Rating Rationale
February 02, 2018 | Mumbai
Kirloskar Pneumatic Company Limited
Ratings Reaffirmed
 
Rating Action
Total Bank Loan Facilities Rated Rs.536 Crore
Long Term Rating CRISIL AA-/Stable (Reaffirmed)
Short Term Rating CRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has reaffirmed its 'CRISIL AA-/Stable/CRISIL A1+' ratings on the bank facilities of Kirloskar Pneumatic Company Limited (KPCL).

For the nine months through December 2017, the company reported net profit of Rs 2 crore against net profit of Rs 36 crore in the corresponding period of the previous fiscal, due to reduced order execution in the first half, on account of delay in order dispatches by customers owing to Goods and Services Tax (GST) transition and losses in the transmission segment. The impact of GST transition was, as expected, temporary. Revenue improved sequentially for the quarter through December 2017, supported by increased order execution in the compressor segment, while operating margin remained steady at 7.7%. Performance should continue to improve over the medium term, supported by the company's diversified product range, strong customer base, and healthy orders. As on December 31, 2017, KPCL had orders of Rs 580 crore against Rs 300 crore a year earlier. Furthermore, financial risk profile remains robust, supported by debt free capital structure and healthy liquidity.

KPCL's road railer business has received approval from the Ministry of Road Transport and is likely to commence operations in the first half of fiscal 2019. It is likely to see a gradual scaling up of operations and CRISIL will factor in the same in its expectations as more visibility emerges. Performance of the road railer business and its impact on the company's credit risk profile will be monitorables.

The ratings continue to reflect the company's strong financial risk profile, supported by a debt-free capital structure and healthy liquidity. The ratings also factor in diverse product range and customer base. These strengths are partially offset by susceptibility to cyclicality in demand from end-user sectors, and to volatility in input prices.

Key Rating Drivers & Detailed Description
Strengths
* Strong financial risk profile: The financial risk profile is supported by debt-free balance sheet, healthy liquid surplus, and prudent working capital management. As on December 31, 2017, liquid surplus (comprising liquid mutual fund investments) remained healthy at Rs 170 crore.

* Diversified product range and customer base: Revenue comes from diverse industries such as 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. The company has an established position in each product segment (air compressors, refrigeration and gas compressors, and transmission products) through technological collaboration and strong after-sales support services.

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. The addition of new facilities or expansion of existing facilities by industries is dependent on the country's economic performance. KPCL's fortunes are thus tied to the capital expenditure cycle in end-user industries.

* Susceptibility to volatility in input prices and competitive pressure: Operating margin is susceptible to volatile input prices. The gestation period of projects in the compressor systems segment is 6-18 months, rendering profitability susceptible to volatility in input prices. Also, in the compressor segment, KPCL faces competition from domestic players and major international players and their Indian subsidiaries, with players having access to strong technological and managerial support from their parent.
Outlook: Stable

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

Upside scenario:
* Sustained increase in revenue and operating profitability supported by increase in scale of operations
* Efficient working capital management, with sustained strong financial risk profile and healthy liquidity

Downside scenario:
* Significant and steady decline in revenue or profitability
* Stretched working capital cycle, or large, debt-funded capital expenditure, weakening the capital structure or liquidity

About the Company

KPCL, set up in 1958, is part of the Pune-based Kirloskar group. It has three divisions: air compressors, air refrigeration and gas compressors, and transmission products. Manufacturing facilities of all divisions are integrated, and located in and around Pune. End users include the oil and gas, 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 necessary technology to build road railers from Wabash Inc, USA, 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.

The scheme of amalgamation of Pneumatic Holdings Ltd (PHL; holding company of KPCL) and Kirloskar Road Railer Ltd (KRRL; wholly owned subsidiary of KPCL) with KPCL has been sanctioned by National Company Law Tribunal on April 19, 2017. The scheme became effective April 28, 2017, with April 1, 2016, being the appointed date of scheme.

Key Financial Indicators
Particulars Unit 2017 2016
Revenue Rs cr 527 512
Profit After Tax (PAT) Rs cr 53 37
PAT Margins % 10.0 7.2
Adjusted debt/adjusted networth Times 0.0 0.0
Interest coverage Times 76.6 59.4

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL 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 cr.) Rating Assigned with Outlook
NA Cash credit NA NA NA 40.00 CRISIL AA-/Stable
NA Letter of credit & bank guarantee NA NA NA 496.00 CRISIL A1+
Annexure - Rating History for last 3 Years
  Current 2018 (History) 2017  2016  2015  Start of 2015
Instrument Type Quantum Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund-based Bank Facilities  LT/ST  40  CRISIL AA-/Stable    No Rating Change    No Rating Change  24-06-16  CRISIL AA-/Stable  02-03-15  CRISIL AA-/Negative  CRISIL AA-/Stable 
Non Fund-based Bank Facilities  LT/ST  496  CRISIL A1+    No Rating Change    No Rating Change    No Rating Change    No Rating Change  CRISIL A1+ 
Table reflects instances where rating is changed or freshly assigned. 'No Rating Change' implies that there was no rating change under the release.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Cash Credit 40 CRISIL AA-/Stable Cash Credit 40 CRISIL AA-/Stable
Letter of credit & Bank Guarantee 496 CRISIL A1+ Letter of credit & Bank Guarantee 496 CRISIL A1+
Total 536 -- Total 536 --
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 Criteria for Consolidation

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