Detailed Rationale

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

 

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, stable demand prospects and healthy operating efficiencies. The ratings are also supported by the company’s healthy financial risk profile and comfortable debt metrics. These strengths are marginally offset by the low profitability in the textiles business, and moderate vulnerability of business performance to cyclical slowdowns.

 

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. The company is expected to register healthy revenue growth of ~14-15% in fiscal 2024, supported by steady domestic demand, new product launches including in the electric vehicle segment, as well as a sharp increase in exports. Thereafter, revenue growth is expected at 8-10% over the medium term. Earlier JKFIL’s revenue grew by 16% on -year in fiscal 2023 crossing Rs.1300 crores, driven by healthy demand in the domestic market, even as export growth remained sluggish. The company generated ~80% of the revenue from the domestic market which includes the aftermarket and the OEM segment. JKFIL continued to  maintain its  leadership position in the belt segment with a dominant  50-55% market share. JKFIL have also expanded their product offering for their hose business and added 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. Demand from new product offerings and continued enhancement in exports is critical for the scaling up of revenues.

 

JKFIL is expected to report better than expected operating profitability of ~17.5-18% in fiscal 2024, compared with ~15.3% in fiscal 2023, due to price hikes taken, moderating raw material prices as well as better margin exports, thereby improving operating profits and cash generation. Besides, the company’s healthy financial profile is also expected to further strengthen, due to moderate capex needs, and progressive long term debt repayment, strengthening its debt protection metrics. Gearing continues to remain comfortable at below 0.3 times at March 31, 2023, while the ratio of debt to earning before interest depreciation, tax and amortization (EBIDTA) stood at 1.05 times in fiscal 2023. With only modest capex and progressive long term debt reduction, debt levels are unlikely to increase materially, leading to continued healthy debt protection metrics. CRISIL Ratings expects debt to EBITDA ratio of JKFIL to further improve to ~0.5-0.7 times in the near to medium term. 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 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 180 crore between fiscal 2019 and first half of fiscal 2024. JKFIL is expected to receive the balance amount in the near term. That said, any further sizeable fund outflows to group companies, buy back or capital reduction, leading to material reduction in the liquid surpluses will be a key monitorable.

Analytical Approach

For arriving at its ratings, CRISIL 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 April 26, 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, ~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 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. Going forward, share of exports is expected to rise due to sizeable orders received, which augurs well for JKFIL. Besides, this will help offset sluggish performance being registered by the textile subsidiaries. 

 

• Improving operating efficiencies. supported by exports:

JKFIL has been focusing on enhancing the share of value added products in its portfolio and has also been undertaking cost reduction initiatives. This along with moderation in key raw material prices, especially natural rubber, price hikes taken and focused enhancement of share of higher margin exports is likely to lead to operating margins improving to 17.5-18% in the near to medium term, an improvement of 250-300 basis points from fiscal 2023, which will also lead to better return on capital employed (RoCE).

 

• 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 below 0.25 time estimated as on March 31, 2023 . 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. Debt/EBITDA ratio stood at 1.05 times in fiscal 2023, compared with ~1.10 times in fiscal 2022. The company incurred as capex of ~Rs 100 crore in fiscal 2023 which was funded through a mix of debt and equity. In the near to medium term, JKFIL is expected to incur capex  of Rs 55-60 crore per annum and fund the same from internal accruals.  Expected steady cash generation of ~Rs.200 crore per annum, progressive debt repayment and prudent working capital management should keep debt levels under control, and result in healthy debt metrics over the medium term. The debt/EBITDA ratio is expected at 0.5-0.7 times over the near to medium term.

 

Weaknesses:

• Low profitability in the textiles business

The textile business accounted for about less than10% 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 on PAT level and have now become self-sufficient in managing their businesses.

 

• Moderate vulnerability of business performance to cyclical downturns

JKFIL derives its revenues from both the industrial and automotive segments, wherein demand is vulnerable to cyclical downturns. This in turn impacts JKFIL’s performance as well as seen in the past, though the company has taken steps to enhance exports further diversify their revenue streams from other industries.

Liquidity: Strong

Liquidity in the company remained strong with cash and equivalents of almost Rs.200 crore as on March 31, 2023, and with almost 70% of working capital limits of Rs.130 crores remaining unutilized. The company is expected to incur capex of ~Rs.55-60 crores annually and has debt repayments of Rs.34-40 crore annually over the next 3 years, which can be met from accruals, obviating the need for debt addition.

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

• Better than anticipated scaling up of revenues, supported by ramp up in new product and exports and sustenance of healthy operating profitability at ~18% 
• Sustenance of healthy financial risk profile and strong 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.

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 Working Capital facility	NA	NA	NA	30.00	NA	CRISIL AA-/Stable
NA	Proposed Term Loan	NA	NA	NA	65.19	NA	CRISIL AA-/Stable
NA	Cash Credit	NA	NA	NA	159.5	NA	CRISIL AA-/Stable
NA	Term Loan	NA	NA	31-Mar-29	64.67	NA	CRISIL AA-/Stable
NA	Term Loan	NA	NA	30- Sep-25	88.19	NA	CRISIL AA-/Stable
NA	Non fund based limits	NA	NA	NA	114.8	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 Deposit Program	NA	NA	NA	0	Simple	CRISIL AA-/Stable

*Not yet Issued