Detailed Rationale

CRISIL Ratings has reaffirmed its ratings on the bank facilities, non-convertible debentures, fixed deposits and commercial paper programmes of J. K. Fenner India Limited (JKFIL) at 'CRISIL AA-/FAA/Stable/CRISIL A1+'.

 

While operations were impacted in the first quarter of fiscal 2021 due to pandemic related disruptions, the same picked-up significantly in the subsequent quarters and company has posted ~3% revenues growth over previous fiscal. This was driven largely by steady demand from aftermarket and exports for both belts and oil-seals post lifting of lockdown restrictions as well as growth in the engineering products division. The offtake of oilseals by automobile OEMS too improved from second quarter leading to stable revenues. Operating margin remained stable at ~15% for the fiscal on account of various cost saving initiatives.

 

Over the medium term, company is expected to post steady revenue growth of ~10%, backed by demand from automobile OEMs and continued stable replacement demand for industrial belts and oil seals, both in domestic and export markets. Expansion of product portfolio in the engineering division will also aid growth. Operating profitability is also expected to be maintained in 15-16%, due to continuing cost-efficiency measures and price increases to offset cost pressures over the medium term.

 

The ratings continues to factor in monetisation of JKFIL’s exposure to group companies. Earlier in fiscal 2017, JKFIL had transferred its equity investments in JK Paper Ltd (rated, CRISIL AA-/FAA/Stable/CRISIL A1+’), JK Lakshmi Cement Ltd, and JK Tyre & Industries Ltd to its wholly owned subsidiary, BMF Investments Ltd (BMF; which has subsequently merged with the group’s holding company, Bengal and Assam Limited (B&A)) at a consideration of Rs 220 crore. JKFIL has been receiving interest payments regularly and had received the first tranche of principal (amounting to Rs 55 crore) from B&A in fiscal 2019. However, the second tranche of another Rs 55 crore, which was due from B&A in March 2020 was deferred. Company has received further ~Rs 15 crore in FY21. The original repayment structure has been changed and JKFIL is expected to receive the balance amount on a staggered basis by fiscal 2026. Company had also extended short term loans of ~Rs 30 crore during fiscal 2021 which is expected to be repaid in fiscal 2022. Any further sizeable fund outflows to group companies in the future will be a key monitorable.

 

The ratings continue to reflect JKFIL’s leading market position in the domestic polymer products segment (V-belts and oil seals), diversified revenue profile across end user industries and healthy financial risk profile supported comfortable debt levels and credit metrics. These strengths are marginally offset by the low, though improving, profitability in the textiles business; the textiles business contributes less than 5% of JKFIL’s overall profit and contribution is expected to remain modest over the medium term as well.

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 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. A 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, ~15% in revenues estimated in fiscal 2021), aftermarket (~45%) and export segments (~20%). With respect to end user industries it caters to industrial segment (~45%), automotive segment (~30%), engineering products (~15%) and textiles segment (~9%). Within industrial segment, it caters to diverse end markets including petrochemicals, steel, cement, sugar, railway, power transmission, defence etc. The share of exports is expected to increase steadily to ~25% over the medium term driven by strong order pipeline with export OEMs. A diversified revenue profile spread across various end user industries mitigates the risk of demand slowdown from a particular market segment or industry.

 

• Healthy financial risk profile

JKFIL’s healthy financial risk profile is supported by healthy annual cash generation, and low debt on its balance sheet. Its consolidated gearing stood at a comfortable 0.3 time estimated as on March 31, 2021, and is expected to remain at comfortable levels over the medium term, due to only modest capital spending, and prudent working capital management. The company is expected to incur capex of around Rs. 45-50 crore per annum for moderate expansion and routine plant modernisation which will be funded entirely through internal accruals. Expected steady cash generation of Rs 110-120 crore per annum, progressive debt repayment and prudent working capital management should lead to reduction on reliance on external debt and further improvement in credit metrics over the medium term. 

 

Weakness:

• Low, though improving, profitability in the textiles business

The textile business accounted for about 9% of consolidated revenue estimated in fiscal 2021 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; ergo, the performance of the textile subsidiaries has shown improvement since fiscal 2020.

Liquidity: Strong

JKFIL has sufficient liquidity. The company’s cash accruals are estimated to improve at Rs 110-120 crore over the medium term will comfortably meet the repayment obligations of Rs. 20-30 crore per annum over the next two fiscals, besides fully funding its capital expenditure. JKFIL also has bank lines of about Rs. 140 crore, which are sparingly utilized at ~15% over the 12 months period ended March 2021. Liquidity is also supported by cash and bank balances of about Rs. 106 crore estimated as on March 31, 2021. 

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

• Significant improvement in business risk profile driven by sustained higher-growth in revenues (over 10-12%) and operating profitability (~at least 16-18%) 
• Sustenance of healthy financial risk profile and further improvement in debt metrics; gross debt to EBITDA of  1-1.2 time

 

Downward factors

• Weaker-than-anticipated business performance; sharp fall in revenues and operating margins weakening to under 12%
• Incremental support to group companies or holding company beyond Rs. 75 crore by way of ICDs, dividend, capital reduction, share buyback, investments, loans and advances or any other form.
• Large debt funded acquisitions or capex, severely impacting debt metrics from current comfortable levels; debt/EBITDA of over 2.3-2.5 times

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 9-10% 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.

Key Financial Indicators (JKFIL consolidated)

As on / for the period ended March 31		2021	2020
Revenue	Rs Crore	811	790
PAT	Rs Crore	68	65
PAT margin	%	8.4	8.3
Adjusted debt/Adjusted Networth	Times	0.25	0.37
Interest coverage	Times	11.60	7.81

 

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 Non Fund based limits	NA	NA	NA	133.2	NA	CRISIL A1+
NA	Proposed Fund-Based Bank Limits	NA	NA	NA	149.5	NA	CRISIL AA-/Stable
NA	Term Loan	NA	NA	Mar-23	16.66	NA	CRISIL AA-/Stable
NA	Term Loan	NA	NA	Mar-23	71.99	NA	CRISIL AA-/Stable
NA	Proposed Long Term Bank Loan Facility	NA	NA	NA	50.0	NA	CRISIL AA-/Stable
NA	Proposed Short Term Bank Loan Facility	NA	NA	NA	1.0	NA	CRISIL A1+
NA	Non-Convertible Debentures#	NA	NA	NA	80.0	Simple	CRISIL AA-/Stable
NA	Commercial Paper	NA	NA	7-365 days	60.0	Simple	CRISIL A1+
NA	Fixed Deposit Programme	NA	NA	NA	-	NA	FAA/Stable

#Not yet Issued

Annexure – List of entities consolidated

Names of Entities Consolidated	Extent of Consolidation	Rationale for Consolidation
Southern Spinners and Processors Limited	Full	common promoters and significant financial linkages
Modern Cotton Yarn Spinners Limited	Full	common promoters and significant financial linkages