Rating Rationale
December 21, 2020 | Mumbai
Kkalpana Industries (India) Limited
Ratings placed on 'Watch Negative'
 
Rating Action
Total Bank Loan Facilities Rated Rs.712.53 Crore
Long Term Rating CRISIL A- (Placed on 'Rating Watch with Negative Implications')
Short Term Rating CRISIL A2+ (Placed on 'Rating Watch with Negative Implications')
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has placed its ratings on the bank facilities of Kkalpana Industries (India) Limited (KIIL) on 'Rating Watch with Negative Implications'.
 
The ratings are placed on watch 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.

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.
 
Weaknesses:
* 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   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

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 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-22 14.63 NA CRISIL A-/Watch Negative
NA Term Loan NA NA 31-Dec-22 11.30 NA CRISIL A-/Watch Negative
NA Term Loan NA NA 31-Mar-21 4.60 NA CRISIL A-/Watch Negative
NA Letter of credit &
Bank Guarantee
NA NA NA 535.00 NA CRISIL A2+/Watch Negative
 
Annexure - List of entities consolidated
S No Name of associate/subsidiary Nature of consolidation Rationale for consolidation
1 Plastic Processors and Exporter Pvt Ltd Fully consolidated Managerial Linkages
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  177.53  CRISIL A-/(Watch) Negative  31-08-20  CRISIL A-/Stable  29-07-19  CRISIL A-/Stable  06-07-18  CRISIL A-/Stable    --  -- 
        04-06-20  CRISIL A-/Stable               
Non Fund-based Bank Facilities  LT/ST  535.00  CRISIL A2+/(Watch) Negative  31-08-20  CRISIL A2+  29-07-19  CRISIL A2+  06-07-18  CRISIL A2+    --  -- 
        04-06-20  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
Cash Credit 147 CRISIL A-/Watch Negative Cash Credit 147 CRISIL A-/Stable
Letter of credit & Bank Guarantee 535 CRISIL A2+/Watch Negative Cash Credit 45 Withdrawn
Term Loan 30.53 CRISIL A-/Watch Negative Letter of credit & Bank Guarantee 535 CRISIL A2+
-- 0 -- Letter of credit & Bank Guarantee 55 Withdrawn
-- 0 -- Proposed Long Term Bank Loan Facility 30.58 Withdrawn
-- 0 -- Term Loan 30.53 CRISIL A-/Stable
Total 712.53 -- Total 843.11 --
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
Rating Criteria for Chemical Industry
CRISILs Criteria for Consolidation

For further information contact:
Media Relations
Analytical Contacts
Customer Service Helpdesk
Saman Khan
Media Relations
CRISIL Limited
D: +91 22 3342 3895
B: +91 22 3342 3000
saman.khan@crisil.com

Naireen Ahmed
Media Relations
CRISIL Limited
D: +91 22 3342 1818
B: +91 22 3342 3000
naireen.ahmed@crisil.com

Anuj Sethi
Senior Director - CRISIL Ratings
CRISIL Limited
B:+91 44 6656 3100
anuj.sethi@crisil.com


Gautam Shahi
Director - CRISIL Ratings
CRISIL Limited
B:+91 124 672 2000
gautam.shahi@crisil.com


Sanjana Ghosh
Rating Analyst - CRISIL Ratings
CRISIL Limited
B:+91 22 3342 3000
Sanjana.Ghosh@crisil.com
Timings: 10.00 am to 7.00 pm
Toll free Number:1800 267 1301

For a copy of Rationales / Rating Reports:
CRISILratingdesk@crisil.com
 
For Analytical queries:
ratingsinvestordesk@crisil.com


 

Note for Media:
This rating rationale is transmitted to you for the sole purpose of dissemination through your newspaper / magazine / agency. The rating rationale may be used by you in full or in part without changing the meaning or context thereof but with due credit to CRISIL. However, CRISIL alone has the sole right of distribution (whether directly or indirectly) of its rationales for consideration or otherwise through any media including websites, portals etc.


About CRISIL Limited

CRISIL is a leading agile and innovative, global analytics company driven by its mission of making markets function better. We are India’s foremost provider of ratings, data, research, analytics and solutions. A strong track record of growth, culture of innovation and global footprint sets us apart. We have delivered independent opinions, actionable insights, and efficient solutions to over 1,00,000 customers.
 
We are majority owned by S&P Global Inc., a leading provider of transparent and independent ratings, benchmarks, analytics and data to the capital and commodity markets worldwide.
 
For more information, visit www.crisil.com 


Connect with us: TWITTER | LINKEDIN | YOUTUBE | FACEBOOK

About CRISIL Ratings
CRISIL Ratings is part of CRISIL Limited (“CRISIL”). We pioneered the concept of credit rating in India in 1987. CRISIL is registered in India as a credit rating agency with the Securities and Exchange Board of India (“SEBI”). With a tradition of independence, analytical rigour and innovation, CRISIL sets the standards in the credit rating business. We rate the entire range of debt instruments, such as, bank loans, certificates of deposit, commercial paper, non-convertible / convertible / partially convertible bonds and debentures, perpetual bonds, bank hybrid capital instruments, asset-backed and mortgage-backed securities, partial guarantees and other structured debt instruments. We have rated over 24,500 large and mid-scale corporates and financial institutions. CRISIL has also instituted several innovations in India in the rating business, including rating municipal bonds, partially guaranteed instruments and microfinance institutions. We also pioneered a globally unique rating service for Micro, Small and Medium Enterprises (MSMEs) and significantly extended the accessibility to rating services to a wider market. Over 1,10,000 MSMEs have been rated by us.


CRISIL PRIVACY
 
CRISIL respects your privacy. We may use your contact information, such as your name, address, and email id to fulfil your request and service your account and to provide you with additional information from CRISIL.For further information on CRISIL’s privacy policy please visit www.crisil.com.


DISCLAIMER

This disclaimer forms part of and applies to each credit rating report and/or credit rating rationale that we provide (each a “Report”). For the avoidance of doubt, the term “Report” includes the information, ratings and other content forming part of the Report. The Report is intended for the jurisdiction of India only. This Report does not constitute an offer of services. Without limiting the generality of the foregoing, nothing in the Report is to be construed as CRISIL providing or intending to provide any services in jurisdictions where CRISIL does not have the necessary licenses and/or registration to carry out its business activities referred to above. Access or use of this Report does not create a client relationship between CRISIL and the user.

We are not aware that any user intends to rely on the Report or of the manner in which a user intends to use the Report. In preparing our Report we have not taken into consideration the objectives or particular needs of any particular user. It is made abundantly clear that the Report is not intended to and does not constitute an investment advice. The Report is not an offer to sell or an offer to purchase or subscribe for any investment in any securities, instruments, facilities or solicitation of any kind or otherwise enter into any deal or transaction with the entity to which the Report pertains. The Report should not be the sole or primary basis for any investment decision within the meaning of any law or regulation (including the laws and regulations applicable in the US).

Ratings from CRISIL Rating are statements of opinion as of the date they are expressed and not statements of fact or recommendations to purchase, hold, or sell any securities / instruments or to make any investment decisions. Any opinions expressed here are in good faith, are subject to change without notice, and are only current as of the stated date of their issue. CRISIL assumes no obligation to update its opinions following publication in any form or format although CRISIL may disseminate its opinions and analysis. CRISIL rating contained in the Report is not a substitute for the skill, judgment and experience of the user, its management, employees, advisors and/or clients when making investment or other business decisions. The recipients of the Report should rely on their own judgment and take their own professional advice before acting on the Report in any way.CRISIL or its associates may have other commercial transactions with the company/entity.

Neither CRISIL nor its affiliates, third party providers, as well as their directors, officers, shareholders, employees or agents (collectively, “CRISIL Parties”) guarantee the accuracy, completeness or adequacy of the Report, and no CRISIL Party shall have any liability for any errors, omissions, or interruptions therein, regardless of the cause, or for the results obtained from the use of any part of the Report. EACH CRISIL PARTY DISCLAIMS ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY, SUITABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE. In no event shall any CRISIL Party be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs) in connection with any use of any part of the Report even if advised of the possibility of such damages.

CRISIL Ratings may receive compensation for its ratings and certain credit-related analyses, normally from issuers or underwriters of the instruments, facilities, securities or from obligors. CRISIL’s public ratings and analysis as are required to be disclosed under the regulations of the Securities and Exchange Board of India (and other applicable regulations, if any) are made available on its web sites, www.crisil.com (free of charge). Reports with more detail and additional information may be available for subscription at a fee – more details about CRISIL ratings are available here: www.crisilratings.com.

CRISIL and its affiliates do not act as a fiduciary. While CRISIL has obtained information from sources it believes to be reliable, CRISIL does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives and / or relies in its Reports. CRISIL keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of the respective activity. As a result, certain business units of CRISIL may have information that is not available to other CRISIL business units. CRISIL has established policies and procedures to maintain the confidentiality of certain non-public information received in connection with each analytical process. CRISIL has in place a ratings code of conduct and policies for analytical firewalls and for managing conflict of interest. For details please refer to: https://www.crisil.com/en/home/our-businesses/ratings/regulatory-disclosures/highlighted-policies.html

CRISIL’s rating criteria are generally available without charge to the public on the CRISIL public web site, www.crisil.com. For latest rating information on any instrument of any company rated by CRISIL you may contact CRISIL RATING DESK at CRISILratingdesk@crisil.com, or at (0091) 1800 267 1301.

This Report should not be reproduced or redistributed to any other person or in any form without a prior written consent of CRISIL.

All rights reserved @ CRISIL