Detailed Rationale

CRISIL Ratings has reaffirmed its ratings on the bank facilities and debt instruments of J. K. Fenner India Limited (JKFIL) at 'CRISIL AA-/Stable/CRISIL A1+'.

 

The ratings continue to be supported by healthy business performance, established presence in belts and oil seals for automotive and industrial use. While domestic demand from automotive sector augurs well, export performance which was almost flattish in fiscal 2023, is also expected to improve materially in fiscal 2024 due to receipt of orders from overseas customers and expanding geographical reach. JKFIL is also expected to sustain healthy operating profitability ranging between 15-16%, leading to healthy annual cash generation. Besides, the company’s financial profile is also expected to strengthen, due to moderate capex, progressive long term debt repayment and strengthening its debt protection metrics.

 

JKFIL’s revenue grew at 16% YoY in fiscal 2023 driven by healthy demand in the domestic market. The company generated ~80% of revenue from domestic market which includes the aftermarket and the OEM segment. While revenue from the domestic business grew 20% YoY, exports remained stable and grew 2% despite slowdown in USA and Europe which are the major export destinations for JKFIL export products. JKFIL continued to maintain its  leader-ship position in the belt segment with a dominant  50-55% market share. The company has also expanded its product offering, including hoses besides adding multiple products in their offering for two wheelers (2W) electric vehicle (EV) industry. The company also onboarded new customers in the two-wheeler OEM space and has commenced supply of EV drive systems. The company’s revenues are set to register 8-10% growth in the near to medium term driven by new product offering in the hose and EV segment and continued steady domestic demand. Exports are also expected to fare better in fiscal 2024.

 

JKFIL’s operating profitability improved to 15.3% in fiscal 2023 from 14.9% in fiscal 2022 despite high inflationary conditions, and volatile raw material prices. Operating profitability is expected at ~16% in the medium term with raw material prices easing, and due to higher exports. Also, sales of high margin products are increasing in the total portfolio which will further support margins.

 

The company continues to maintain a healthy financial risk profile, with net worth of over Rs.1000 crore and moderate debt. This has resulted in healthy debt protection metrics, which are expected to continue over the medium term, in the absence of sizeable capex spend. Liquidity also remains strong, in form of surplus cash of almost Rs.200 crore at March 31, 2023, and moderately utilized working capital lines.

 

The ratings also continues to factor in the benefit of monetization of JKFIL’s exposure to group companies. Earlier in fiscal 2017, JKFIL transferred its equity investments in listed group entities to the group’s holding company, Bengal and Assam Limited (BACL) at a consideration of Rs 220 crore. These are treated as loans to BACL. JKFIL has been receiving interest payments on this regularly and also received principal payment of Rs 155 crore between fiscal 2019 and fiscal 2023 and recently the interest rates on the loans were increased which shall support treasury income. JKFIL is expected to receive the balance amount on a staggered basis by fiscal 2026. Any further sizeable fund outflows to group companies in the future will be a key monitorable.

 

The ratings also reflects JKFIL’s leading market position in the domestic polymer products segment (V-belts and oil seals), diversified revenue profile across end user industries, stable demand prospects and emerging business opportunities in EV space and exports. The ratings are also supported by the company’s healthy financial risk profile and comfortable debt metrics. These strengths are marginally offset by the average though improving scale of operations and moderate vulnerability of business performance to cyclical slowdowns, as well as sub-par profitability of the textiles business.

Analytical Approach

For arriving at its ratings, CRISIL Ratings has combined the business and financial risk profiles of JKFIL and its wholly owned subsidiaries, Modern Cotton Yarn Spinners Ltd (MCYSL) and Southern Spinners and Processors Ltd (SSPL; ‘CRISIL BBB-/Stable/CRISIL A3’), together referred to as JKFIL, as the entities share common promoters and significant financial linkages. JKFIL is also expected to provide timely support to its textile subsidiaries, in the event of financial exigencies.

 

The preference shares worth Rs 70 crore issued by JKFIL (Rs.45 crores outstanding as on March 31,2023) to JK Tyres Limited (issued on 26th April 2017) has been treated as neither debt nor equity as the preference shares are redeemable in five equal instalments from the sixth year onwards along with 4% premium on redemption and coupon rate of 1%. This is in line with the CRISIL Ratings’ treatment of corporate sector hybrid securities.

 

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:

Leading position in the domestic polymer business

For over a decade, JKFIL has been the largest manufacturer of V-belts and the second-largest manufacturer of oil seals in the domestic market, backed by a strong brand, diversified customer and market segments, and wide distribution network comprising over 20,000 retailers and 900 dealers. The company has been an established player in the polymer products industry for more than 50 years. The bulk of its sales in the polymer segment, is derived from aftermarket, which is less prone to cyclical pressures, compared with the original equipment segment.

 

Diversified revenue profile across end user industries

JKFIL has a diverse revenue profile with established presence in the original equipment manufacturer (OEM, ~17% in revenues estimated in fiscal 2023), aftermarket (~47%) and export segments (~20%). With respect to end user industries, it caters to industrial segment (~42%), automotive segment (~42%) and engineering products (~16%). Within industrial segment, it caters to diverse end markets including petrochemicals, steel, cement, sugar, railway, power transmission, defense etc. The share of exports is expected to increase steadily to ~25% over the medium term driven by expanded product offering for their hose business and strong order pipeline with export customers. A diversified revenue profile spread across various end user industries mitigates the risk of demand slowdown from a particular market segment or industry. Besides, the available export market for belts and hoses is significantly larger than the potential in the domestic market, which augurs well for JKFIL.

 

Healthy financial risk profile

JKFIL’s healthy financial risk profile is supported by steady annual cash generation, and low debt on its balance sheet. Its consolidated gearing stood at a comfortable <0.25 time estimated as on March 31, 2023 and is expected to remain at comfortable levels over the medium term, due to modest capital spending, and prudent working capital management. Interest cover is estimated to have remained above 13 times in fiscal 2023, while Net cash accruals to total debt (NCATD) have remained comfortable at 0.72x in fiscal 2023. Debt/EBITDA ratio stood at 1.05 times in fiscal 2023, compared with ~1.10 times in fiscal 2022. The company had incurred a capex of ~Rs 100 cr in fiscal 2023 which was funded through a mix of debt and internal accruals. In the near to medium term, JKFIL is expected to incur capex of Rs 70-80 crore per annum and fund the same from internal accruals.  Expected steady cash generation of >Rs.150 crore per annum, progressive debt repayment and prudent working capital management should keep debt levels under control, and result in continuing healthy debt metrics over the medium term.

 

Weaknesses:

Average though improving scale of existing operations and moderate vulnerability of business performance to cyclical downturns

JKFIL primarily derives ~60% of revenues from the industrial belt segment which is a ~Rs 1500-1800 crore market in India where JKFIL enjoys a dominant ~50% market share. With respect to oil seals segment JKFIL derives 15% revenues, which is a fragmented industry with smaller un-organized players. JKFIL caters to both industrial and automotive segment, where the demand is vulnerable to cyclical downturns which in turn impacts JKFIL’s performance as seen in the past. However, the company has recently taken steps to launch new products both in the domestic EV space and exports market (such as hoses, where global market size is over Rs.5000 crores), which has resulted in share of new businesses increasing to ~10% of total sales in fiscal 2023, from 6% in fiscal 2021. With a sizeable order from an overseas customer for hoses, exports are expected to register material improvement in fiscal 2024, enhancing scale of operations. That said, the company’s ability to procure sizeable export orders on a sustained basis will be a monitorable, and if successful, could help JKFIL revenues register strong revenue growth.

 

Sub-par profitability of the textiles business

The textile business accounted for about less than 10% of consolidated revenue estimated in fiscal 2023 and had negligible net profit of about Rs 2-3 crore. JKFIL’s textile subsidiaries are small players in the domestic textile segment, and present in low value added segment. Their performance is vulnerable to volatility in cotton prices. Also, facilities at the textile units are old, thereby further affecting yield and profitability. In fiscal 2019, the group has consolidated the cotton yarn spinning capacity in SSPL to benefit from economies of scale and improved efficiency. This restructuring led to both the companies becoming profitable at net profit level and have now become self-sufficient in managing their businesses. Due to lower profitability of the textiles business, overall operating profitability of JKFIL is also marginally impacted.

Liquidity- Strong

Liquidity in the company remained strong with cash and equivalents of Rs 197 cr as on March 31, 2023. The company had incurred a capex of ~Rs 100 cr in fiscal 2023 which was funded through a mix of debt and internal accruals. Net cash accruals are expected to exceed Rs.160 crore annually, and will suffice to meet annual capex plans of Rs 70-80 crore, annual debt repayment of Rs 35-40 crore per annum, until fiscal 2026. Also, the company has access to working capital lines of Rs 130 crore which are moderately utilized at 29% in past 12 months.

Outlook: Stable

CRISIL Ratings believes JKFIL will benefit over the medium term from its dominant market position, improving product profile, steady demand prospects, and healthy profitability in the polymer business. The company’s steady cash generating ability, and prudent capital spending is also expected to help sustain its healthy financial risk profile over the medium term. No material increase in exposure to group companies is anticipated over the medium term.

Rating Sensitivity Factors

Upward factors

• Improvement in business risk profile driven by significant revenue growth and healthy operating profitability of 16-17% 
• Sustenance of healthy financial risk profile and further improvement in debt metrics

 

Downward factors

• Weaker-than-anticipated business performance; sharp fall in revenues and operating margins weakening to under 12%
• Large debt funded acquisitions or capex, severely impacting debt metrics from current comfortable levels
• Material incremental support to group companies or holding company by way of ICDs, dividend, capital reduction, share buyback, investments, loans and advances or any other form.

About the Company

Part of the JK group, JKFIL is a leading manufacturer of polymer products and has units in Madurai, Sriperumbudur; Nilakottai, Tamil Nadu; and Patancheru, Telangana. It also manufactures engineering products in Pashamailaram, Telangana, and has windmills at Aralvoimozhi in Kanyakumari, Tamil Nadu. The textile business is vested in subsidiaries, SSPL (capacity of 25,258 spindles in Salem, Tamil Nadu) and MCYSL, and accounts for about 7-8% of consolidated revenues. Both the units were consolidated into SSPL in fiscal 2019. Post the consolidation, MCYSL, apart from trading of cotton yarn is also engaged in manufacturing of yarn.

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of Instrument	Date of Allotment	Coupon Rate (%)	Maturity Date	Issue Size (Rs.Cr)	Complexity Levels	Rating Assigned with Outlook
NA	Proposed Term Loan	NA	NA	NA	14.05	NA	CRISIL AA-/Stable
NA	Cash Credit	NA	NA	NA	159.5	NA	CRISIL AA-/Stable
NA	Term Loan	NA	NA	Mar-29	65	NA	CRISIL AA-/Stable
NA	Term Loan	NA	NA	Sep-25	64	NA	CRISIL AA-/Stable
NA	Non-Fund Based Limit	NA	NA	NA	119.8	NA	CRISIL A1+
NA	Non-Convertible Debentures*	NA	NA	NA	80	Simple	CRISIL AA-/Stable
NA	Commercial Paper	NA	NA	7-365 days	60	Simple	CRISIL A1+
NA	Fixed Deposits	NA	NA	NA	0	Simple	CRISIL AA-/Stable

*Not yet Issued