Rating Rationale
April 18, 2019 | Mumbai
Indo-National Limited
Ratings Reaffirmed
 
Rating Action
Total Bank Loan Facilities Rated Rs.36.68 Crore
Long Term Rating CRISIL A/Stable (Reaffirmed)
Short Term Rating CRISIL A1 (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has reaffirmed its ratings on the bank facilities of Indo-National Limited (INL) at 'CRISIL A/Stable/CRISIL A1'.
 
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, and the company's comfortable financial risk profile. These strengths are partially offset by low 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 has consolidated the business and financial risk profile of INL and its subsidiary, Kineco Ltd (Kineco). CRISIL has also amortized the goodwill on acquisition of Kineco over a period of five years.

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
With a production capacity of 78.5 crore batteries per annum, INL is the second-largest player in the dry-cell industry in India with a market share of above 30% and continues to benefit from its strong 'Nippo' brand. INL has also been trying to diversify its product portfolio into products like LED, torches, etc. Further, 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 authorised 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 ranges. CRISIL believes INL will continue to capitalize on its wide distribution network and established brand image
 
* Comfortable financial risk profile
INL's gearing is healthy, estimated at less than 0.5 time as on March 31, 2019. Cash generation benefits from improving contribution from Kineco and stable cash flows from the core business. The interest coverage and net cash accrual to total debt (NCATD) ratios are adequate and estimated at 8.2 times and 0.3 time respectively in fiscal 2019 as compared to 12 times and 0.4 time in fiscal 2018.
 
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. INL's low gearing will cushion the financial risk profile from impact on account of the penalty.
 
Weakness
* Stagnant revenue growth in core dry cell battery business
INL's revenue growth from dry cell battery segment has been flat at about Rs.260 crore in fiscal 2018 and fiscal 2019. This is mainly due to competition from cheaper imports. In the past, decreasing share of larger 'D' size batteries impacted revenues from this segment. While the company has been diversifying its product and revenue mix, successful scaling up of new products and Kineco will be critical to improve business levels.
 
* Partial susceptibility to raw material price volatility and intense competition
Raw material accounts for over 45% 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.
 
* 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

INL has adequate liquidity driven by expected cash accruals of about Rs. 28 crore per annum in fiscal 2019 and fiscal 2020. INL also has access to fund based limits of Rs. 40 crore utilised at about 29.5 crore as on March 31, 2019. Term loan repayments are about 6 crore per annum in the subsidiary. There are no capex plans in the medium term. CRISIL expects internal accruals, cash & cash equivalents and unutilized bank lines to be sufficient to meet its repayment obligations as well as incremental working capital requirements.

Outlook: Stable

CRISIL believes that INL's credit risk profile will continue to benefit from its established position and brand in the battery segment, increasing contribution from electrical products and better performance in the subsidiary. The outlook may be revised to 'Positive' if revenue and profitability are significantly better-than-expected leading to sustained higher cash generation, while maintaining adequate credit metrics. The outlook may be revised to 'Negative' in case of steep decline revenues or lower than expected performance at Kineco leading to lower cash flows, or in case of elongated working capital levels or larger than expected debt-funded capex. Any adverse changes in INL's pricing ability or market share in the wake of the CCI order will be a rating sensitivity factor.

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 also 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 (unit of Apollo Hospitals Enterprise Ltd, rated 'CRISIL AA/FAA+/Stable/CRISIL A1+').
 
For first nine months of fiscal 2019, on a standalone basis, INL reported a profit after tax (PAT) of Rs.16 crore on net sales of Rs.265 crore, against a PAT of Rs.14 crore on net sales of Rs.225 crore for the previous corresponding period.

Key Financial Indicators
Particulars Unit 2018 2017
Revenue Rs. Cr. 394 378
Profit After Tax (PAT) Rs. Cr. 21 12
PAT Margins % 5.2 3.2
Adjusted Debt/ Adjusted Net worth Times 0.31 0.4
Interest coverage Times 11.69 9.35
 

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 instrument Date of allotment Coupon rate (%) Maturity date Issue size (Rs crore) Rating assigned with outlook
NA Cash Credit NA NA NA 5.0 CRISIL A/Stable
NA Cash Credit NA NA NA 1.0 CRISIL A/Stable
NA Cash Credit* NA NA NA 7.5 CRISIL A/Stable
NA Bill Purchase-Discounting Facility NA NA NA 8.0 CRISIL A1
NA Bill Purchase-Discounting Facility NA NA NA 15.0 CRISIL A1
NA Proposed Short-Term Bank Loan Facility NA NA NA 0.18 CRISIL A1
*Interchangeable with short term loan up to Rs. 7.5 Cr
 
Annexure - List of entities consolidated
Names of Entities Consolidated Extent of Consolidation Rationale for Consolidation
Kineco  Limited Fully Consolidated Strong business and financial linkages
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
Fund-based Bank Facilities  LT/ST  36.68  CRISIL A/Stable/ CRISIL A1      26-04-18  CRISIL A/Stable/ CRISIL A1  14-07-17  CRISIL A/Stable/ CRISIL A1  05-05-16  CRISIL A/Stable/ CRISIL A1  CRISIL A+/Stable/ CRISIL A1 
Non Fund-based Bank Facilities  LT/ST    --    --    --    --  05-05-16  CRISIL A1  CRISIL A1 
All amounts are in Rs.Cr.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Bill Purchase-Discounting Facility 23 CRISIL A1 Bill Purchase-Discounting Facility 23 CRISIL A1
Cash Credit* 13.5 CRISIL A/Stable Cash Credit* 13.5 CRISIL A/Stable
Proposed Short Term Bank Loan Facility .18 CRISIL A1 Proposed Short Term Bank Loan Facility .18 CRISIL A1
Total 36.68 -- Total 36.68 --
*Interchangeable with short term loan up to Rs. 7.5 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
CRISILs Criteria for rating short term debt

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