Rating Rationale
November 08, 2021 | Mumbai
Kirloskar Oil Engines Limited
Rated amount enhanced
 
Rating Action
Total Bank Loan Facilities RatedRs.841 Crore (Enhanced from Rs.791 Crore)
Long Term RatingCRISIL AA/Stable (Reaffirmed)
Short Term RatingCRISIL A1+ (Reaffirmed)
 
Rs.100 Crore Commercial PaperCRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to Annexure for Details of Instruments & Bank Facilities

Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AA/Stable/CRISIL A1+’ ratings on the bank facilities and commercial paper programme of Kirloskar Oil Engines Limited (KOEL).

 

In fiscal 2022, operating income grew 44% to Rs 1,739 crore during the first six months despite the second wave of Covid-19, and EBITDA rose to Rs 127 crore at 7.3% margin, compared with EBITDA of Rs 97 crore at 8% margin during the corresponding period of the previous fiscal. This was also supported by healthy performance of the subsidiary, La-Gajjar Machineries Private Limited (LGMPL; ‘CRISIL A+/Stable/CRISIL A1’). CRISIL Ratings believes the operating performance will improve in the subsequent quarters, aided by better demand and the company’s established market position. Operating margin is expected to remain healthy at 8-9% in fiscal 2022, while revenue is expected to grow 20-25% on-year to more than pre-pandemic levels.

 

The ratings factor in equity infusion of Rs 784 crore as of September 2021 in ARKA (ARKA Fincap Ltd and ARKA Financial Holdings Pvt Ltd, together called ARKA), which is KOEL’s wholly owned subsidiary in the non-banking financial company (NBFC) segment. The investment was funded through cash and liquid investments, which stood at Rs 432 crore as on September 30, 2021. The financial risk profile will remain strong even after capital infusion in ARKA, taking total investments to Rs 1,000 crore by fiscal 2023, backed by strong debt protection metrics and negligible term debt obligation. Developments in the NBFC subsidiary and higher-than-expected investment from KOEL will be key monitorables.

 

The ratings also factor in the company’s strong financial risk profile, established market position in the small and medium-sized diesel engine segment across key end-user industries and wide product portfolio with the electric pump business of LGMPL. These strengths are partially offset by susceptibility to cyclicality in end-user segments, volatility in raw material prices and intense competition in the diesel engine market.

Analytical Approach

For arriving at the ratings, CRISIL Ratings has combined the business and financial risk profiles of KOEL and its subsidiaries, KOEL Americas Corp (wholly owned subsidiary) and LGMPL (76% subsidiary), collectively referred to herein as KOEL, as the entities have common management and operational linkages. For the financial subsidiary, ARKA, CRISIL Ratings has used the capital allocation method. Cash outflow towards investment of Rs 784 crore in ARKA by September 2021 has been considered.

 

Also, CRISIL Ratings has amortised goodwill (post completion of purchase price allocation) from the acquisition over five years; both profit after tax (PAT) and networth have been adjusted to that extent.

 

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 financial risk profile

Networth was healthy at Rs 1,886 crore, and gearing was low at 0.09 time, as on March 31, 2021. Interest coverage ratio stood at 32.7 times in fiscal 2021, and will remain healthy over the medium term. The financial risk profile is likely to be sustained over the medium term, despite annual capital expenditure (capex) of about Rs 190 crore (including LGMPL) and additional investment of Rs 216 crore in ARKA, on account of steady cash accrual. Larger-than-expected capex or acquisition, having material impact on the liquidity or capital structure, will be a key monitorable.

 

  • Established market position in the small and medium-range diesel engine segments

The company has strong presence in diverse sectors, such as power generation, agriculture and industrial. Its market position is well established, particularly in the agriculture and industrial sectors; a bulk of the revenue comes from diesel-powered farm pump sets (agriculture) and engines for construction equipment (industrial). Acquisition of controlling stake in LGMPL has provided KOEL a significant footprint in the electric pump market. While the operating performance has been marginally impacted owing to subdued demand in the industrial and power generation segments, LGMPL’s business has provided stability.

 

Weaknesses:

  • Susceptibility to cyclicality in end-user industries

Because of the nature of products, the company’s prospects remain linked to capex undertaken by end-user industries. Susceptibility to cyclicality in demand should persist, reducing revenue contribution from the impacted segment, as witnessed in the industrial and power generation segments in the past few fiscals.

 

  • Exposure to volatility in raw material prices and intense competition

Raw material cost accounts for 66-67% of operating income. Profitability, therefore, is susceptible to volatility in the prices of raw materials, particularly on account of the intensely competitive small- and medium-range diesel engine segment. The company faces competition from unorganised players in the small diesel engine segment, and from entities such as Cummins India Ltd, Ashok Leyland Ltd and Mahindra & Mahindra Ltd in the medium diesel engine segment.

Liquidity: Strong

Liquidity will remain strong over the next two fiscals supported by healthy cash accrual. Term debt obligation is expected to be minimal at Rs 5.8 crore and Rs 7.1 crore in fiscals 2022 and 2023, respectively; capex of Rs 190 crore in fiscal 2022 and Rs 120 crore in fiscal 2023 will be funded through internal cash accrual. KOEL had liquid surplus of Rs 432 crore as on September 30, 2021. Utilisation of the fund-based limit of Rs 313 crore was nominal. Liquidity should remain adequate, despite capex and additional investment in ARKA. Any larger than expected capex or acquisition could adversely impact KOEL’s liquidity position and will remain the key monitorable.

Outlook: Stable

KOEL will continue to benefit from its established market position and large product portfolio catering to diverse sectors. The financial risk profile will remain strong, supported by robust capital structure and debt protection metrics.

Rating Sensitivity factors

Upward factors:

  • Substantial and sustained increase in revenue and profitability, driven by product launches or higher sales to major end-user segments, resulting in annual net cash accrual over Rs 400 crore
  • Efficient working capital management and maintenance of the healthy financial risk profile
  • Sustained strong liquidity profile

 

Downward factors:

  • Weaker business performance owing to downturns in end-user industries, constraining revenue and profitability, resulting in annual net cash accrual below Rs 150 crore
  • Large, debt-funded capex or acquisition, leading to liquid surplus declining below Rs 200 crore
  • Stretched working capital cycle or debt funded acquisition resulting in gearing above 0.25 time

About the Company

KOEL, one of the flagship companies of the Kirloskar group, manufactures and services diesel engines (primarily between 2.5-740 horsepower) and diesel generator sets (mainly between 2-1,010 kilovolt ampere). The company also makes diesel, petrol and kerosene pump sets. It has manufacturing units in Pune, Kagal, and Nashik, all in Maharashtra. It caters to the agriculture, power generation and industrial sectors. On August 1, 2017, it acquired 76% stake in LGMPL, and is likely to acquire the remaining stake over the next five years, in line with the share purchase agreement. KOEL has set up an NBFC through ARKA, with equity infusion of Rs 526.5 crore as on March 31, 2020. 

 

For the first six months of fiscal 2022, on a consolidated basis, net profit was Rs 74 crore on operating income of Rs 1,739 crore, against Rs 53 crore and Rs 1,211 crore, respectively, in the corresponding period of the previous fiscal.

Key Financial Indicators*

Particulars

Unit

2021

2020

Revenue

Rs crore

3,191

3,326

PAT

Rs crore

165

118

PAT margin

%

5.2

3.5

Adjusted debt / adjusted networth

Times

0.09

0.06

OPBDIT interest coverage

Times

28.4

25.4

*CRISIL Ratings-adjusted consolidated numbers

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)

ISIN

Name of instrument

Date of

allotment

Coupon

rate (%)

Maturity

date

Issue size

(Rs crore)

Complexity

level

Rating assigned

with outlook

NA

Cash Credit

NA

NA

NA

313

NA

CRISIL AA/Stable

NA

Letter of credit & Bank Guarantee

NA

NA

NA

478

NA

CRISIL A1+

NA

Long Term Loan

NA

NA

Oct-24

25

NA

CRISIL AA/Stable

NA

Long Term Loan

NA

NA

Oct-24

25

NA

CRISIL AA/Stable

NA

Commercial Paper

NA

NA

7 to 365 days

100

Simple

CRISIL A1+

 

Annexure – List of entities consolidated

Names of Entities Consolidated

Extent of Consolidation

Rationale for Consolidation

KOEL Americas Corp

Full

Common management and operational linkages

LGMPL

Full

Common management and operational linkages

 

Annexure - Rating History for last 3 Years
  Current 2021 (History) 2020  2019  2018  Start of 2018
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund Based Facilities LT 363.0 CRISIL AA/Stable 05-04-21 CRISIL AA/Stable 29-10-20 CRISIL AA/Stable 13-12-19 CRISIL AA/Stable 03-09-18 CRISIL AA/Stable CRISIL AA/Stable
      --   -- 06-07-20 CRISIL AA/Stable 09-04-19 CRISIL AA/Stable   -- --
Non-Fund Based Facilities ST 478.0 CRISIL A1+ 05-04-21 CRISIL A1+ 29-10-20 CRISIL A1+ 13-12-19 CRISIL A1+ 03-09-18 CRISIL A1+ CRISIL A1+
      --   -- 06-07-20 CRISIL A1+ 09-04-19 CRISIL A1+   -- --
Commercial Paper ST 100.0 CRISIL A1+ 05-04-21 CRISIL A1+ 29-10-20 CRISIL A1+   --   -- --
      --   -- 06-07-20 CRISIL A1+   --   -- --
All amounts are in Rs.Cr.
Annexure - Details of Bank Lenders & Facilities
Facility Amount (Rs.Crore) Name of Lender Rating
Cash Credit 20 The Hongkong and Shanghai Banking Corporation Limited CRISIL AA/Stable
Cash Credit 75 State Bank of India CRISIL AA/Stable
Cash Credit 15 ICICI Bank Limited CRISIL AA/Stable
Cash Credit 125 HDFC Bank Limited CRISIL AA/Stable
Cash Credit 3 Bank of Maharashtra CRISIL AA/Stable
Cash Credit 50 Kotak Mahindra Bank Limited CRISIL AA/Stable
Cash Credit 25 Axis Bank Limited CRISIL AA/Stable
Letter of credit & Bank Guarantee 30 The Hongkong and Shanghai Banking Corporation Limited CRISIL A1+
Letter of credit & Bank Guarantee 30 State Bank of India CRISIL A1+
Letter of credit & Bank Guarantee 28 Axis Bank Limited CRISIL A1+
Letter of credit & Bank Guarantee 110 ICICI Bank Limited CRISIL A1+
Letter of credit & Bank Guarantee 110 HDFC Bank Limited CRISIL A1+
Letter of credit & Bank Guarantee 45 Bank of Maharashtra CRISIL A1+
Letter of credit & Bank Guarantee 125 State Bank of India CRISIL A1+
Long Term Loan 25 Kotak Mahindra Bank Limited CRISIL AA/Stable
Long Term Loan 25 HDFC Bank Limited CRISIL AA/Stable

This Annexure has been updated on 08-Nov-2021 in line with the lender-wise facility details as on 08-Nov-2021 received from the rated entity.

Criteria Details
Links to related criteria
CRISILs Approach to Financial Ratios
Rating criteria for manufaturing and service sector companies
CRISILs Bank Loan Ratings - process, scale and default recognition
CRISILs Bank Loan Ratings
CRISILs Criteria for Consolidation

Media Relations
Analytical Contacts
Customer Service Helpdesk

Pankaj Rawat
Media Relations
CRISIL Limited
B: +91 22 3342 3000
pankaj.rawat@crisil.com

 


Naireen Ahmed
Media Relations
CRISIL Limited
D: +91 22 3342 1818
B: +91 22 3342 3000
naireen.ahmed@crisil.com


Anuj Sethi
Senior Director
CRISIL Ratings Limited
B:+91 44 6656 3100
anuj.sethi@crisil.com


Tanvi Kumar Shah
Associate Director
CRISIL Ratings Limited
D:+91 22 4097 8331
tanvi.shah@crisil.com


Ashish Kumar
Manager
CRISIL Ratings Limited
D:+91 22 4040 5815
Ashish.Kumar1@crisil.com
Timings: 10.00 am to 7.00 pm
Toll free Number:1800 267 1301

For a copy of Rationales / Rating Reports:
CRISILratingdesk@crisil.com
 
For Analytical queries:
ratingsinvestordesk@crisil.com


 

Note for Media:
This rating rationale is transmitted to you for the sole purpose of dissemination through your newspaper / magazine / agency. The rating rationale may be used by you in full or in part without changing the meaning or context thereof but with due credit to CRISIL Ratings. However, CRISIL Ratings alone has the sole right of distribution (whether directly or indirectly) of its rationales for consideration or otherwise through any media including websites, portals etc.


About CRISIL Ratings Limited (A subsidiary of CRISIL Limited)

CRISIL Ratings pioneered the concept of credit rating in India in 1987. With a tradition of independence, analytical rigour and innovation, we set the standards in the credit rating business. We rate the entire range of debt instruments, such as, bank loans, certificates of deposit, commercial paper, non-convertible / convertible / partially convertible bonds and debentures, perpetual bonds, bank hybrid capital instruments, asset-backed and mortgage-backed securities, partial guarantees and other structured debt instruments. We have rated over 33,000 large and mid-scale corporates and financial institutions. We have also instituted several innovations in India in the rating business, including rating municipal bonds, partially guaranteed instruments and infrastructure investment trusts (InvITs).
 
CRISIL Ratings Limited ("CRISIL Ratings") is a wholly-owned subsidiary of CRISIL Limited ("CRISIL"). CRISIL Ratings Limited is registered in India as a credit rating agency with the Securities and Exchange Board of India ("SEBI").
 
For more information, visit www.crisilratings.com 




About CRISIL Limited

CRISIL is a global analytical company providing ratings, research, and risk and policy advisory services. We are India's leading ratings agency. We are also the foremost provider of high-end research to the world's largest banks and leading corporations.

CRISIL is majority owned by S&P Global Inc., a leading provider of transparent and independent ratings, benchmarks, analytics and data to the capital and commodity markets worldwide


For more information, visit www.crisil.com

Connect with us: TWITTER | LINKEDIN | YOUTUBE | FACEBOOK


CRISIL PRIVACY NOTICE
 
CRISIL respects your privacy. We may use your contact information, such as your name, address, and email id to fulfil your request and service your account and to provide you with additional information from CRISIL.For further information on CRISIL’s privacy policy please visit www.crisil.com.


DISCLAIMER

This disclaimer forms part of and applies to each credit rating report and/or credit rating rationale (each a "Report") that is provided by CRISIL Ratings Limited  (hereinafter referred to as "CRISIL Ratings") . For the avoidance of doubt, the term "Report" includes the information, ratings and other content forming part of the Report. The Report is intended for the jurisdiction of India only. This Report does not constitute an offer of services. Without limiting the generality of the foregoing, nothing in the Report is to be construed as CRISIL Ratings providing or intending to provide any services in jurisdictions where CRISIL Ratings does not have the necessary licenses and/or registration to carry out its business activities referred to above. Access or use of this Report does not create a client relationship between CRISIL Ratings and the user.

We are not aware that any user intends to rely on the Report or of the manner in which a user intends to use the Report. In preparing our Report we have not taken into consideration the objectives or particular needs of any particular user. It is made abundantly clear that the Report is not intended to and does not constitute an investment advice. The Report is not an offer to sell or an offer to purchase or subscribe for any investment in any securities, instruments, facilities or solicitation of any kind or otherwise enter into any deal or transaction with the entity to which the Report pertains. The Report should not be the sole or primary basis for any investment decision within the meaning of any law or regulation (including the laws and regulations applicable in the US).

Ratings from CRISIL Ratings are statements of opinion as of the date they are expressed and not statements of fact or recommendations to purchase, hold, or sell any securities / instruments or to make any investment decisions. Any opinions expressed here are in good faith, are subject to change without notice, and are only current as of the stated date of their issue. CRISIL Ratings assumes no obligation to update its opinions following publication in any form or format although CRISIL Ratings may disseminate its opinions and analysis. Rating by CRISIL Ratings contained in the Report is not a substitute for the skill, judgment and experience of the user, its management, employees, advisors and/or clients when making investment or other business decisions. The recipients of the Report should rely on their own judgment and take their own professional advice before acting on the Report in any way. CRISIL Ratings or its associates may have other commercial transactions with the company/entity.

Neither CRISIL Ratings nor its affiliates, third party providers, as well as their directors, officers, shareholders, employees or agents (collectively, "CRISIL Ratings Parties") guarantee the accuracy, completeness or adequacy of the Report, and no CRISIL Ratings Party shall have any liability for any errors, omissions, or interruptions therein, regardless of the cause, or for the results obtained from the use of any part of the Report. EACH CRISIL RATINGS' PARTY DISCLAIMS ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY, SUITABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE. In no event shall any CRISIL Ratings Party be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs) in connection with any use of any part of the Report even if advised of the possibility of such damages.

CRISIL Ratings may receive compensation for its ratings and certain credit-related analyses, normally from issuers or underwriters of the instruments, facilities, securities or from obligors. CRISIL Rating's public ratings and analysis as are required to be disclosed under the regulations of the Securities and Exchange Board of India (and other applicable regulations, if any) are made available on its web sites, www.crisil.com (free of charge). Reports with more detail and additional information may be available for subscription at a fee - more details about ratings by CRISIL Ratings are available here: www.crisilratings.com.

CRISIL Ratings and its affiliates do not act as a fiduciary. While CRISIL Ratings has obtained information from sources it believes to be reliable, CRISIL Ratings does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives and / or relies in its Reports. CRISIL Ratings has established policies and procedures to maintain the confidentiality of certain non-public information received in connection with each analytical process. CRISIL Ratings has in place a ratings code of conduct and policies for analytical firewalls and for managing conflict of interest. For details please refer to: http://www.crisil.com/ratings/highlightedpolicy.html

Rating criteria by CRISIL Ratings are generally available without charge to the public on the CRISIL Ratings public web site, www.crisil.com. For latest rating information on any instrument of any company rated by CRISIL Ratings you may contact CRISIL RATING DESK at CRISILratingdesk@crisil.com, or at (0091) 1800 267 1301.

This Report should not be reproduced or redistributed to any other person or in any form without a prior written consent of CRISIL Ratings.

All rights reserved @ CRISIL Ratings Limited. CRISIL Ratings Limited is a wholly owned subsidiary of CRISIL Limited.

CRISIL Ratings uses the prefix ‘PP-MLD’ for the ratings of principal-protected market-linked debentures (PPMLD) with effect from November 1, 2011 to comply with the SEBI circular, "Guidelines for Issue and Listing of Structured Products/Market Linked Debentures". The revision in rating symbols for PPMLDs should not be construed as a change in the rating of the subject instrument. For details on CRISIL Ratiings' use of 'PP-MLD' please refer to the notes to Rating scale for Debt Instruments and Structured Finance Instruments at the following link: www.crisil.com/ratings/credit-rating-scale.html