Rating Rationale
December 18, 2019 | Mumbai
IFB Industries Limited
'CRISIL AA-/Stable' assigned to NCD
 
Rating Action
Rs.50 Crore Non Convertible Debentures CRISIL AA-/Stable (Assigned)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has assigned its 'CRISIL AA-/Stable' rating to the non-convertible debenture programme of IFB Industries Limited (IFB).
 
The rating reflects IFB's strong business risk profile, driven by established position in manufacturing of fine blanking components, and strong brand presence in automatic washing machines segment. The ratings also factor in the experienced management and adequate customer diversity in the fine blanking division, diversified product profile of household appliances division, and comfortable financial risk profile. These strengths are partially offset by moderate operating efficiency characterized by moderate and fluctuating operating margins, intensifying competition in the consumer durable industry, and susceptibility to foreign exchange (forex) fluctuations.
 
IFB's strong market position in fine blanking and household appliances led to scale up in operations at a five-year compound annual growth rate (CAGR) of 11.7% to Rs 2,660 crore in fiscal 2019 and is expected to grow further at a CAGR of 10%-12% over the medium term. The strong market position in manufacturing of fine blanking components (revenue and operating profit contribution of 18% and 42% respectively) is characterised by strong market share and healthy customer diversity; further, IFB's presence in the aftermarket segment increases revenue diversity. IFB has witnessed increase in revenue at a 3-year CAGR of 10.3% from fine blanking division, outperforming automotive component manufacturing industry, driven by technological edge and superiority in manufacturing of fine blanks, established client base and continual new product addition. Operating margin from fine blanking division ranged between 11.0% and 15.5% in the past 8 years; the margin may moderate to about 12%-13% in fiscal 2020 amid slowdown in auto segment. 
 
IFB has dominant position in the automatic washing machine industry, as witnessed by healthy volume growth of three-year CAGR of 14.7% and 12.6% in front loading washing machines and top loading washing machines, respectively. IFB's above-average revenue growth has emanated from strong focus on research and development (R&D), continual increase in distribution reach, consistent spends on R&D, niche and premium product strategy and regular product additions. Further, expected ramp up of air conditioners (ACs) manufacturing capacity from fiscal 2021 will drive improvement in profitability and further aid product diversity. The operating margin from household appliances remained volatile, ranging from 4.4% to 7.4% due to forex fluctuations. Going forward, with reducing import content due to in-house manufacturing of ACS, operating margin is likely to improve to more than 5% on a sustained basis.   
 
IFB is incurring a cumulative capital expenditure (capex) of around Rs 360 crore over the next two fiscals for setting up in-house AC manufacturing facility, manufacturing of motors and routing capex in the fine blanking division and the consumer house hold appliances division. The capex would be funded by a mix of debt and internal cash accrual. Expected cash accrual of Rs 125-150 crore and prudent funding of capex will result in steady gearing of less than 0.3 time over the medium term. Further, expected sustenance of cash surplus of Rs 100 crore should aid liquidity.

Analytical Approach

For arriving at the rating, CRISIL has consolidated the business and financial risk profiles of IFB and its subsidiaries, Trishan Metals Pvt Ltd (51.12%% subsidiary, India) and Global Automotive and Appliances Pte Ltd, (100% subsidiary) as they have significant managerial, operational, and financial linkages.

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 presence in fine blanking industry and consumer household appliances industry
IFB is one of the leading players in manufacturing of fine blanking components and manufacturing and marketing of consumer hold appliances. IFB offers a wide range of product under its brand, IFB. Over the years, the company has built a market share of about 45% in fine blanking components and around 27% market share in automatic washing machines in India. It has a dominant position in front load washing machines with market share of about 45% and 15% share in top load washing machines. IFB's market share in automatic washing machines increased to 27% in fiscal 2019 from 21% in fiscal 2015. IFB derives strength from strong focus on R&D resulting from consistent investment in people and infrastructure, continual increase in distribution network and strong product development capabilities.
 
* Diversified business profile
IFB has diversified revenue profile having presence in fine blanking division and household appliances contributing around 18% and 82%, respectively, while EBITDA contribution is at about 42% and 58% respectively for fiscal 2019. Revenue has been on an increasing growth trajectory, both in fine blanking division and consumer household divisions; revenue has been rising at a CAGR of 11.74% during the last three years. IFB has healthy consumer and segment diversity in the fine blanking division. The company has adequate product diversity, led by segmental contribution of around 52% from front load washing machine, 18% from top load washing machines, 13% from microwave ovens, 11% for ACs and remaining 6% from other product categories.
 
* Strong financial risk profile, supported by robust liquidity
The financial risk profile is marked by comfortable debt protection metrics, with gearing of 0.05 time as on March 31, 2019, minimal debt and healthy cash surplus. Gearing is expected to remain below 0.3 time despite undertaking of debt-funded capex in fiscal 2020 and 2021. Operating margin is expected to improve and remain above 5.5% driven by ramp up of inhouse AC manufacturing facility, reducing import of raw material through localisation and contribution from higher margin new product segments. As a result, sash accrual is expected to remain comfortable at Rs 100-125 crore per annum over the medium term and surplus liquidity to sustain over Rs 100 crore (Rs 135 crore as on September 30, 2019). The financial profile will remain robust over the medium term, despite any small or medium size acquisition. However, any significant debt-funded capex or any sizable acquisition would remain closely monitored.
 
Weaknesses
* Moderate operating efficiency
IFB's operating efficiency have remained moderate primarily due to volatility in operating margins. Operating margin ranged in 4.8%-7.2% over last 8 fiscals. The volatility in margins is on account of volatility of raw material prices, higher imported input content, lower margins on traded goods and changes in regulatory policies. While IFB has taken initiatives to reduce volatility in operating margins on sustained basis through indiginisation through reducing import content, sustained improvement and stability of margin in its household appliances segment remain key monitorable.
 
IFB margins are susceptible to fluctuations in raw material prices since raw material cost and purchases of traded goods constitutes around 62% of the cost of sales. Over the past few years, prices of primary raw materials (includes steel, polymer) used in the consumer durables industry and automotive industry, have remained volatile. Prices were on an upward trend till fiscal 2014, thereafter declined till fiscal 2017, and rose again during fiscals 2018 and 2019. However, raw material prices moderated in fiscal 2020. Further, downstream acquisition of stake in Trishan Metals Pvt Ltd would result in timely availability of raw materials and reduce volatility in the operating margin.
 
Due to fluctuating operating margin, IFB's return on capital employed ratio has also been volatile in the range of 15-30%. Furthermore, higher capex in near term along with volatile margin may impact return on capital employed till the investment results into better margin.
 
* Exposure to cyclicality in demand in automobile industry
While IFB's revenue profile derives strength from healthy customer diversity and strong segment diversity, it remains closely aligned to the performance of customers in the auto segment and industry. Due to large dependence on auto OEMs, IFB's revenue prospects are exposed to cyclical demand patterns inherent to the automobile industry and ability of auto OEMs to sustain their operating performance and ramp up their operations.
 
* Vulnerability to intense competition in household appliances segment
IFB faces stiff competition from large, organised players such as LG Electronics India Pvt Ltd, Samsung India Electronics Ltd, Whirlpool of India and Godrej and Boyce Manufacturing Company Ltd, yet has managed to gain market share in automatic washing machine segment, due to its strong distribution network and continuous focus on R&D and continual product development. The front load washing machines volumes grew at four-year CAGR of 10.8% and top load washing machines grew at 20.4% as against the CAGR of 9%, recorded by the industry.
Liquidity Strong

IFB has adequate liquidity, driven by expected healthy annual cash accrual of Rs 100-125 crore and cash and equivalents of about Rs 135 crore as on September 30, 2019. IFB also has average bank limit utilisation of 54% during the 12 months ended September 30, 2019. The company has minimal dependence on external debt. Cash accrual, cash & cash equivalents, and unutilised bank lines should be sufficient to meet the repayment obligations of Rs 9.9  crore and 13.3 crore during fiscal 2020 and 2021 as well as capex of Rs 250 crore and 125 crore and incremental working capital requirements.

Outlook: Stable

CRISIL believes IFB will continue to benefit from a healthy market share and established brand name in fine blanking and consumer household appliances division. Financial risk profile should remain comfortable despite the debt-funded capex undertaken in fiscal 2020.  
 
Rating Sensitivity factors
Upward factors
* Sustained increase in scale and improvement in operating margin to over 7% due to increase in market share, localisation of manufacturing and improvement in revenue diversity
* Healthy financial risk profile and cash surplus of over Rs 100 crore
 
Downward factors
* Weakening of the market position considerably in automatic washing machines and moderation in operating margin below 4%
* Deterioration of capital structure and debt protection metrics, due to sizeable, debt-funded capex or acquisition for instance debt/earnings before interest, tax, depreciation and amortization increasing to more than 2 times

About the Company

Incorporated in 1974, currently IFB is being managed by professional management and headed by Mr Bikram Nag.  IFB is currently operating in two segments, manufacturing of fine blank components and manufacturing and marketing of consumer durable goods. IFB manufactures fine blanking components for two wheelers, four wheelers, heavy vehicles and electricals OEMs, with an established brand presence and diversified product portfolio of front load washing machines, top load washing machines, dryers, ACs, microwave ovens, dishwashers, modular kitchen, and chimneys.
 
IFB has its manufacturing facilities for fine blanking division in Kolkata and Bengaluru and for consumer appliances in Goa and Bengaluru.
 
For the six months ended September 30, 2019, net profit was Rs 31.28 crore on revenue of Rs 1,415.4 crore, as against net profit Rs 47.91 crore on revenue of Rs 1,306.1 crore in the corresponding period of the previous fiscal.

Key Financial Indicators
Particulars Unit 2019 2018
Revenue Rs crore 2,660 2,219
Profit after tax (PAT) Rs crore 71 79
PAT margins % 2.7 3.6
Interest coverage Times 11.96 32.77
Net debt/adjusted networth Times 0.05 0.06

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL 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 the Instrument Date of Allotment Coupon Rate (%) Maturity Date Issue size
(Rs crore)		 Rating assigned
with outlook
NA Non-Convertible Debenture^ NA NA NA 50.00 CRISIL AA-/Stable
^Yet to be raised
 
Annexure - List of entities consolidated
Names of Entities Consolidated Extent of Consolidation
Trishan Metals Private Limited 51.12%
Global Automotive & Appliances Pte Ltd 100%
Annexure - Rating History for last 3 Years
  Current 2019 (History) 2018  2017  2016  Start of 2016
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Non Convertible Debentures  LT  0.00
18-12-19  		CRISIL AA-/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
Rating criteria for manufaturing and service sector companies
CRISILs Criteria for Consolidation
Understanding CRISILs Ratings and Rating Scales

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