Rating Rationale
June 04, 2019 | Mumbai
Kirloskar Pneumatic Company Limited
'CRISIL AA-/Stable' assigned to NCD 
 
Rating Action
Total Bank Loan Facilities Rated Rs.540 Crore (Enhanced from Rs.536 Crore)
Long Term Rating CRISIL AA-/Stable (Reaffirmed)
Short Term Rating CRISIL A1+ (Reaffirmed)
 
Rs.75 Crore Non Convertible Debentures CRISIL AA-/Stable (Assigned)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has assigned its 'CRISIL AA-/Stable' rating to the non convertible debentures (NCD) of Kirloskar Pneumatic Company Limited (KPCL) and reaffirmed its 'CRISIL AA-/Stable/CRISIL A1+' ratings on the bank facilities.
  
The company's performance was steady in fiscal 2019, driven by revenue growth of 18% and continued healthy operating margin of 12.4%. Over the medium term, business performance will be supported by diversified product range, strong customer base, and healthy orders. As on March 31, 2019, outstanding order book was Rs 640 crore. Financial risk profile, too, should remain strong supported by healthy capital structure and liquidity.
 
KPCL's road railer business commenced operations in the second half of fiscal 2019. Given the first year of operations, CRISIL will continue to monitor its performance and impact on the credit risk profile.
 
The ratings continue to reflect the company's strong financial risk profile and established market position. These strengths are partially offset by susceptibility to cyclicality in demand from end user sectors and volatile input prices.

Key Rating Drivers & Detailed Description
Strengths
* Strong financial risk profile:
Financial risk profile is strong, supported by healthy capital structure and liquid surplus and prudent working capital management. As on March 31, 2019, liquid surplus (comprising liquid mutual fund investments and cash and bank balance) was a healthy Rs 228 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. Revenue is derived 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.

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. KPCL's fortunes are, therefore, tied to the capital expenditure (capex) cycle in the 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 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 parent.
Liquidity

Liquidity is healthy, driven by expected cash accrual of more than Rs 50 crore per annum in fiscals 2020 and 2021 each, and should be sufficient to fund capex requirement'expected at Rs 20-30 crore per annum'and support working capital requirement in the absence of any long-term debt obligation. Cash and cash equivalents stood at Rs 228 crore as on March 31, 2019. KPCL also has access to fund-based limit of Rs 40 crore which remains unutilised thus far.

Outlook: Stable

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

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 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, air refrigeration and gas compressors, and transmission products. Manufacturing facilities of all divisions are integrated and are 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 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.

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 was sanctioned by National Company Law Tribunal on April 19, 2017. The scheme became effective on April 28, 2017, with April 1, 2016, as the appointed date.

Key Financial Indicators
Particulars Unit 2019* 2018
Revenue Rs crore 713 602
Profit after tax Rs crore 55 50
PAT margin % 7.7 8.3
Adjusted debt/adjusted networth Times NA -
Interest coverage Times 89.8 66.5
 *based on provisional audited financial statements

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 CRISIL AA-/Stable
NA Letter of credit & Bank Guarantee NA NA NA 496 CRISIL A1+
NA Proposed Non Fund based limits NA NA NA 4 CRISIL A1+
NA Non Convertible Debentures# NA NA NA 75 CRISIL AA-/Stable
#Yet to be issued
Annexure - Rating History for last 3 Years
  Current 2019 (History) 2018  2017  2016  Start of 2016
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Non Convertible Debentures  LT  0.00
04-06-19 
CRISIL AA-/Stable    --    --    --    --  -- 
Fund-based Bank Facilities  LT/ST  40.00  CRISIL AA-/Stable  22-05-19  CRISIL AA-/Stable  02-02-18  CRISIL AA-/Stable  14-08-17  CRISIL AA-/Stable  25-11-16  CRISIL AA-/Stable  CRISIL AA-/Negative 
                    24-06-16  CRISIL AA-/Stable   
Non Fund-based Bank Facilities  LT/ST  500.00  CRISIL A1+  22-05-19  CRISIL A1+  02-02-18  CRISIL A1+  14-08-17  CRISIL A1+  25-11-16  CRISIL A1+  CRISIL A1+ 
                    24-06-16  CRISIL A1+   
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
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+
Proposed Non Fund based limits 4 CRISIL A1+ -- 0 --
Total 540 -- 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

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