Detailed Rationale

CRISIL Ratings has revised its rating outlook on the long-term bank facilities of Ion Exchange India Ltd (IEIL; part of the Ion Exchange group)to ‘Positive’ from ‘Stable’ and reaffirmed the rating at ‘CRISIL A-‘. The short-term rating has been reaffirmed at ‘CRISIL A2+’.

 

The outlook revision reflects the expectation that the business risk profile of the group may strengthen over the medium term if it sustains improvement in operating profitability while maintaining scale. Better cash accrual and working capital cycle should also support improvement in leverage, with total outside liabilities to total networth ratio (TOLTNW) moderating to below 3 times as on March 31, 2020, from above 3.5 times in the previous fiscal. Gross current assets (GCAs) improved to 216 days from 235 days and is expected to remain in a similar range over the medium term.

 

Operating profit before depreciation, interest, and tax margin was 11% for the nine months ended December 31, 2020, vis-à-vis 8.4% for the corresponding period in fiscal 2020.The group has three main divisions – engineering, chemicals and consumer products. Estimated order book under the engineering division stood at ~Rs1,000 crore as on March 31, 2021. The group is bidding for new orders under this which, if won, may provide further fillip to revenue over the medium term. Healthy profitability of the chemicals division is expected to provide cushion to overall margin. Covid-19 may impact the pace of engineering projects and overall profitability and will, therefore, remain a key monitorable. With the nationwide lockdown in April 2020, civil works in the engineering division was impacted for 1-2 months. Impact on the chemicals division was relatively lower   since the supplies include many of the business segments falling under essential services. Despite the pandemic, revenue for fiscal 2021 is estimated to be similar as that of fiscal 2020.

 

The ratings continue to reflect the established market position of Ion Exchange group in the water treatment segment, diverse product mix, and comfortable financial risk profile on account of healthy networth and strong debt protection metrics. These strengths are partially offset by 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 and 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 of IEIL’s associate companies, 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 group has strong expertise in providing the full range of products in the water treatment segment. Longstanding presence and robust nationwide after sales service have helped to establish its brand. Revenue is diversified with engineering, chemicals and consumer products divisions contributing 61%, 31% and 8%, respectively, to sales in fiscal 2021. The group caters to customers in diverse industries: JSW Steel Ltd and Steel Authority of India Ltd in the steel industry; Larsen and Toubro Limited (‘CRISIL AAA/FAAA/Stable/CRISIL A1+’) and Bharat Heavy Electricals Ltd (‘CRISIL AA/Negative/CRISIL A1+’) in the engineering segment; Jindal Power Ltd and NTPC Ltd (‘CRISIL AAA/FAAA/Stable/CRISIL A1+’) in the power industry; Indian Oil Corporation Ltd (‘CRISIL AAA/Stable/CRISIL A1+’), Hindustan Petroleum Corporation Ltd (‘CRISIL AAA/FAAA/Stable/CRISIL A1+’), and Vedanta Ltd ( ‘CRISIL AA/Stable/CRISIL A1+’) in the refinery industry; apart from players in other sectors such as auto, food and beverages, paper, pharma, chemical and cement segments.

 

The engineering segment witnessed moderate order inflow of Rs 402 crore in fiscal 2020 due to a muted fourth quarter following Covid-19. However, as on March 31, 2021, estimated order book was Rs 600-650 crore which, along with pending orders worth about Rs 393 crore from Sri Lanka, provide strong medium-term revenue visibility. The diverse end-user industry base protects the Ion Exchange group from downturn in any one 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 also plans for a greenfield project to set up an additional resin manufacturing facility. The group has applied for the required licences and approvals for this, which are, however, getting delayed because of the pandemic.

 

* Comfortable financial risk profile: Networth is estimated above Rs 400 crore as on March 31, 2021 as compared to Rs 355 crore last year. Debt protection metrics are estimated to be strong, with net cash accrual to total debt and interest coverage ratios are estimated to be in the range of 0.8-0.9 time and 7-9 times, respectively, in fiscal 2021 (0.91 time and 9.03 times, respectively, in fiscal 2020). The metrics should remain healthy over the medium term on account of improving operating performance. Gearing is estimated to be healthy at less than 0.5 time as on March 31, 2021 (0.33 time as on March 31, 2020), and is expected to remain at a similar level.

 

The TOLTNW ratio was high at 3.57 times as on March 31, 2019, due to receipt of large customer advances but improved to 2.9 times as on March 31, 2020,with phased execution of orders; TOLTNW ratio is estimated to be 2.2-2.7 times as on March 31, 2021. However, disruptions caused by the pandemic are likely to lead to spillover of unfinished orders to fiscal 2022. Execution of the order from Sri Lanka in fiscal 2022 and further correction in TOLTNW ratio, along with sustained improvement in revenue and profitability, will be key monitorables.

 

Weaknesses

* Working capital-intensive operations: GCA days remains high due to nature of the business which is estimated to be in the range of 215-230 days as on March 31, 2021 (216days in the previous fiscal), mainly led by rise in cash levels owing to receipt of advances pertaining to few large orders; and stretched receivables at a consolidated level. Receivables stood at 127 days as on March 31, 2020, against 139 days last year. Receivables reduced, due to improved collections especially in the Engineering segment. Inventory remained small at 38-45 days while payables declined to 178 days as on March 31, 2020, from over 203 days during the past few fiscals. The group is partly protected against working capital issues due to back-to-back arrangements with suppliers.

 

* Susceptibility to economic cycles: The engineering and capital goods industries are linked to economic cycles and thus, investments tend to fluctuate. Slowdown in the Indian economy led to curtailment of capex in sectors such as steel, infrastructure and power, which are key customer segments for the IEIL group. For instance, order inflow of the group declined in fiscal 2009 with the economic slowdown, resulting in deferment of capex by most corporates. Subsequently, revenue fell 8.5% year-on-year in fiscal 2009 and remained flat in fiscal 2010.

Liquidity: Strong

Cash accrual is expected to be more than Rs 100 crore each in fiscals 2021 and 2022 against yearly debt obligation of Rs 17 crore. Unencumbered cash was Rs 44.46 crore (excluding Sri Lanka & Vedanta order) as on December 31, 2020. Also, cash flow position will improve with sizeable collections from the Sri Lanka project. Fund-based limit was utilised below 15% over the 12 months through February 2021. Liquidity should remain strong over the medium term, backed by moderate cash accrual and absence of any major debt-funded capex.

Outlook: Positive

CRISIL Ratings believes IEIL group will continue to benefit from its established market position, healthy unexecuted orders in the engineering division, strong profitability margins in the chemicals division and better financial risk profile.

Rating Sensitivity Factors

Upward factors:

• Sustenance of operating margin at the current level over the medium term
• Stable order inflow in the engineering segment
• Maintaining comfortable financial risk profile; correction in TOLTNW ratio to below 2 times

 

Downward factors:

• Weakening of operating performance on account of significant slowdown in order inflows or delay in execution of the Sri Lanka project
• Considerable stretch in working capital cycle with GCAs crossing 220days (netting of cash and cash equivalent)
• Larger-than-expected debt-funded capex weakening key credit metrics

About the Group

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 stages and since 1985, the paid-up share capital has been held by resident Indians. IEIL began manufacturing ion-exchange resins at its plant in Ambernath, Maharashtra, in 1965 and diversified into chemical treatment of water in 1982.

 

IEIL has three key segments - engineering, chemical, and consumer products - which it operates through six factories in five states. Each of the businesses 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.

 

For the nine months ended December 31, 2020, the group reported topline of Rs 1,004 crore and net profit of Rs 73 crore, as compared to topline and net profit of Rs 1,129 crore and Rs 65 crore, respectively, for the corresponding period previous fiscal.

Key Financial Indicators

As on/for the period ended March 31	Unit	2020	2019
Revenue	Rs.Crore	1,480	1,162
Profit After Tax (PAT)	Rs.Crore	94	66
PAT Margin	%	6.4	5.7
Adjusted debt/adjusted networth	Times	0.33	0.48
Interest coverage	Times	9.03	6.69

 

Any other information: Not applicable