Detailed Rationale

CRISIL Ratings has upgraded its ratings on the bank facilities of ION Exchange India Limited (IEIL; part of the Ion Exchange group) to ‘CRISIL A/Stable/CRISIL A1’ from 'CRISIL A-/Positive/CRISIL A2+'.

 

The upgrade reflects an improvement in the business profile, driven by an increase in scale of operations, order book value and diversity in the order book, along with a steady operating margin. Consolidated operating income grew 9% to Rs 1,576crore in fiscal 2022, supported by rise in revenue from the chemicals and consumer products segments, by 27% and 26%, respectively. The order book from the engineering segment increased to Rs 2,586 crore as on March 31, 2022 (Rs 1,000 crore as on March 31, 2021), with the company bagging an order worth Rs 1,165 crore from the Uttar Pradesh government under the Jal Jeevan Mission. The order worth Rs 250 crore in Sri Lanka should be completed in fiscal 2023. The strong bid pipeline of Rs 6,700 crore also offers strong revenue visibility.

 

Operating margin dipped slightly to 13.6% in fiscal 2022, from 14.1% in fiscal 2021, due to an increase in raw material prices. Healthy profitability of the chemicals division provided a cushion to overall profitability in fiscal 2022. Operating margin should be in the range of 14-15% with greater share of higher-margin engineering projects and sustenance of strong profitability in the chemical segment. Driven by the strong order book and better profitability, IEIL is likely to generate net cash accrual of over Rs 250 crore each in fiscals 2023 and 2024, against capital expenditure of Rs 75-100 crore and repayment of Rs 10-20 crore.

 

Sustained improvement in the financial risk profile is evident in the net cash accrual to adjusted debtratio of over 4 times in fiscal 2022 (3.27 times in fiscal 2021) and the stable working capital cycle. The total outside liabilities to networth (TOL/TNW) ratio came down to less than 1.5 times as on March 31, 2022, from 2.86 times as on March 31, 2020, and should remain below 1.5 times in the medium term. Despite capital expenditure of over Rs 250 crore over fiscals 2023-2025, debt may remain below Rs 100 crore, aided by strong cash accrual. Liquidity is adequate strong with healthy cash accrual, minimal debt and expected improvement in working capital cycle.

 

The ratings continue to reflect the established market position of the Ion Exchange group in the water treatment segment, its diverse product mix, and comfortable financial risk profile.  These strengths are partially offset by the working capital-intensive operations and susceptibility to economic downturns.

Analytical Approach

For arriving at its ratings, CRISIL Ratings has combined the business and financial risk profiles of IEIL and its subsidiaries. This is because all these companies, collectively referred to as the Ion Exchange group, have a common management, have significant transactional linkages and operate in the same business. IEIL has also extended corporate guarantees for a portion of debt contracted by its subsidiaries. Furthermore, CRISIL Ratings has factored in the debt of one associate company, Aquanomics Systems Ltd (ASL), as IEIL has extended corporate guarantees for the debt contracted by ASL.

 

Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

Established market position in the water treatment business: The Ion Exchange group has strong expertise in providing the full range of products in the water treatment segment. Longstanding presence of the promoters and a robust nationwide aftersales service have helped the group establish the brand. Revenue is well-diversified, with the engineering, chemicals and consumer products divisions contributing 58%, 34% and 8%, respectively, to sales in fiscal 2022. The customer base is also spread over various industries, comprising JSW Steel Ltd and Steel Authority of India Ltd; L&T Ltd (‘CRISIL AAA/Stable/CRISIL A1+’) and Bharat Heavy Electricals Ltd (‘CRISIL AA-/Negative/CRISIL A1+’); Jindal Power Ltd and NTPC Ltd (‘CRISIL AAA/Stable/CRISIL A1+’); Indian Oil Corporation Ltd (‘CRISIL AAA/Stable/CRISIL A1+’), Hindustan Petroleum Corporation Ltd (‘CRISIL AAA/Stable/CRISIL A1+’), and Vedanta Ltd (‘CRISIL AA/Stable/CRISIL A1+’). The group also caters to players in other sectors such as auto, food and beverages, paper, pharma, chemical and cement.

 

The engineering segment had orders worth Rs 2,586 crore as on March 31, 2022, which include the Sri Lankan project (Rs 250 crore) and orders from the Uttar Pradesh government (Rs 1,156 crore). The company also has a strong bid pipeline of Rs 6,700 crore. The diverse end-user industry base protects the Ion Exchange group from downturn in any industry.

 

Operating margin in the chemicals segment is healthy, and the group has incurred moderate capital expenditure (capex) over the years, especially in the resin division, to increase capacity. There are plans to set up an additional resin manufacturing facility as a greenfield project. The group has applied for the required licenses and approvals, which got delayed because of the pandemic.

 

Comfortable financial risk profile: Networth is at Rs 655 crore as on March 31, 2022, vis-a-vis Rs 495 crore a year before. Debt protection metrics are strong, with net cash accrual to total debt and interest coverage ratios at 4.4 times and 21 times, respectively, in fiscal 2022. The metrics should remain healthy over the medium term, aided by sustained improvement in operating performance. Gearing is healthy below 0.2 time as on March 31, 2022 (0.1 time as on March 31, 2021) and should remain comfortable.

 

The TOLTNW ratio was high at 3.57 times as on March 31, 2019, due to receipt of large customer advances, but improved to 1.42 times as on March 31, 2022, with phased execution of orders. However, disruptions caused by the pandemic may lead to spillover of unfinished orders to fiscal 2023. Improvement in the ratio, amidst execution of the order from Sri Lanka in fiscal 2023, remains a key monitorable.

 

Weaknesses

Working capital-intensive operations: Gross current assets are high at 228 days as on March 31, 2022 (245 days in the previous fiscal), led by receivables of 117 days (against 115 days) and modest inventory of 50 days. Payables declined to 205 days as on March 31, 2022, from over 215 days, a year ago. Back-to-back arrangements with suppliers partly aid working capital management.

 

Susceptibility to economic cycles: Investments in the engineering and capital goods industries remain susceptible to economic cycles. Slowdown in the Indian economy can lead to curtailment of capex in sectors such as steel, infrastructure and power, which are key customer segments for the IEIL group.

Liquidity: Strong

Expected cash accrual of over Rs 250 expected per fiscal in 2023 and 2024 should comfortably cover the yearly debt of Rs 17 crore and capital expenditure of Rs 75-100 crore. Unencumbered cash was Rs 53 crore as on March 31, 2022. Fund-based limit was utilised below 15% over the 12 months through April 2022. Liquidity should remain strong over the medium term, backed by strong cash accrual and low external debt.

Outlook: Stable

CRISIL Ratings believes IEIL group will continue to benefit from its established market position, healthy order pipeline in the engineering division, strong profitability in the chemicals division and an improved financial risk profile.

Rating Sensitivity Factors

Upward Factors:

• Growth in revenue and steady operating margin, leading to net cash accrual of over Rs 180 crore, supported by stable order inflow in the engineering segment and timely execution of projects
• Comfortable financial risk profile i.e. sustenance of TOL/TNW below 1.5-1.7 times

 

Downward Factors:

• Weaker operating performance, owing to significant slowdown in order inflow or delay in execution of the Sri Lanka project, leading to operating margin below 7%
• Considerable stretch in working capital cycle
• Larger-than-expected debt-funded capex weakening key credit metrics

About the Company

The flagship company of the ION Exchange group, IEIL was incorporated in 1964 as a 60% subsidiary of the UK-based Permutit Company. The foreign holding was reduced in a phased manner and the paid-up share capital has been held by resident Indians since 1995. IEIL began manufacturing ion-exchange resins at its plant in Ambernath, Maharashtra in 1965 and diversified into chemical treatment of water in 1982.

 

IEIL operates in three key segments - engineering, chemical, and consumer products and has six factories in five states. Each business is managed by a dedicated team. The engineering segment plans and executes orders for installation of large and medium-sized water and effluent treatment plants. The chemicals division manufactures ion-exchange resins and industrial chemicals and sells them in India, the US, the Middle East, Europe, and South-East Asia. The consumer products segment offers a range of water-care products for homes, institutions and community under the Zero-B brand.

Any other information: Not applicable