Rating Rationale
July 07, 2020 | Mumbai
Kirloskar Ebara Pumps Limited
Ratings Reaffirmed
 
Rating Action
Total Bank Loan Facilities Rated Rs.180.5 Crore
Long Term Rating CRISIL A-/Stable (Reaffirmed)
Short Term Rating CRISIL A2+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has reaffirmed its 'CRISIL A-/Stable/CRISIL A2+' ratings on the bank facilities of Kirloskar Ebara Pumps Limited (KEPL).
 
KEPL's revenue declined by 5% in fiscal 2020 to Rs 163 crore, mainly due to temporary closure of its factory during the nationwide lockdown to control to Covid-19 pandemic and fall in turnover from the export segment. However, the company is expected to have moderate revenue growth of about 5% over the medium term, backed by a healthy order book of Rs 230 crore as of June 2020. Operating margin declined around 9% in fiscal 2020 from 17.7% in fiscal 2019 on account of sharp increase in the raw material cost. The operating margin is expected to improve to 12-13% over the near to medium term, with focus on high-margin domestic orders, cost-control measures and steady sales of high-margin spares. The improvement in operating profitability will remain a key monitorable.
 
The ratings reflects the operational synergies and expected financial support from the joint venture (JV) partner, Kirloskar Brothers Ltd (KBL; rated 'CRISIL AA-/Stable/CRISIL A1+'), in case of exigencies, established market position in the process pumps segment and adequate financial risk profile.  These strengths are partially offset by susceptibility to intense competition and risks related to cyclicality in demand from end-user industries.

Analytical Approach

CRISIL has changed its analytical approach and applied the parent notch-up framework to factor in support from KBL, the JV partner, which holds 45% in KEPL. Earlier, the approach was credit assessment on a standalone basis.

Key Rating Drivers & Detailed Description
Strengths: 
* Strong operational and financial support from the parent, KBL: 
KEPL is strategically important to KBL because KEPL's business is a vertical extension of KBL's pumps business. KBL holds 45% shareholding in KEPL and continues to provide operational, technical and sales support as well as overall guidance. KBL is expected to provide financial support to the company in case of an exigency.
 
* Established market position in the process pumps industry:
The market position is supported by KBL's strong brand in the pumps industry and the sound product quality. The reputed clientele includes Reliance Industries Ltd ('CRISIL AAA/Stable/CRISIL A1+'), Indian Oil Corporation Ltd ('CRISIL AAA/Stable/CRISILA1+'), Bharat Petroleum Corporation Ltd ('CRISIL AAA/Watch Developing/CRISIL A1+'), Larsen & Turbo Ltd ('CRISIL AAA/FAAA/Stable/CRISIL A1+') and HPCL-Mittal Energy Ltd.
 
* Adequate financial risk profile:
The capital structure is strong, with no long-term debt as on March 31, 2020. Capital expenditure (capex) of Rs 3-4 crore expected over fiscals 2021 and 2022 is likely to be funded through internal cash accrual, thus ensuring an adequate financial profile. Debt protection metrics were comfortable, with interest coverage ratio of 9.8 times in fiscal 2020 compared to 21.8 times in fiscal 2019. Financial flexibility is supported by low bank limit utilisation given the healthy cash accrual.
 
Weaknesses:
* Susceptibility to competitive pressure and volatility in raw material prices:
Business performance is susceptible to competitive pressure, mainly in the pumps segment, from major international players and their Indian subsidiaries, which have access to strong technological and managerial support from their parents. Furthermore, the operations are exposed to volatility in raw material prices. The company's operating profitability has been volatile due to intense competition and fluctuations in raw material prices, with operating profitability declining to 9% in fiscal 2020 compared to 17.7% in fiscal 2019.  
 
* Exposure to risks related to cyclicality in demand from end-user industries:
A major portion of the revenue is derived from the sale of process pumps and pump spares. More than 70% of the equipment sold is to the petroleum refining industry, and the remaining is to other process industries. The pumps are in demand during commissioning of refining or manufacturing facilities or expansion of the current facilities. This is dependent on the overall performance of the Indian economy, which would have a bearing on the company's performance.
 
* Large working capital requirement: 
The working capital cycle remains stretched on account of large receivables and finished goods inventory. Gross current assets (GCAs) are expected to be high at around 356 days as on March 31, 2020, driven by temporary increase in inventory due to the nationwide lockdown amid the Covid-19 pandemic. However, GCAs are expected to improve to about 300 days over the medium term. Progress of execution of projects and collection of retention money will be key monitorables.
Liquidity Strong

Bank limit utilisation is minimal, and cash accrual of Rs 11-13 crore per fiscal will be adequate to meet the yearly capex of Rs 3-4 crore in the absence of any debt obligation over the medium term.

Outlook: Stable

The business risk profile is likely to improve over the medium term backed by its established market position and healthy order book. The financial risk profile is expected to remain adequate, supported by steady cash accrual and moderate capex.

Rating Sensitivity factors
Upward factors
* Sustained revenue growth of 15%, with operating profitability above 15%
* Efficient working capital management
* Improvement in the parent's credit risk profile and better business synergies
 
Downward factors
* Significant decline in revenue, with operating profitability falling below 7%
* Larger-than-expected, debt-funded capex or stretched working capital cycle weakening the financial risk profile
* Material deterioration in the parent's credit risk profile or lower-than-expected or non-timely support from KBL
About the Company

KEPL, a JV between KBL and EC, was incorporated in 1988 to manufacture special-purpose rotary machines, such as process pumps, used in process industries for handling viscous liquids and chemicals. Each of the JV partners owns 45% of the equity shares; the remaining is held by Kirloskar family, KBL Employees' Welfare Trust and others. The overall management, including procurement, operations and marketing functions, is under the Kirloskar group.
 
KEPL mainly operates in two business segments: process and boiler-feed pumps and turbines. In May 2020, National Company Law Tribunal dismissed a case filed by Riverdale Infrastructures Pvt Ltd against KEPL with respect to pending litigation on the sale of shares by Ebara Corporation to Riverdale Infrastructures Pvt Ltd. Hence, Ebara Corporation continues to be the JV partner and KBL has first right of refusal in case of a stake sale offer by Ebara.

Key Financial Indicators
Particulars  Unit 2020* 2019
Revenue Rs in crore 163 169
Profit After Tax (PAT) Rs in crore 8 18
PAT Margin % 4.9 10.9
Adjusted debt/adjusted networth Times 0.13 NA
Interest coverage % 12.7 23.8
*Provisional

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL 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. For more details on the CRISIL complexity levels, please visit www.crisil.com/complexity-levels.
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 Bank Guarantee^^ NA NA NA 46 NA CRISIL A2+
NA Bank Guarantee# NA NA NA 27 NA CRISIL A2+
NA Bank Guarantee** NA NA NA 50 NA CRISIL A2+
NA Proposed Long Term Bank Loan Facility NA NA NA 8.5 NA CRISIL A-/Stable
NA Cash Credit^ NA NA NA 14 NA CRISIL A-/Stable
NA Letter of Credit^^ NA NA NA 30 NA CRISIL A2+
NA Overdraft* NA NA NA 5 NA CRISIL A-/Stable
 ^Interchangeable with Export Packing Credit/Foreign Bill Discounting/ Packing Credit Foreign Currency / Bill Discounting limit up to Rs 14 crore.
^^Full interchangeability between Letter of Credit and Bank Guarantee limit.
*Interchangeable with Working Capital Demand Loan/Export Packing Credit /Post-Shipment Credit Foreign Currency/ Packing Credit Foreign Currency limit up to Rs 5 crore.
**Interchangeable with Letter of Credit limit up to Rs 14 crore.
#Interchangeable with Letter of Credit/Packing Credit Foreign Currency/Export Packing Credit/Post-Shipment Credit Foreign Currency limit up to Rs 10 crore, Standby Letter of Credit / Cash Credit/Bill discounting Limit up to Rs 5.00 crore.
Annexure - Rating History for last 3 Years
  Current 2020 (History) 2019  2018  2017  Start of 2017
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund-based Bank Facilities  LT/ST  27.50  CRISIL A-/Stable      30-12-19  CRISIL A-/Stable  31-10-18  CRISIL A-/Stable  17-07-17  CRISIL A-/Negative  CRISIL A-/Negative 
Non Fund-based Bank Facilities  LT/ST  153.00  CRISIL A2+      30-12-19  CRISIL A2+  31-10-18  CRISIL A2+  17-07-17  CRISIL A2+  CRISIL A2+ 
All amounts are in Rs.Cr.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Bank Guarantee^^ 46 CRISIL A2+ Bank Guarantee^^ 46 CRISIL A2+
Bank Guarantee# 27 CRISIL A2+ Bank Guarantee# 27 CRISIL A2+
Bank Guarantee** 50 CRISIL A2+ Bank Guarantee** 50 CRISIL A2+
Cash Credit^ 14 CRISIL A-/Stable Cash Credit^ 14 CRISIL A-/Stable
Letter of Credit^^ 30 CRISIL A2+ Letter of Credit^^ 30 CRISIL A2+
Overdraft* 5 CRISIL A-/Stable Overdraft* 5 CRISIL A-/Stable
Proposed Long Term Bank Loan Facility 8.5 CRISIL A-/Stable Proposed Long Term Bank Loan Facility 8.5 CRISIL A-/Stable
Total 180.5 -- Total 180.5 --
 ^Interchangeable with Export Packing Credit/Foreign Bill Discounting/ Packing Credit Foreign Currency / Bill Discounting limit up to Rs 14 crore.
^^Full interchangeability between Letter of Credit and Bank Guarantee limit.
*Interchangeable with Working Capital Demand Loan/Export Packing Credit /Post-Shipment Credit Foreign Currency/ Packing Credit Foreign Currency limit up to Rs 5 crore.
**Interchangeable with Letter of Credit limit up to Rs 14 crore.
#Interchangeable with Letter of Credit/Packing Credit Foreign Currency/Export Packing Credit/Post-Shipment Credit Foreign Currency limit up to Rs 10 crore, Standby Letter of Credit / Cash Credit/Bill discounting Limit up to Rs 5.00 crore.
Links to related criteria
CRISILs Approach to Financial Ratios
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating criteria for manufaturing and service sector companies
CRISILs Bank Loan Ratings
Criteria for Notching up Stand Alone Ratings of Companies based on Parent Support

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