Detailed Rationale

CRISIL Ratings on the bank loan facilities of Kkalpana Industries (India) Limited (KIIL) remains on ‘Rating Watch with Negative Implications’.

 

Further, CRISIL Ratings has withdrawn its rating on Term Loan facility of Rs.30.53 crores, at the company's request and on receipt of a no-objection certificate from the bankers. This is in-line with CRISIL Ratings’ withdrawal policy.

 

CRISIL has placed the ratings on watch on December 21, 2020 following the recent announcement by the company that its board of directors has approved restructuring of the business through a scheme of arrangement. As per this, the compounding business will be demerged into a separate company, Ddev Plastiks Industries Ltd (DPIL), while KIIL will continue to hold the reprocessing business. After this restructuring, the entire external debt of the existing KIIL (Rs 62 crore as on March 31, 2020) will be transferred to DPIL. KIIL will become debt-free as the resultant KIIL i.e.  reprocessing business requires significantly smaller working capital requirement compared to the compounding business. As a result of the relatively lower scale of operations than the erstwhile KIIL, credit risk profile, post-demerger, may be more than one notch lower than the current rating.

 

Of the overall revenue of Rs 1,745 crore in fiscal 2020, the compounding business undertaking contributed Rs 1,693 crore with earnings before interest, depreciation, taxes and amortisation (EBIDTA) of Rs 83 crore; the reprocessing business undertaking contributed revenue of Rs 53 crore and EBIDTA of Rs 6 crore.  

 

As per the proposed scheme, the compounding segment, which is the core business of KIIL (contributed about 97% of the total revenue in fiscal 2020), is being transferred to the new entity while smaller business segment of the reprocessing segment will remain with KIIL. This is because there are restrictions on the transfer of licences held for reprocessing of plastic waste. A similar licence is also held by a Dubai-based wholly owned subsidiary of KIIL.

 

Also, the objective of this demerger is to explore growth opportunities separately as both the business segments have their own sets of strengths and dynamics in the form of risks, challenges and business models.

 

Each shareholder of KIIL would be issued shares of DPIL in 1:1 ratio, in consideration for the demerger; and DPIL will also be listed with its shareholding mirroring that of KIIL. The demerger is likely to take 6-9 months subject to necessary statutory and regulatory approvals from stock exchanges, National Company Law Tribunal, minority shareholders, lenders, and creditors.

 

CRISIL will continue to be in discussions with KIIL's management and will remove the ratings from watch and announce its final action once key regulatory approvals are obtained.

 

The ratings continue to reflect KIIL’s healthy business risk profile driven by its established position in the domestic polyvinyl chloride (PVC) and polyethylene (PE) compounds market, wide range of products, strong clientele consisting of all major wire and cable companies in India, and extensive experience of the promoters in the polymer compounds industry. These strengths are partially offset by exposure to intense competition, susceptibility of profitability to sharp volatility in raw material prices and currency fluctuations, as well as a modest interest coverage ratio.

Analytical Approach

CRISIL has considered loans from the promoters as 75% equity and 25% debt. CRISIL has also combined the business and financial risk profiles of KIIL and its 99.99% subsidiary, Plastic Processors and Exporter Pvt Ltd, as the two companies are in the same business and have common management and operational linkages.

 

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:

• Healthy business risk profile on the back of strong market position, extensive experience of the promoters, wide product range, and strong clientele

KIIL is promoted by Kolkata-based Surana family that has been associated with the polymer compounding industry for over five decades. Over the years, the promoters have diversified product profile, developed a strong understanding of market dynamics, and established healthy relationships with suppliers and customers. Clientele includes large wire and cable companies such as KEI Industries Ltd, Havells India Ltd, Apar Industries Ltd, and KEC International Ltd; apart from some key international manufacturers.

 

KIIL is the largest polymer compounder in India with capacity of 292,500 tonne per annum (tpa) as on March 31, 2020, with market leadership in PE compounds catering to the low- and medium-voltage power cable industry, supported by diversified products used for manufacturing building wires, control and instrumentation cables, and for insulation and jacketing of wires in the wire and cable industry, as well as in the packaging segment. The company’s strong market position is underpinned by large scale of operations (annual turnover of Rs 1,745 crore in fiscal 2020) and a diverse customer base.

 

• Disciplined inventory management and strategic location of facilities

The company has manufacturing facilities on the east and west coasts of India (West Bengal, Daman, and Silvassa).. Strategic location of its plants provides logistical advantages for import of raw materials as well as for export of products. Proximity to suppliers and ports also helps keep a tight control over inventory (20-40 days in the past eight fiscals). Volatility in raw material prices (crude oil derivatives) impacts operating profitability. However, the discipline in inventory management has helped KIIL to protect its business from sharp changes in raw material prices and sustain operating profitability at 4-7% over the past 10 fiscals. 

 

• Comfortable capital structure

Net worth was healthy at Rs 344 crore, gearing healthy at 0.30 time, and total outside liabilities to tangible net worth ratio strong at 1 time, as on March 31, 2020. With no major capital expenditure (capex) and effective working capital management backed by timely realisation of receivables, capital structure is expected to improve over the medium term.

 

Weakness:

• Exposure to intense competition in the compounds market and dependence on large players in the oil and gas industry for raw material

The domestic polymer compounding industry faces steep competition from import from global chemical giants such as Borealis AG, Dow Chemical Company, and Solvay SA. These players have an advantage of large capacity and economies of scale. While these entities mainly cater to speciality grade compounds focussed more on high- and extra-high-voltage power cables, KIIL’s business performance remains susceptible to competition from import. Also, the company procures around 70% of its raw material from Reliance Industries Ltd, Indian Oil Corporation Ltd, and ONGC Petro-additions Ltd, leading to low bargaining power with suppliers. 

 

• Modest, although improving, interest coverage ratio

In fiscal 2020, adjusted interest coverage ratio was modest at 1.93 times (1.8-2.5 times in the past five fiscals). Over the medium term, with operating profitability of 4-6% and lower debt level, interest coverage ratio should improve and sustain at over 2 times.

 

• Susceptibility of profitability to sharp volatility in raw material prices and currency rates

Raw materials, such as LDPE/HDPE and PVC resin, used to manufacture polymer compounds are crude derivatives and a significant portion of the same is imported. Input prices and currency exchange rates have been volatile in the past because of sharp fluctuations in crude oil prices. While the company has demonstrated discipline in working capital management in the past, its profitability is susceptible to any sharp movement in raw material prices and currency rates. 

Liquidity: Adequate

Cash accrual is likely to be Rs 50 crore against debt obligation of Rs 13 crore in fiscal 2021. Cash and equivalent stood at Rs 20 crore as on September 30, 2020. The company has no major capex over the medium term, and any maintenance capex is expected to be funded mainly through internal accrual. Current ratio remains strong at 1.5 times as on March 31, 2020

Rating Sensitivity Factors

Upward Factors:

• Improvement in scale of operations of KIIL post-demerger
• Sharp and sustained increase in operating profitability supported by better diversity
• Sustained improvement in interest coverage ratio above 3 times

 

Downward Factors:

• Regulatory issues in demerger or moderation in business risk profile impacting profitability and cash flow generation
• Deterioration in operating performance

About the Company

Incorporated in 1985 and promoted by the late Mr D C Surana and his son, Mr Narrindra Surana in Kolkata, KIIL established a unit in Daman for manufacturing PVC compounds. Sustained expansion has resulted in a diverse product portfolio consisting of PE and PVC compounds, master batches, engineering plastics, and reprocessed compounds. The company has seven manufacturing plants in West Bengal, Daman and Diu, Dadra and Nagar Haveli, and Noida; with an aggregate installed capacity of 292,500 TPA.

 

In the six months of fiscal 2021, the company reported revenue of Rs 626 crore and profit after tax of Rs 5 crore, against Rs 895 crore and Rs 9 crore in the same period previous fiscal.

Key Financial Indicators -CRISIL-adjusted numbers

As on/for the period ended March 31	Unit	2020	2019
Revenue	Rs crore	1745	1992
Profit after tax (PAT)	Rs crore	30	26
PAT margin	%	1.7	1.3
Adjusted debt/adjusted net worth	Times	0.30	1.17
Adjusted interest coverage	Times	1.93	1.97

 

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of Instrument	Date of Allotment	Coupon Rate (%)	Maturity Date	Issue Size (Rs.Cr)	Complexity Level	Rating Assigned with Outlook
NA	Cash Credit	NA	NA	NA	147.00	NA	CRISIL A-/Watch Negative
NA	Term Loan	NA	NA	30-Sept-2022	14.63	NA	Withdrawn
NA	Term Loan	NA	NA	31-Dec-2022	11.30	NA	Withdrawn
NA	Term Loan	NA	NA	31-Mar-2021	4.60	NA	Withdrawn
NA	Letter of credit & Bank Guarantee	NA	NA	NA	535.00	NA	CRISIL A2+/Watch Negative

 

Annexure – List of entities consolidated

Name of associate/subsidiary	Nature of consolidation	Rationale for consolidation
Plastic Processors and Exporter Pvt Ltd	Fully consolidated	Managerial Linkages