Detailed Rationale

CRISIL Ratings has reaffirmed its 'CRISIL AA+/Stable/CRISIL A1+' ratings on the bank facilities of Inox Air Products Private Ltd (IAPL). Further CRISIL Ratings has withdrawn its rating on Non-Convertible Debentures (NCD) of Rs.200 crore (refer to ‘Annexure - Details of Rating Withdrawn’ for details) as these have been completely redeemed. The withdrawal is line in with CRISIL Ratings’ policy on withdrawal of ratings.

 

The rating takes into account sustained strong business risk profile driven by leadership position in the domestic industrial gases segment, continued strong operating efficiencies and withdrawn maintenance of healthy financial risk profile.

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Revenue in fiscal 23 registered moderate growth on account of increase in onsite segment (~32% of revenues) and packaged sales (~12% of sales). However, revenue from merchant segment declined marginally on account of normalization of realizations even as volume offtake increased. Further company is undertaking significant capacity expansion over next 4 fiscals which would aid revenue growth over the near to medium term. Higher realizations during the pandemic waves have led to substantial increase in the margins to 48-50% in fiscal 2021 & fiscal 2022 respectively. However, margin in fiscal 23 have normalized but still remained healthy at over 40% with realizations moderating from the pandemic highs and increase in power & fuel cost due to increase in average coal prices during the year. Further, during April-Nov’2023, the company is estimated to have recorded revenues of ~Rs.1,807 crore with EBITDA margins of 44.0%.

 

The company is undergoing significant capacity expansion (capex) totaling Rs.4000 crore over next  4 fiscals which is expected to be funded through a prudent mix of debt and internal accruals. This expansion will benefit the company in maintaining their market leadership position over the medium term, as well as increase their geographical presence. This is expected to be commercialized in a phased manner over fiscal 2024 to 2027.

 

Operating performance continues to derive support from the company’s healthy presence in the onsite segment owing to the long-term take or pay contracts with the customers. Although steel segment continues to be the major end user segment contributor to revenue, IAPL is also involved in the supply to other end-user segments such as chemicals, pulp & paper, glass, tyres etc, and are undergoing capex for the onsite segment as well.

 

IAPL's financial risk profile is healthy and has improved over the years. Same is marked by a strong capital structure with gearing expected to sustain at below 0.40 times over the medium term. Owing to significant capacity expansions, part of which will be funded through debt, debt protection metrics such as Debt/EBITDA is expected to peak at 1-1.5 times next fiscal and thereafter improve to less than 1 times over the medium term. Interest coverage is expected to sustain at healthy levels of over 10 times over the near to medium term.

 

Company has strong liquidity profile with estimated cash accruals of over Rs. 850-900 crore per annum which would be sufficient to meet repayment obligations around  Rs. 300 crore per annum and also partially fund the capex requirements. Further, liquidity profile is also supported by liquid surplus of around Rs 2500 crore as on November 30, 2023 . The liquidity profile is expected to remain strong over the medium term also. Furthermore, the company's bank lines of Rs. 145 crore have been utilized at around 11% for the past sixteen months ending April 2023, thereby providing additional cushion.

 

The ratings continue to reflect the company’s established market position, diverse revenue, strong profitability, sound operating efficiency, healthy financial risk profile supported by steady cash accrual and comfortable debt protection metrics. These strengths are partially offset by exposure to intense competition in the commoditised industrial gas industry and to cyclicality in end-user segments. The ratings also factor in large capital requirement.

Analytical Approach

For arriving at the ratings, CRISIL Ratings has combined the business and financial risk profiles of IAPL and its joint venture with Linde India Ltd, Bellary Oxygen Co Pvt Ltd, due to strong operational and financial linkages and past instances of support.

 

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 and diversified revenue: IAPL’s revenue is diversified in terms of customers and geography. The company operates in three segments in the industrial gas business: onsite installations, sales to merchant customers, and packaged sales to end-users. The company derives majority of revenue from the steel and metal sector, and the remaining from diversified segments including automotive, chemicals, pharmaceuticals, and healthcare. The company also derives significant technological support from its joint venture (JV) partner, Air Products & Chemicals Inc (Air Products; rated 'A/Stable/A-1' by S&P Global Ratings), a key player in the global industrial gases segment.

 

Commercialization of the new capacities will benefit scale expansion and enable IAPL to gain market share in the domestic industrial gases industry in the medium term.

 

• Strong profitability and healthy operating efficiency in the industrial gas industry: IAPL’s operating margin has historically remained strong at over 40% and is expected to sustain at similar levels over the medium term, supported by higher share of merchant revenue, steady cash flow from the onsite segment, efficient distribution, and increasing geographical presence. Return on capital employed (RoCE) is also expected to remain healthy over the medium term.

 

• Healthy financial risk profile: IAPL's financial risk profile is healthy and has improved over the years. Networth stood at around Rs. 5200 crores as on 30th November 2023 and the same is expected to improve going forward with accretion to reserves. The company has capex plans around Rs. 4000 crore over the next 4 fiscals which shall be funded in a prudent mix of debt and internal accruals. Hence, capital structure is expected to remain healthy with gearing sustaining at below 0.40 times. Debt protection metrics are expected to sustain at healthy levels with Debt/EBITDA peaking at 1.0-1.5 times next fiscal and thereafter improving to less than 1 times over the medium term. Interest coverage is expected to sustain at healthy levels of over 10 times over the near to medium term.

 

Weaknesses:

• Exposure to intense competition in the commoditised industrial gas industry and cyclicality in end-user segments: The domestic industrial gas industry is intensely competitive because of commoditised products. This has also led to consolidation in the industry with some large players merging. The company has to compete with both organised (other international players present in the Indian market) and unorganised players. The inherent cyclicality in end-user segments exposes the company to sluggish growth during economic downturns. The company derives major revenue from the steel and metal sector, which is highly volatile, though the take-or-pay nature of contracts provides some protection.

 

• Large capital requirement: The industrial gases industry is highly capital intensive, involving large capex, long gestation period, and stretched payback. These factors could have an adverse impact if the implementation of onsite projects or large capacity addition in the merchant segment were to coincide with a downturn in the industry.

Liquidity: Superior

Liquidity is supported by sufficient accrual to meet debt obligation, and sufficient cushion in bank limits. Accrual is expected at around Rs 850-900 crore per year over next 4 fiscals against annual debt obligation around Rs. 300 crore per annum. Strong liquid surplus of around  Rs 2500 crore as on November 30, 2023 provides additional comfort. Furthermore, the company's bank lines of Rs. 145 crore have been utilized at around 11% for the past sixteen months ending April 2023.

Outlook: Stable

CRISIL Ratings believes IAPL will continue to benefit from its established market position, healthy revenue diversity, and healthy operating efficiency. The financial risk profile is expected to sustain backed by prudent funding of capex, progressive debt repayment, and steady cash flow from operations

Rating Sensitivity factors

Upward Factors:

• Sizeable increase in revenue scale while maintaining profitability at existing levels of over 40%
• Diversification in revenue profile from different end user industries, thereby reducing customer concentration risk Maintenance of strong financial risk profile.

 

Downward Factors:

• Significant decline in the operating performance with revenue contraction and margins deteriorating impact overall cash generation.
• Large debt-funded capex/acquisitions or a stretch in receivables, leading to increased dependence on borrowings; Gross Debt/EBITDA remaining above 1.75 times on sustained basis

About the Company

IAPL is a joint venture between the Jain family (owners of INOX Group) and Air Products & Chemicals Inc with each partner holding 49.74% stake. IAPL manufactures industrial and medical gases, including oxygen, medical oxygen, argon, nitrogen, hydrogen, dissolved acetylene, nitrous oxide, and specialty gas mixtures. The company sells these gases to customers across industries such as steel, energy, process, and healthcare. It also sets up air-separation and nitrogen plants.

Any other information: Not Applicable

Annexure - Details of Instrument(s)

ISIN	Name of the instrument	Date of Allotment	Coupon Rate (%)	Maturity Date	Issue size (Rs.Crore)	Complexity Level	Rating assigned with outlook
NA	Cash Credit*	NA	NA	NA	145	NA	CRISIL AA+/Stable
NA	Letter of Credit	NA	NA	NA	180	NA	CRISIL A1+
NA	Term Loan	NA	NA	May-27	300	NA	CRISIL AA+/Stable
NA	Term Loan	NA	NA	30-Jun-29	1000	NA	CRISIL AA+/Stable
NA	Term Loan	NA	NA	28-Apr-25	47	NA	CRISIL AA+/Stable
NA	Term Loan	NA	NA	28-Apr-24	22	NA	CRISIL AA+/Stable
NA	Term Loan	NA	NA	30-Sep-29	106	NA	CRISIL AA+/Stable

*One way interchangeable with non-fund based limit

 

Annexure - Details of Rating Withdrawn

ISIN	Name of the instrument	Date of Allotment	Coupon Rate (%)	Maturity Date	Issue size (Rs.Crore)	Complexity Level	Rating assigned with outlook
INE321A07167	Non-convertible debentures#	31-Dec-13	10.85%	31-Dec-23	200	Simple	Withdrawn

#Ratings on NCD was assigned In December 2013