature of the inventory (precious metals) and efficient risk management policies.

 

• Exposure to intense competition from international players: While HPPL has no major domestic competitors, it faces intense competition from established international players such as Johnson Matthey Plc (London, the UK), Umicore (Belgium), and Heraeus Holding GmbH (Hanau, Germany; rated ‘BBB+/Stable/A-2’ by S&P Global Ratings), which have presence in the country either through branches or through affiliates and joint ventures.

Liquidity: Strong

Cash accrual is expected to be Rs 140-160 crore per annum in fiscals 2021 and 2022 against expected term debt repayment of Rs 6 crore in fiscal 2022. Cash and cash equivalents stood at Rs 40 crore as on March 31, 2020. Bank limit of Rs 888.5 crore (interchangeable between fund-based and non-fund-based to the extent of Rs 642.5 crore) was utilised at 89% on average over the 12 months through November 2020. Though the bank limit utilization has remained high in the recent months, it is expected to ease going forward.

Outlook Stable

CRISIL Ratings believes HPPL will continue to benefit over the medium term from its established market position in the precious metal refining business and improving geographical diversity. Also, it will sustain its healthy financial risk profile because of steady cash accrual.

Rating Sensitivity factors

Upward factors

• Significant improvement in operating performance with revenue growing at a CAGR of over 15% and profitability improving to over 17% on a sustained basis
• Reduction in working capital borrowing, thereby improving financial risk profile

 

Downward factors

• Weakening of business performance on account of decline in revenue by over 20% and profitability falling below 9%, thereby impacting cash accrual
• Deterioration in financial risk profile on account of stretch in working capital cycle, especially inventory, or any large, debt-funded capex
• Material impact on financial risk profile because of crystallisation of contingent liabilities

About the Company

Incorporated in 1961 in Mumbai and promoted by Choksi brothers, HPPL refines and fabricates precious and semi-precious metals such as platinum, palladium, rhodium, ruthenium, gold, and silver for use in the pharmaceuticals, chemicals, oil refineries, petrochemicals, electrical, fertilisers, man-made fibres, and fibre and optical glass industries. The metals are also used for scientific research. HPPL has been awarded the ‘London Good Delivery’ standard for platinum, palladium, and silver.

Key Financial Indicators

As on / for the period ended March 31		2020	2019
Revenue	Rs crore	1475	1371
Adjusted profit after tax (PAT)	Rs crore	115	137
Adjusted PAT margin	%	7.8	10.0
Adjusted debt/adjusted networth	Times	0.78	0.81
Interest coverage	Times	8.86	18.99

 

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of Instrument	Date of Allotment	Coupon Rate (%)	Maturity Date	Issue Size (Rs Cr)	Complexity level	Rating Assigned with Outlook
NA	Bank guarantee &	NA	NA	NA	10.00	NA	CRISIL A+/Stable
NA	Bank guarantee	NA	NA	NA	246.00	NA	CRISIL A1
NA	Cash credit	NA	NA	NA	10.00	NA	CRISIL A+/Stable
NA	Cash credit ^	NA	NA	NA	450.00	NA	CRISIL A+/Stable
NA	Standby Letter of Credit *	NA	NA	NA	172.50	NA	CRISIL A+/Stable

&Fully interchangeable with fund-based facility

**Fully interchangeable with non-fund-based facility

^Commercial standby letter of credit for metal loan for USD 23 million (approximately Rs 172.50 crore) fully interchangeable with fund-based facility

Annexure – List of entities consolidated

Names of Entities Consolidated	Extent of Consolidation	Rationale for Consolidation
Hindustan Platinum DMCC	100%	Wholly owned subsidiary
Hindustan Platinum P.R. LLC	100%	Wholly owned subsidiary
Hindustan Platinum international Limited	100%	Wholly owned subsidiary