| Kamdhenu Limited | ||||||
| Ratings continues on 'Watch Developing' | ||||||
| Rating Action | ||||||
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| 1 crore = 10 million | ||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings’ ratings on the bank facilities of Kamdhenu Limited (KL) continues on 'Rating Watch with Developing Implications'.
CRISIL Rating had, on September 12, 2021, assigned its ‘CRISIL A-/CRISIL A2+’ ratings to the bank facility KL while placing the ratings on ‘Watch with Developing Implications’.
The ratings continue to reflect KL’s strong market position, backed by its established brand “Kamdhenu” in steel long products (thermo-mechanically-treated [TMT] bars) and decorative paints, with a geographically diversified presence. In the TMT bar segment, KL is one of the largest players in India. The rating also factors in the company’s comfortable financial risk profile, marked by low gearing and above-average debt protection metrics. These strengths are partially offset by modest scale of operations and susceptibility to susceptibility to demand and price risks
The asset light model of company wherein products are largely manufactured by franchisees and KL earns royalty income from its franchisees. Company has benefitted from same and has been able to improve its operating margin to 7.6% in fiscal 2021 from 3.8% in fiscal 2018 and maintain healthy return on capital employed (RoCE) in range of 13-17% over last 4 years ending fiscal 2021. Operating margins for H1 Fiscal 2021 were around 7.08% as against 6.68% during similar period last Fiscal. In addition, the credit profile is supported by comfortable financial risk profile backed by healthy capital structure and low reliance of external debt. Gearing remained less than 1 times for last 4 years ending fiscal 2021. Comfortable debt protection matrices marked by interest coverage of over 3 times also supports the financial risk profile.
The assigned ratings also reflect KL’s established market position in the domestic market with strong dealer network, and healthy operating efficiencies.
The rating of KL has been placed on rating watch with developing implications, following announcement of plan to demerge the paint business in KL to a separate company, Kamdhenu Ventures Limited (KVL). The proposed demerger is driven by the company management’s intent to grow both businesses independently and provide better management focus and operational flexibility.
NCLT has accepted the Second Motion petition on 16th December, 2021 and fixed 22nd March, 2022 for the consideration of the final approval of the Scheme of Arrangement.
CRISIL Ratings will remain in contact with the management and monitor the developments, as well as await clarity on the final scheme of arrangement, and the quantum of rated debt to be transferred to KVL. The credit profile of KL is expected to sustain in the existing rating category post demerger due to the company’s established market position, improving operating efficiencies, and adequate financial risk profile, supported by an asset light business model.
However, post demerger, the credit profile of the paints business could be moderate than KL’s current rating, given the modest market position, and operating profitability.
CRISIL Rating will take a final rating action once there is more clarity regarding the impact on the business and financial risk profiles. |
Key Rating Drivers & Detailed Description Strengths: Established position in the domestic market with strong dealer network: KL has an established market position marked by its Kamdhenu brand in the thermo-mechanically treated (TMT) bar segment and access to large manufacturing capacity through its franchise network. Brand turnover increased to approx. Rs 12,000 crore in fiscal 2021 against Rs 6,052 crore in fiscal 2017. Total Branded turnover for H1 Fiscal 2022 (Apr-Sep 2021) stood at around Rs. 7,277 crores as compared to Rs.4,618 crores for H1 Fiscal 2021.
Further, the strong network comprises around 7,500 dealers for the steel business, and over 4,500 dealers for the paint business. Business risk profile should remain supported over the medium term due to strong brand and its expanding franchise network.
Healthy operating efficiencies: KL has franchisee arrangements with 75+ steel mills to produce and sell TMT bars under the Kamdhenu brand; These mills have a combined production capacity of 45 lakh tpa (tonne per annum) while the production capacity of KL is 1.20 lakhs tpa only. The asset light model benefits the company to obtain higher operating efficiencies reflected from operating margin of 7.6% and RoCE of 13.7% for fiscal 2021. Operating margins for H1 Fiscal 2021 were around 7.08% as against 6.68% during similar period last Fiscal.
Comfortable financial risk profile: Gearing stood at 0.5 time as on March 31, 2021 and may remain below 1 time over the medium term. Interest coverage ratio is at 3.54 times in fiscal 2021, vis-à-vis 3.65 times in fiscal 2020. Thus, liquidity should also remain adequate over the medium term.
Weakness: Modest scale of operations: Revenue of KL declined from Rs. 1,232 crore in fiscal 2019 to Rs 962 crore in fiscal 2020 and to Rs. 626 crore in fiscal 2021, largely due to decline in trading business. Revenue from manufacturing operations remained modest at estimated Rs. 421 crore (steel business) and Rs. 202 crore (paint business) in fiscal 2021.
During H1 Fiscal 2022, the company clocked revenue of Rs. 361 crore (including paid business revenue of Rs. 96 crore and balance from steel business) as against Rs. 234 crore in H1 Fiscal 2021 (including Rs. 73 crore of paint business and balance steel business).
Susceptibility to demand and price risks: Demand for long-steel products depends on the level of construction and infrastructure activities and any movement in economic cycles. Furthermore, the steel industry remains exposed to global steel prices. While the company’s cost-efficiency and asset light model cushions its profitability against cyclical downturns, it shall remain exposed to inherent price and demand volatility in the steel industry. |
Liquidity: Strong Bank limit utilisation is medium at around 66 percent for the past twelve months ended November 2021. Cash accrual are expected to be in range of Rs 28-35 crore for Fiscal 2022 and Fiscal 2023 which are sufficient against term debt obligation of Rs 4-6 crore over the medium term. Surplus accruals should act as cushion to the liquidity of the company. Current ratio was healthy at 1.44 times on March 31, 2021. The company had around RS. 0.59 crore of free cash and cash balance as on Nov 30, 2021. Low gearing and moderate net worth support its financial flexibility for access of any additional debt in case of any adverse conditions or downturn in the business. |
Rating Sensitivity Factors Upward factor
Downward factor
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About the Company KL (previously, Kamdhenu Ispat Ltd) is a public-listed entity, incorporated in September 1994, which started commercial operations in October 1995. The company manufactures TMT bars at its plant in Bhiwadi, Rajasthan, which has capacity to manufacture 1,20,000 tonne per annum (tpa). It also manufactures ingots (capacity of 22,500 tpa) that are used for captive consumption. In addition, KL has franchisee arrangements with 75+ steel mills to produce and sell TMT bars under the Kamdhenu brand; these mills have a combined production capacity of 45 lakh tpa. In the franchisee business model, KL earns royalty income on sales of TMT bars and other products by these franchisee units.
The company is also engaged in the paint business under the brand, Kamdhenu Paints-Colour Dreamz. Paints are manufactured at facility in Chopanki, Rajasthan, which began operating in August 2008. This division is expected to be demerged in a separate company in name of Kamdhenu Ventures Limited.
KL is listed on the Bombay Stock Exchange and the National Stock Exchange. |
Key Financial Indicators
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Any other information: Not applicable |
| Note on complexity levels of the rated instrument: CRISIL Ratings' complexity levels are assigned to various types of financial instruments. The CRISIL Ratings' complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL Ratings' complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments. |
Annexure - Details of Instrument(s)
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| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| All amounts are in Rs.Cr. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annexure - Details of Bank Lenders & Facilities | ||||||||||||||||||||||||
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This Annexure has been updated on 15-Mar-2022 in line with the lender-wise facility details as on 16-Sep-2021 received from the rated entity.
Criteria Details
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