Rating Rationale
February 07, 2023 | Mumbai
Kirloskar Pneumatic Company Limited
Ratings reaffirmed at 'CRISIL AA-/Stable/CRISIL A1+'
 
Rating Action
Total Bank Loan Facilities RatedRs.540 Crore
Long Term RatingCRISIL AA-/Stable (Reaffirmed)
Short Term RatingCRISIL A1+ (Reaffirmed)
 
Rs.40 Crore Commercial PaperCRISIL A1+ (Reaffirmed)
Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings.
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 Pneumatic Company Limited (KPCL).

 

The ratings continue to reflect the company’s strong financial risk profile supported by healthy capital structure with nil gearing and established market position. These strengths are partially offset by susceptibility to cyclicality in demand from end-user sectors, strong competition and volatile input prices.

 

Operating income grew by 41% year-on-year to Rs 880 crore during the first nine months of this fiscal along with Earnings before interest, tax, depreciation and amortisation (EBITDA) margin improving to 13.4% as compared to 11.4% during fiscal 2022. The improvement in operating performance was driven by healthy demand for CNG gas compressors and other process gas systems, improved export sales and fixed costs absorption, despite high raw material prices.

 

KPCL’s order book has been growing steadily and stood at more than Rs 1,300 crore as on December 31, 2022, thereby providing revenue visibility. Revenue growth is expected to be healthy at 25-30% during this fiscal while EBITDA margin is expected to improve to 12-13% this fiscal despite high raw material prices. Sustenance of revenue growth while maintaining healthy EBITDA margins over the medium term, remains a key monitorable. The road-railer operations are expected to ramp up over the medium term with addition of new routes and wagons. Furthermore, the financial risk profile remains robust, supported by debt-free balance sheet, strong debt protection metrics and healthy liquidity.

Key Rating Drivers & Detailed Description

Strengths:

Strong financial risk profile: The financial risk profile is supported by healthy capital structure with nil gearing as of December 31, 2022, prudent working capital management, healthy cash accruals, and moderate capex needs. Total outside liabilities to tangible net worth (TOL/TNW) ratio has remained healthy and stood at 0.56 times as of March 31, 2022 with interest coverage remaining strong at above 35 times. As on December 31, 2022, liquid surplus (comprising marketable securities and cash and bank balance) was healthy at Rs 200 crore.

 

Established market position: KPCL has an established market position in each product segment (air compressors, refrigeration and gas compressors, and transmission products) through technological collaboration and strong after-sales support services deriving 94% share of revenue from compression systems. The company has three state of the art manufacturing facilities in India producing for diverse industries, such as oil and gas, power, cement, steel, automobiles, textiles, refinery, petrochemicals, city gas distribution, cold storage and food, besides the defence and railway departments of the Government of India. KPCL holds 50% market share in the Compressed Natural Gas (CNG) gas station market and is the first company in India being approved for hydrocarbon refrigeration systems.

 

Weaknesses:

Vulnerability to inherent cyclicality in demand from end-user industries: KPCL's customers are mainly from the engineering and other capital-intensive industries, wherein demand is cyclical. Addition of new facilities or expansion of current facilities by the industries is dependent on the country’s economic performance as evident during fiscal 2021 when low demand impacted KPCL”s revenue. KPCL's fortunes are, therefore, tied to the capital expenditure (capex) cycle in end-user industries.

 

Susceptibility to volatile input prices and competitive pressure: Operating margin is susceptible to volatile input prices. The gestation period of projects in the compressor systems segment is 3-18 months, rendering profitability susceptible to volatile input prices. Also, in the air compressor segment, KPCL faces competition from domestic and major international players and their Indian subsidiaries, with players having access to strong technological and managerial support from their parents.

Liquidity: Strong

Cash accrual is expected to be more than Rs 90 crore annually, which should be adequate to fund capex of Rs 25-30 crore annually, and support working capital requirement in the absence of any long-term debt obligation. Cash and cash equivalent stood at Rs 200 crore as on December 31, 2022. KPCL also has access to fund-based limit of Rs 40 crore which remains unutilised thus far.

Outlook: Stable

CRISIL Ratings believes KPCL's business risk profile will steadily improve over the medium term, driven by healthy orders, increased demand from end-user industries, and established market position in the compressor segment. The financial risk profile should remain strong, supported by healthy capital structure with nil gearing and healthy liquidity.

Rating Sensitivity factors

Upward factors:

  • Sustained annual double-digit growth in revenue over the medium term, alongwith healthy EBITDA margin above 12-13%, ensuring healthy cash generation
  • Efficient working capital management, while maintaining healthy financial risk profile and liquidity

 

Downward factors:

  • Significant and steady decline in revenue by 20% or operating margin below 8%
  • Stretched working capital cycle or large, debt-funded capex weakening the capital structure or liquidity

About the Company

Incorporated in 1958, KPCL is a part of the Pune-based Kirloskar group. It has three divisions: air compressors, refrigeration and gas compressors, and transmission products. Manufacturing facilities of all divisions are integrated and three locations situated in and around Pune. End users include the oil and gas, pharmaceutical, steel, power, railways and defence sectors.

 

KPCL entered into an agreement with the Indian Railways to operate road-railers, including the pilot project between New Delhi and Chennai, Tamil Nadu. The company has acquired the technology required to build road-railers from Wabash Inc, USA, which is a leading North American manufacturer of semi-trailers. The Indian Railways' Research Design and Standards Organisation (RDSO) has inspected and cleared the prototype and conducted the Emergency Brake Distance (EBD) test.

 

For the first nine months of fiscal 2023, revenue was Rs 880 crores and PAT was Rs 76 crore, against revenue of Rs 623 crore and PAT of Rs 31 crore in the corresponding period of the previous fiscal.

Key Financial Indicators

Particulars

Unit

Fiscal 2022

Fiscal 2021

Revenue

Rs crore

993

794

Profit after tax (PAT)

Rs crore

85

64

PAT margin

%

8.5

8.0

Adjusted debt/adjusted networth

Times

0.00

0.07

Adjusted Interest coverage

Times

36.4

30.4

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 and are included (where applicable) in the 'Annexure - Details of Instrument' in this Rating Rationale.

CRISIL Ratings will disclose complexity level for all securities - including those that are yet to be placed - based on available information. The complexity level for instruments may be updated, where required, in the rating rationale published subsequent to the issuance of the instrument when details on such features are available.

For more details on the CRISIL Ratings` complexity levels please visit www.crisilratings.com. 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 
levels		 Rating assigned
with outlook
NA Cash Credit NA NA NA 40 NA CRISIL AA-/Stable
NA Commercial Papers (CPs) NA NA 7 to 365 Days 40 Simple CRISIL A1+
NA Letter of credit & Bank Guarantee NA NA NA 496 NA CRISIL A1+
NA Proposed Non Fund based limits NA NA NA 4 NA CRISIL A1+
Annexure - Rating History for last 3 Years
  Current 2023 (History) 2022  2021  2020  Start of 2020
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund Based Facilities LT 40.0 CRISIL AA-/Stable   -- 08-02-22 CRISIL AA-/Stable 25-02-21 CRISIL AA-/Stable 29-10-20 CRISIL AA-/Stable CRISIL AA-/Stable
      --   --   --   -- 30-06-20 CRISIL AA-/Stable --
Non-Fund Based Facilities ST 500.0 CRISIL A1+   -- 08-02-22 CRISIL A1+ 25-02-21 CRISIL A1+ 29-10-20 CRISIL A1+ CRISIL A1+
      --   --   --   -- 30-06-20 CRISIL A1+ --
Commercial Paper ST 40.0 CRISIL A1+   -- 08-02-22 CRISIL A1+ 25-02-21 CRISIL A1+ 29-10-20 CRISIL A1+ --
      --   --   --   -- 30-06-20 CRISIL A1+ --
Non Convertible Debentures LT   --   --   -- 25-02-21 Withdrawn 29-10-20 CRISIL AA-/Stable CRISIL AA-/Stable
      --   --   --   -- 30-06-20 CRISIL AA-/Stable --
All amounts are in Rs.Cr.
Annexure - Details of Bank Lenders & Facilities
Facility Amount (Rs.Crore) Name of Lender Rating
Cash Credit 5 Bank of India CRISIL AA-/Stable
Cash Credit 10 Bank of Maharashtra CRISIL AA-/Stable
Cash Credit 20 ICICI Bank Limited CRISIL AA-/Stable
Cash Credit 5 HDFC Bank Limited CRISIL AA-/Stable
Letter of credit & Bank Guarantee 86 Bank of India CRISIL A1+
Letter of credit & Bank Guarantee 110 HDFC Bank Limited CRISIL A1+
Letter of credit & Bank Guarantee 50 Bank of Maharashtra CRISIL A1+
Letter of credit & Bank Guarantee 250 ICICI Bank Limited CRISIL A1+
Proposed Non Fund based limits 4 Not Applicable CRISIL A1+

This Annexure has been updated on 07-Feb-23 in line with the lender-wise facility details as on 27-Jul-22 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

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