Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AA-/Stable/CRISIL A1+’ ratings on the bank loan facilities of Inox India Ltd (IIL).

 

The reaffirmation in ratings reflects the company’s strong and improving business risk profile supported by sizeable order book, established market position in key product categories and adequate operating capabilities, even as the company sustains its healthy financial risk profile.

 

IIL concluded an initial public offering (IPO) on December 21, 2023. The IPO was entirely an offer-for-sale wherein the Promoters and promoters group diluted their stake from 99.30% to 75%, and hence, no money flowed into the company. CRISIL Ratings has taken note of the same and expects no impact of the IPO on the credit risk profile of the company.

 

The business risk profile continues to benefit from increasing demand for small-scale liquefied natural gas (LNG) owing to its varied applications such as industrial heating and captive power generation as well as for high horse-power applications, such as heavy duty trucks and buses, mining trucks and marine engines. Further, new applications such as liquefied-compressed natural gas (LCNG), LNG locomotives and automotive fuel tanks have boosted the business. Besides, the company is strengthening its presence in the cryo-bio and life sciences segment with new products developed for vaccines, stem cells, blood and biospecimens. Also, IIL has been steadily improving its global footprint and has secured high-value supply contracts from South Korea, Japan and Europe. Furthermore, it is setting up a new plant to ramp up its beverage keg capacity. Beverage kegs are widely used in the food and beverage industry to store beer, syrups and other beverages, which remain unaltered during storage, regardless of the handling and climate conditions. The group expects high export demand from the US and Europe for beverage KEGs.

 

Revenue and operating margin stood at Rs 565 crore and 23.1%, respectively, in the first half of fiscal 2024, driven by increased demand from industrial gas segment and continued traction in the LNG segment. The growth momentum is expected to continue supported by healthy order book of around Rs 966 crore as on March 31, 2023. Majority of the raw material (stainless steel) is procured within a month of getting an order and the price is determined basis current raw material prices. Hence, the company is shielded from fluctuations in raw material prices resulting in stable profitability.

 

The healthy financial risk profile is supported by low debt of Rs 31 crore pertaining to working capital and strong networth of Rs 554 crore as on September 30, 2023. The company is expected to undertake capital expenditure (capex) of ~Rs 170 crore in fiscal 2024 and Rs 20-30 crore per annum thereafter, to be funded entirely from internal accrual and liquid surplus. Liquidity was strong supported by cash surplus of ~Rs 261 crore as on September 30, 2023. IIL paid special dividend of about Rs 100 crore in fiscal 2024 – before the IPO - in the absence of any large capex plans. However, this is unlikely to have any impact on the liquidity and the company will remain debt-free. The working capital cycle is managed efficiently on account of increase in localisation of raw material procurement and presence of healthy cash accrual. Interest coverage ratio is expected to remain comfortable over 50 times.

 

The ratings continue to reflect the leading market position of the company in the domestic cryogenic storage industry, its improving global footprint backed by a sizeable order book, a healthy financial risk profile and strong parentage, being part of the re-organised Inox group (Pavan Jain and Siddharth Jain faction) also comprising Inox Air Products Pvt Ltd (‘CRISIL AA+/Stable/CRISIL A1+’) and having 16.85% stake in PVR Inox Pictures. These strengths are partially offset by exposure to intense competition in international markets and susceptibility of revenue to the investment climate in the end-user industry, oil and gas. 

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of IIL, INOXCVA Europe B.V. and E Industria De Equipamentos Criogenicos Ltd (Inox Brazil), together referred to as the IIL group. This is because these companies have common management and business interests.

 

 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:

• Strong market position in the cryogenic storage industry in India: The IIL group is the largest player in the cryogenic tank segment in India, with market share of 70-75% in fiscal 2023. It is also the market leader in related products such as cryo-containers (~50% share), vaporisers and disposable cryogenic cylinders. Its clientele consists of large engineering companies and companies engaged in the manufacture and distribution of cryogenic gases, such as Air Liquide SA (France, for its worldwide operations), Praxair, Linde, ITER and Inox Air Products.

 

Improvement in performance is driven by revival of capex in the industrial gas and LNG segment coupled with increased traction from new segments such as cryo-bio and life sciences. The company had orders worth Rs 966 crore as on March 31, 2023. The industrial gas segment accounted for ~58% of the order book while the LNG segment accounted for ~42%. The large order book provides healthy medium-term revenue visibility.

 

• Healthy and improving financial risk profile: IIL prepaid its long-term debt in April 2020 leading to improvement in debt protection metrics. Over the three fiscals through 2023, the company has been reducing its total debt through receipt of cash inflow from sale of assets of overseas subsidiary Inox CVA and healthy cash accrual. The company was debt-free as of March 2023 from peak debt levels of Rs 419 crore as on March 31, 2018. Further, the debt-free balance sheet is expected to sustain owing to modest capex plans of Rs 170 crore in fiscal 2024 and Rs 20-30 crore per annum, which will be funded entirely through internal accrual and liquid surplus. The interest coverage ratio is expected to remain comfortable over 50 times over the medium term.

 

• Benefits of being part of the Inox group: The company benefits from being part of the diverse Inox group, which has presence in air gases and cryogenic tanks. Leading companies in the group are among the top two in their respective sectors in the country and also financially strong. Besides, the promoters have supported IIL in the past through infusion of funds to offset losses in overseas subsidiary and to retire debt. Promoter support is expected to be forthcoming in case of exigencies.

 

Weaknesses:

• Exposure to intense competition in international markets: IIL faces intense competition in the international cryogenic products market. Although the company has strong market position in India, where it commands dominant market share, its scale of operations is modest in the international market (accounted for 46% of the consolidated revenue in fiscal 2023). However, the company has been increasing its footprint in the global market and share from revenue from export is expected to go up to ~50% over the medium term.

 

• Susceptibility to slowdown in the end-user segment: The  company operates in the capital goods sector, which is cyclical in nature and susceptible to international policies governing end-user industries, such as oil and gas and industrial gases. Revenue is closely linked to the investment climate in its end-user segment. The performance will be susceptible to slowdown in the end-user segment.

Liquidity: Strong

The company had cash surplus over Rs 261 crore as on September 30, 2023. Modest capex plans of ~Rs 170 crore in fiscal 2024 and Rs 20-30 crore per annum thereafter are expected to be funded entirely through internal accrual, expected at Rs 200-220 crore per annum (ex-dividend). Hence, despite special dividend of Rs 100 crore paid in fiscal 2024, the liquidity will remain strong. Further, IIL has cushion in the form of fund-based bank limit of Rs 105 crore with almost nil utilisation over the past 12 months.

Outlook: Stable

CRISIL Ratings believes the IIL group will continue to benefit from its improving business risk profile led by strong operating performance over the medium term. Healthy operating performance should improve the capital structure supported by healthy cash flow. Also, the promoters will provide necessary support in case of exigencies.

Rating Sensitivity factors

Upward factors:

• Sizeable increase in scale of operations driven by increasing product and geographical diversification while maintaining operating margin at over 20%
• Sustenance of financial risk profile, including through prudent management of working capital and capex spend
• Maintenance of healthy liquidity in normal course of business

 

Downward factors:

• Sluggish business performance impacting operating margins below 17% on a sustained basis
• Significant rise in debt levels due to sizeable expansion or acquisitions or elongation of working capital levels, impacting key debt metrics

About the Group

IIL started commercial operations in 1993 as a manufacturer of cryogenic tanks. The company later diversified into manufacturing atmospheric vaporisers, cryoseal containers and disposable gas cylinders. It mainly operates in three product segments: industrial gas, LNG and cryo-scientific. It manufactures cryogenic tanks for liquefied gases, cold convertor systems, disposable gas cylinders, cryoseal containers, atmospheric vaporisers, liquid cylinders, beverage kegs and cryogenic containers. The group also manufactures cryogenic transportation vessels and pumpers used in the exploration of oil and gas.

 

IIL has four plants in India. It has two subsidiaries: (i) INOXCVA Comercio E Industria De Equipamentos Criogenicos Ltda, a service unit started in 2012 at Sao Paolo in Brazil; and (ii) INOXCVA Europe BV, a trading setup started in 2014 in Netherlands.

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	80	NA	CRISIL AA-/Stable
NA	Cash credit*	NA	NA	NA	25	NA	CRISIL AA-/Stable
NA	Letter of credit and bank guarantee!	NA	NA	NA	85	NA	CRISIL A1+
NA	Letter of credit and bank guarantee@@	NA	NA	NA	40	NA	CRISIL A1+
NA	Bank guarantee##	NA	NA	NA	150	NA	CRISIL AA-/Stable
NA	Bank guarantee	NA	NA	NA	30	NA	CRISIL A1+
NA	Bank guarantee	NA	NA	NA	20	NA	CRISIL A1+
NA	Letter of credit#	NA	NA	NA	200	NA	CRISIL A1+

*Cash credit of Rs 5 crore, working capital demand loan (WCDL) of Rs 7.5 crore, pre/post shipment packing credit of Rs 12.5 crore. Fully interchageable with letter of credit/bank guarantee

@ Fully interchangeable with cash credit, WCDL, pre-shipment/export packing credit (EPC) in INR/USD, post shipment/foreign usance bills discounted/foreign bills purchased in INR/USD. Interchangeable with sales bill discounting of Rs 50 crore.

 @@ Fully interchangeable with bank guarantees towards bid bond, security deposit, earnest money deposit, performance, advance payment, and retention money purpose or customs, central excise, sales tax, electricity, insurance, contract performance purpose.

!Interchangeable with cash credit of Rs 5 crore, WCDL of Rs 20 crore, EPC/PCFC of Rs 20 crore. Fully interchangeable with letter of credit-domestic/import/SBLC and performance bank guarantees. Interchangeable with financial bank guarantees of Rs 50 crore.

# Interchangeable with WCDL of Rs 12 crore, foreign bill negotiated (FBN)/foreign bill purchase/post shipment credit in FCY/post shipment credit in INR/foreign bill discounting/pre-shipment (INR/FCY)/post shipment (INR/FCY) of Rs 40 crore, cash credit of Rs 8 crore. Interchangeable with financial bank guarantees/SBLC for import of Rs 50 crore. Interchangeable with performance bank guarantee of Rs 100 crore. Interchangeable with financial bank guarantees for the purpose of advance payment, mobilization payment, security deposit, margin money, payment obligations, regulatory payments of Rs 60 crore. Interchangeable with stand by letter of credit of Rs 50 crore for the purpose of procurement of steel.

 ## Interchangeable with overdraft facility of Rs 7.5 crore, short-term loan facility of Rs 22.5 crore, overdraft facility of Rs 3 crore for payment to micro, small and medium enterprise vendors, export invoice financing facility of Rs 75 crore. For the purpose of purchase/discounting of domestic/export sales bill/invoices with/without letter of credit, preshipment financing under export order facility of Rs 75 crore, shipping guarantee facility of Rs 30 crore, import letter of credit of Rs 75 crore for the purpose of purchase of raw material.