Rating Rationale
August 31, 2020 | Mumbai
Indo-National Limited
Ratings Reaffirmed
 
Rating Action
Total Bank Loan Facilities Rated Rs.70 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'.
 
Operating performance is expected to be fairly steady in fiscal 2021 despite disruptions caused by the Covid-19 pandemic. Healthy demand for batteries and a good order book in the subsidiary, particularly for the aerospace division, should partially offset a subdued performance in the electricals products division and likely delays in railways order execution. The company has signed cricketer Rohit Sharma as its brand ambassador to promote its portfolio of products (dry-cell batteries, torches and mosquito bats). Operating profitability may moderate by 150-200 basis points as zinc prices firm up in the current fiscal and revenue was impacted in the first quarter in the subsidiary. Nevertheless, Cash accrual is expected at Rs 28-30 crore in fiscal 2021, largely adequate to fund the moderate capital expenditure (capex) and working capital requirement. The financial risk profile should thus remain comfortable.
 
In fiscal 2020, revenue grew by about 14% compared with the previous fiscal, driven by scaling-up of operations in the subsidiary where revenue rose sharply by about 41%, supported by the healthy demand from the railways and aerospace divisions. The increase in revenue also led to improvement in the consolidated operating profitability margin by 200 basis points to 14.4% in fiscal 2020 from 12.4% in fiscal 2019. The company reported an extraordinary loss of Rs 29.2 crore pertaining to write-off of debtors from an authorised wholesale distributor. CRISIL believes this is a one-time expense and no other material bad-debts are likely to devolve.
 
The ratings continue to reflect an established market position and brand in the domestic dry-cell batteries industry, an extensive distribution network, and a comfortable financial risk profile. These strengths are partially offset by low growth in the core domestic dry-cell batteries business, exposure to supplier concentration risks, and susceptibility of operating profitability to volatile input prices and intense competition.

Analytical Approach

For arriving at the ratings, CRISIL has combined the business and financial risk profiles of INL and its subsidiary, Kineco Ltd (Kineco), together referred to herein as INL. CRISIL has also amortised the goodwill on acquisition of Kineco over five years.

Please refer Annexure - Details 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 a strong brand in the 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. The company has also been trying to diversify its portfolio into products such as LEDs (light-emitting diodes), torches, and mosquito bats. It expects the mosquito bats category to do well given the absence of a branded pan-Indian player in this category and a better product offering. Mosquito bats contributed Rs 10-11 crore in fiscal 2020. Further, an increasing scale of operations at Kineco is expected to improve revenue diversity and visibility in the medium to long term.
 
* Wide and established distribution network
The distribution network comprises exclusive distributors, 4,000 stockists, 30 depots, and more than 17 lakh retail outlets and wholesalers. The company has been associated with many distributors since its inception. They also assume absolute responsibility for the storage and distribution of goods. The extensive marketing network has been leveraged to scale-up the existing portfolio of electrical products and launch new ranges. In fiscal 2021, the company has entered into an agreement to market the Korean DORCO razor blades in India backed by the established distribution network.
 
The company is likely to continue to capitalise on its wide distribution network and established brand image.
 
* Comfortable financial risk profile
The gearing was healthy at less than 0.7 time as on March 31, 2020. 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 were adequate at 4 times and 0.13 time, respectively (despite a one-time extraordinary loss of Rs 29.2 crore) in fiscal 2020 as against 4.8 times and 0.2 time, respectively, in fiscal 2019.
 
The Competition Commission of India in its order dated April 19, 2018, imposed a penalty of Rs 42.66 crore on INL as it found that the company, and two others, had violated provisions of the Competition Act, 2002. The low gearing should cushion the financial risk profile from the impact of the penalty.
 
Weaknesses:
* Stagnant revenue growth in the core dry-cell battery business
Revenue from the dry-cell battery segment has been flat at about Rs 260 crore in fiscals 2018 to 2020. Although battery sales are expected to improve in the current fiscal, growth is likely to be moderate in the medium to long term. That's mainly due to competition from cheaper imports. In the past, a decreasing share of the larger D size batteries impacted revenue from this segment. However, to counter this, the company has been diversifying the product mix by introducing products that are relevant to its distribution channel. Besides, the subsidiary performance has also been steadily improving.  Sustained benefits of these measures will be critical to improve business levels.
 
* Susceptibility to raw material price volatility and intense competition
Raw materials accounts for over 45% of the total cost of sales. The company purchases zinc based on prices on the London Metal Exchange and sources monthly requirements both at spot and monthly average prices. Any steep increase in zinc prices will impact profitability given the intense competition in the industry and limited pricing flexibility.
 
* Exposure to supplier concentration risk
Zinc, which constitutes about 30% of the raw material, is sourced entirely from Hindustan Zinc Ltd (Hindustan Zinc; rated 'CRISIL AAA/Stable/CRISL A1+'). The supplier concentration may affect price-negotiation capabilities. However, this is partially offset by an established business relationship, going back to more than a decade, with Hindustan Zinc, and a long-term contract for supply of zinc.
Liquidity Adequate

Cash accrual is expected at over Rs 30 crore per fiscal in fiscals 2021 and 2022. About Rs 31 crore of the fund-based bank limit of Rs 47 crore was utilised as on March 31, 2020. Term loan repayment is about Rs 7 crore in fiscal 2021 in the subsidiary. There are no major capex plans for the medium term. Internal cash accrual, cash and cash equivalents and unutilised bank lines should be sufficient to meet repayment obligation as well as incremental working capital requirement over the medium term.

Outlook: Stable

The credit risk profile should continue to benefit from the established position and brand in the battery segment, increasing contribution from electrical products, and better performance in the subsidiary.

Rating Sensitivity Factors
Upward factors
* Healthy revenue growth and profitability, leading to cash accrual of over Rs 40 crore per fiscal
* Further improvement in the financial risk profile

Downward factors
* A steep decline in revenue or profitability, impacting cash generation
* A stretched working capital cycle, or sizeable debt-funded capex, leading to a gearing of over 1.2 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 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 batteries per annum and a market share of above 30%. It has an established distribution network comprising exclusive distributors, 4,000 exclusive stockists, 30 depots, and 17 lakh retail outlets and wholesalers. In fiscal 2016, INL acquired 44.49% stake in Kineco, which manufactures composites for railways, aerospace, and defence. Subsequently, in fiscal 2017, INL increased its stake in Kineco to 51%. Kineco also has a 51:49 JV, 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 a 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+').

Key Financial Indicators
Particulars Unit 2019 2018
Revenue Rs.Crore 459 407
Profit After Tax (PAT) Rs.Crore 17 21
PAT Margin % 3.6 5.2
Adjusted debt/adjusted networth Times 0.71 0.52
Interest coverage Times 4.80 11.69

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments and are included (where applicable) in the Annexure -- Details of Instrument in this Rating Rationale. For more details on the CRISIL complexity levels, please visit www.crisil.com/complexity-levels.
Annexure - Details of Instrument(s)
ISIN Name of instrument Date of allotment Coupon rate (%) Maturity date Issue size (Rs.Crore) Complexity
Levels		 Rating assigned with outlook
NA Cash Credit* NA NA NA 47.0 NA CRISIL A/Stable
NA Bill Purchase-Discounting Facility NA NA NA 23.0 NA CRISIL A1
*Interchangeable with short term debt and Bill discounting facility
 
Annexure - List of Entities Consolidated
Names of entities consolidated Extent of consolidation Rationale for consolidation
Kineco  Ltd Fully consolidated Strong business and financial linkages
Annexure - Rating History for last 3 Years
  Current 2020 (History) 2019  2018  2017  Start of 2017
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund-based Bank Facilities  LT/ST  70.00  CRISIL A/Stable/ CRISIL A1      03-05-19  CRISIL A/Stable/ CRISIL A1  26-04-18  CRISIL A/Stable/ CRISIL A1  14-07-17  CRISIL A/Stable/ CRISIL A1  CRISIL A/Stable/ CRISIL A1 
            18-04-19  CRISIL A/Stable/ CRISIL A1           
Non Fund-based Bank Facilities  LT/ST    --    --    --    --    --  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* 47 CRISIL A/Stable Cash Credit* 47 CRISIL A/Stable
Total 70 -- Total 70 --
*Interchangeable with short-term debt and Bill discounting facility  
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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