| Indo-National Limited | ||||||
| Ratings downgraded to 'CRISIL A-/Negative/CRISIL A2+' | ||||||
| Rating Action | ||||||
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| Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings. | ||||||
| 1 crore = 10 million | ||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has downgraded its ratings on the bank facilities of Indo-National Limited (INL) to ‘CRISIL A-/Negative/CRISIL A2+’ from ‘CRISIL A/Stable/CRISIL A1’
The rating action reflects CRISIL Ratings expectations that INL’s business performance will continue to be moderate compared with expectations, due to sluggish demand for dry-cell batteries, and delayed ramp-up of order execution at its subsidiary, Kineco Ltd (Kineco). Besides, the company’s operating profitability is also expected to be weaker than earlier expected, due to lower business levels, higher input prices, and stiff competitive pressures. Ergo, cash generation is expected to be lower than earlier anticipated, also impacting the company’s debt metrics..
Though revenue grew by 7% during fiscal 2022 owing to order execution in railways/aerospace business under Kineco Ltd, and higher price realisations in the battery segment, the same was lower than anticipated. There was a significant decline in dry-cell battery volumes by 24% on year, in fiscal 2022 and by 16% in the first half of fiscal 2023 on account of sluggish demand situation, resulting from lesser sales of covid gadgets, rechargeable products replacing various battery operated gadgets and increase in competitive pressure. INL’s operating profitability declined significantly from Rs.10.8% in fiscal 2021 to 4.7% in fiscal 2022, and is expected to remain at almost similar levels in fiscal 2023 due to limited ability of INL to pass higher input (zinc) prices, and increase in freight rates. Operating profitability further declined to 2.15% in the first half of fiscal 2023 despite multiple price increase in battery segment and softening of zinc prices, due to non-availability of input pass on clauses in many of Kineco’s orders. INL consequently reported a net loss of Rs.5.1 crore in the first half of fiscal 2023, compared to a profit after tax of Rs.13 crore in the corresponding period of fiscal 2022.
Revenue growth, will continue to be modest at less than 5% and driven by Kineco due to its healthy orderbook from Indian railways for supplying composite parts for Vande Bharat trains, and other turnkey projects for Garibrath and Tejas trains. However, better absorption of fixed costs as a result of higher order execution, and slight softening of input costs, will improve operating margins resulting in overall margins of 4-6% for fiscal 2023 and beyond, which will still be lower compared with 10-12% anticipated earlier.
Nevertheless, cash accruals are expected to be between Rs.14-17 crores over medium term, adequate to meet term debt repayment obligations of Rs.~2-4 crore and to fund the moderate capital expenditure (capex) and working capital requirements. Higher order execution for Indian Railways/defense is expected to result in better absorption of fixed costs leading to improvement in cash generation and gradual improvement in debt metrics.
The ratings continue to reflect INL’s established market position and brand in the domestic dry cell batteries industry, as well as its vast distribution network, diverse revenue profile through Kineco (composites for defence, railways and aerospace), and the company's moderate financial risk profile. These strengths are partially offset by sluggish growth in the core domestic dry cell batteries business, supplier concentration risks, and susceptibility of operating profitability to volatile input prices and intense competition. |
Analytical Approach For arriving at the rating, CRISIL Ratings has consolidated the business and financial risk profile of INL and its subsidiary, Kineco Ltd due to common promoters and cash flow fungibility between these entities. Bill discounting outstanding at year end has been considered as debt.
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 player, with strong brand name, in dry-cell industry; revenue diversity through Kineco: With a production capacity of 80 crore batteries per annum, INL is the second-largest player in the dry-cell industry in India with a market share of around 30% and continues to benefit from its strong ‘Nippo’ brand. INL has diversified its product portfolio with the acquisition of Kineco in fiscal 2016 and introduction of products like LED, torches, Mosquito bats, DORCO Razor blades etc. Kineco manufacturers composites for the defence, railways and aerospace sectors and registered revenues of Rs.201 crore in fiscal 2022 (Rs.145 crores in fiscal 2021), with higher execution of railway orders. The company has an order book of Rs.200 crore, and increasing scale of operations at Kineco is expected to improve INL’s revenue diversity and visibility in the medium to long term.
Wide and established distribution network: More than 70%of INL’s batteries are sold through authorized distributors. The company has an established distribution network involving exclusive distributors, 4000 stockists, 30 depots, and more than 17 lakh retail outlets and wholesalers. INL has been associated with many distributors since its inception. The distributors also assume absolute responsibility for the storage and distribution of goods. Company has also leveraged on its extensive marketing network to scale-up existing portfolio of electrical products and launch new products leveraging the strong distribution network. CRISIL Ratings believes INL will continue to capitalize on its wide distribution network and established brand image
Moderate financial risk profile: While its overall financial risk profile is moderate, INL’s gearing is comfortable, at 0.55 time as on March 31, 2022. Cash generation is expected to benefit from better contribution from Kineco Ltd due to healthy order execution and better profitability from the second half of fiscal 2023.
The interest coverage and net cash accrual to total debt (NCATD) ratios reduced to 3.95 times and 0.11 times respectively in fiscal 2022 as against 5.70 times and 0.26 time respectively in fiscal 2021 mainly due to steep decline in absolute operating profits. Earlier, in fiscal 2020, the company provided for Rs.29 crores in its books towards doubtful debts, following bankruptcy of one of its key distributors. Going forward, only routine capex will be undertaken for modernization; albeit due to moderation in operating profitability, key debt metrics like interest cover will remain modest at ~3-3.2 times, from ~4 times in fiscal 2022.
The Competition Commission of India (CCI) in its order dated April 19, 2018, imposed a penalty of Rs 42.66 Cr on INL since it has found INL, and two other companies, to have violated provisions of the Competition Act, 2002. The Company had filed an appeal against order of CCI before the National Company Law Appellate Tribunal (NCLAT) . NCLAT has granted stay on the CCI order on the condition that INL deposit 10% of the penalty amounting to Rs.4.22 crore which was deposited with the registry (through fixed deposit) within the due date as stipulated by NCLAT. While the matter is subjudice, INL’s low gearing should help absorb any negative impact of the decision resulting in payment of penalty.
Weaknesses: Sluggish revenue growth in core dry cell battery business: INL’s revenue from dry cell battery segment was flat at about Rs.242 crore in fiscal 2022, and mainly driven by price hikes. Sale volumes were impacted due to decline in demand for covid related gadgets, various battery operated gadgets switching to rechargeable products and increase in competitive pressure; consequently, dry cell battery volumes declined by 24% in fiscal 2022 and further by 16% in the first half of fiscal 2023. Demand is expected to remain sluggish in the near to medium term as well.
Partial susceptibility to raw material price volatility and intense competition: Raw material accounts for ~60 % of total cost of sales. The company purchases zinc based on prices on London Metal Exchange and sources its monthly requirements both at spot and monthly average prices. Any steep increase in zinc prices will impact the company’s profitability given the intense competition in the industry and limited pricing flexibility. The largest player in the industry, Eveready Industries India Ltd, has also made a strong comeback in the dry cell battery segment, under a new management, and along with the other peer, Panasonic India, has intensified competition pressures.
Supplier concentration risk: Zinc, which constitutes about 30% of INL’s raw material is sourced entirely from Hindustan Zinc Ltd (Hindustan Zinc; rated ‘CRISIL AAA/Stable/CRISL A1+’).This, exposes INL to supplier concentration risk and may affect its price-negotiation capabilities. However, this is partly offset by INL’s established business relationship, going back to more than a decade, with Hindustan Zinc, and long-term contract for supply of zinc. |
Liquidity: Adequate Liquidity is adequate driven by annual accruals of Rs.14-17 crore which is sufficient for meeting repayment obligations of Rs.2.3 cr and Rs. 4.5 cr per annum for fiscal 2023 & 2024 respectively. Further company does not have any major capex in medium term; routine annual capex will be funded from accruals. The company has adequate cushion in the form of bank limits of Rs.76 crores which was utilized at 30% for the 12 month period till October 2022, to meet incremental working capital needs. |
Outlook: Negative Improvement in INL's business performance will be contingent on healthy order execution by Kineco and continuing cost efficiency measures, and will remain moderate compared to earlier expectations. The company’s financial risk profile is also expected to remain moderate due to modest operating profitability and cash generation. |
Rating Sensitivity factors Upward factors * Higher than anticipated growth in revenues (over 10-12%) over medium term, and operating profitability improving to 8-10%, leading to better cash generation * Improvement in financial profile, supported by prudent capex and working capital management and better cash generation benefitting debt metrics; interest cover of over 4-4.5 times
Downward factors * Sluggish revenue growth and decline in operating profitability (below 4%), impacting cash generation * Stretched working capital cycle, or sizeable debt-funded capex leading to moderation in debt metrics (interest cover below 2.5 times) |
About the Company Incorporated in 1972 as a joint venture (JV) between the late Mr. P Obul Reddy and Panasonic Corporation (leading Japanese electronics company, which subsequently exited the JV in 2012), Chennai-based INL (formerly, Nippo Batteries Company Ltd) manufactures and sells dry cell batteries and trades in torches, emergency power back-up products, and LEDs.
INL is the second-largest player in the dry cell batteries industry in India, with capacity of 78.5 crore battery per annum and a market share of above 30%. INL has an established distribution network comprising exclusive distributors, 4000 exclusive stockists, 30 depots, and 17 lakh retail outlets and wholesalers. In fiscal 2016, INL acquired 44.49% stake in Kineco, which manufactures composite for Railways, aerospace, and defence. Subsequently, in fiscal 2017, INL increase its stake in Kineco to 51%. Kineco also has a 51:49 joint venture, Kineco Kaman Composites Pvt Ltd, with Kaman Aerospace Group, USA, which manufactures advanced composites for medical, aerospace, and several other industries. INL also set up 4.6 megawatt solar power plant in Polepally village, Telangana, and has entered into a power purchase agreement with Deccan Hospitals. |
Key Financial Indicators
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Any other information: Not applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
*Interchangeable with short term debt and Bill discounting facility |
Annexure – List of entities consolidated
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| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||
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| All amounts are in Rs.Cr. | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annexure - Details of Bank Lenders & Facilities | ||||||||||||||||
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This Annexure has been updated on 20-Dec-2022 in line with the lender-wise facility details as on 17-Aug-2021 received from the rated entity
Criteria Details
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