Rating Rationale
April 26, 2018 | 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)
* Interchangeable with Short term loan
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has reaffirmed its ratings on bank facilities of Indo-National Limited (INL) at 'CRISIL A/Stable/CRISIL A1'.
 
The Competition Commission of India (CCI) in its order dated April 19, 2018, has 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. These players collectively account for more than 90% of India's dry cell battery capacity.
 
CRISIL believes that INL's adequate liquidity and low gearing will cushion the credit risk profile from impact from the penalty. The credit risk profile of INL is therefore expected to sustain over the near to medium term. However, CRISIL will closely monitor the impact, if any, of the order on the industry's operating environment, INL's pricing ability and market share.
 
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 intensifying competition.

Analytical Approach

For arriving at the rating, CRISIL has consolidated the business and financial risk profile of INL and its subsidiary, Kineco. CRISIL has also amortized the goodwill on acquisition of Kineco over a period of five years.

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 29% 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, the acquisition of Kineco is also expected to improve INL's revenue diversity and visibility in the medium to long term as Kineco's operations gradually turnaround and scale up.
 
* Wide and established distribution network
More than 90% of INL's batteries are sold through authorised distributors. The company has an established distribution network involving exclusive distributors, 4000 stockists, 33 depots, and 15 lakh retail outlets and wholesalers. INL has had established relationships with its distributors since inception. The distributors also assume absolute responsibility for the storage and distribution of goods. 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 at an estimated 0.5 time as on March 31, 2018. Cash generation has also improved with turnaround of operations in Kineco and stable cash flows from the core business. However, part debt funded capex in the subsidiary has led to slight moderation in debt protection metrics. The interest coverage and net cash accrual to total debt (NCATD) ratios were at an estimated 8.3 times and 0.2 time respectively in fiscal 2018 as compared to 9.3 times and 0.3 time in fiscal 2017.
 
Weaknesses
* Stagnant revenue growth in core dry cell battery business
INL's revenue from dry cell battery segment has grown at a modest compound annual growth rate (CAGR) of about 1% from about Rs.260 crore in fiscal 2006 to Rs.320 crore in fiscal 2017. This is mainly due to decreasing share of larger 'D' size batteries, and competition from cheaper imports. While the company has been diversifying its product and revenue mix successfully 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 following the prevailing over-capacity.
 
* 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.
Outlook: Stable

CRISIL believes that INL's credit risk profile will continue to benefit from its established position in the battery segment, resulting in steady cash generation, which will help partially buttress impact of subdued performance at Kineco and debt-funded capex in the subsidiary. The outlook may be revised to 'Positive' if INL generates significantly higher-than-expected cash accrual from core business and Kineco improves its performance much faster than anticipated, while sustaining credit metrics. The outlook may be revised to 'Negative' in case of steep decline in the core battery business or delays in improvement 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, may also lead to a rating action.

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 about 29%. INL has an established distribution network comprising exclusive distributors, 4000 exclusive stockists, 30 depots, and 15 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 2018, on a standalone basis, INL reported a profit after tax (PAT) of Rs.14 crore on net sales of Rs.225 crore, against a PAT of Rs.16 crore on net sales of Rs.263 crore for the previous corresponding period.

Key Financial Indicators
Particulars Unit 2017 2016
Revenue Rs. Cr. 378 374
Profit After Tax (PAT) Rs. Cr. 12 13
PAT Margins % 3.3 3.5
Adjusted Debt/ Adjusted Net worth Times 0.40 0.49
Interest coverage Times 9.35 6.67

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 13.5 CRISIL A/Stable
NA Bill Purchase-Discounting Facility NA NA NA 23 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 - Rating History for last 3 Years
  Current 2018 (History) 2017  2016  2015  Start of 2015
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      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 rating short term debt

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