Rating Rationale
July 29, 2019 | Mumbai
Kkalpana Industries (India) Limited
Ratings Reaffirmed
 
Rating Action
Total Bank Loan Facilities Rated Rs.843.11 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 Kkalpana Industries (India) Limited (KIL).

The ratings continue to reflect the company's healthy business risk profile driven by its established position in the domestic polyvinyl chloride (PVC) and polyethylene (PE) compounds market, its wide range of products, and strong clientele consisting of all major wire and cable companies in India. The ratings also factor in the extensive experience of the promoters in the polymer compounds industry, the company's disciplined working capital management, and comfortable capital structure. These strengths are partially offset by low interest coverage which is expected to improve with ramp-up in operations, increasing share of high-margin products, and reducing long-term debt in the absence of significant capital expenditure (capex) plan. The ratings also factor in high competitive intensity in the industry and susceptibility of profitability to sharp volatility in raw material prices and currency fluctuations.

In fiscal 2019, the company posted revenue growth of 16%, driven by strong volume growth in the new product segments (reprocessed compounds and engineering plastics) and increased realisations for PE and PVC compounds. While envisaged improvement in operating margin to over 6% in fiscal 2019 was arrested owing to higher labour expenses in the reprocessed compounds segment on account of change in the plastic scrap sorting process, the margin remained stable at 5.8%. A marginal change in product mix with focus on value-added products will support improvement in the margin to 6-7% over the medium term. Also, turnover is expected to increase at a healthy rate of 10-12% per annum, supported by growth in the end-user industry. Furthermore, capital structure improved in fiscal 2019, with the ratio of total outside liabilities to tangible networth (TOLTNW) improving to 1.41 times in fiscal 2019 from 1.71 times in fiscal 2018 because of disciplined working capital management leading to reduced dependence on short-term borrowings and low capex intensity. The TOLTNW ratio is expected to improve to 1.2 times by fiscal 2022. Interest coverage improved to 1.97 times in fiscal 2019 from 1.82 times in the previous fiscal. Increase in revenue and profitability, disciplined working capital management, and low capex will drive improvement in the adjusted interest coverage to over 2.5 times over the medium term.

KIL's consolidated turnover registered healthy compound annual growth rate of 9.9% over the past five fiscals. The product profile is diversified across PE, PVC, engineering plastics, and reprocessed compounds. PE compounds have the largest revenue share (comprising 54% of sales), and the company has strong market leadership in sub segments such as Sioplas (market share of 50%), XLPE (market share 33%), and Semicon (market share 25%). KIL has an established presence of over 40 years, strong clientele, and strong research and development capability which has helped the company introduce different product categories and diversify revenue. Over the past two fiscals, the company focussed on increasing the contribution of new product segments'engineering plastics and reprocessed compounds'to diversify the product profile. The contribution of these two segments to revenue increased to 13% in fiscal 2019 from 7% in 2018.

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 KIL and its 99.99% subsidiary, Plastic Processors and Exporter Pvt Ltd, as the companies are in similar businesses, and have common management and operational linkages.

Please refer Annexure - Details of consolidation, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description
Strengths
* Healthy business risk profile, driven by established position in the domestic polymer compounds market, the extensive experience of the promoters, wide product range, and strong clientele

KIL is promoted by the Kolkata-based Surana family, which has been associated with the polymer compounding industry for over five decades. Over the years, the promoters have diversified the product profile, developed a strong understanding of the nuances of the industry, and have established strong relationships with suppliers as well as customers. KIL's clientele includes large wire and cable companies such as KEI Industries Ltd, Havells India Ltd, Apar Industries Ltd, and KEC International Ltd ('CRISIL AA-/Stable/CRISIL A1+'). KIL will likely continue to benefit from its promoters' extensive experience in the polymer compounding industry.

KIL is the largest polymer compounder in India with capacity of 292,500 tonne per annum (tpa) as on March 31 2019, with market leadership in PE compounds catering to the low- and medium-voltage power cable industry. The leadership position is supported by diversified product base with 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 industries such as packaging. The company's strong market position is underpinned by large scale of operations (annual turnover of Rs 1,992 crore) and a diverse customer base. The company has longstanding relationships with all major wire and cable manufacturers in India as well as a few major international manufacturers.

* Disciplined inventory management and strategic location of facilities
The company has manufacturing facilities on the east and west coasts of India, in 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. The company had inventory of 20-40 days in the past 8 years. Volatility in raw material prices (crude oil derivatives) impact operating profitability. The discipline in inventory management has helped KIL protect its business from volatility in raw material prices, mainly crude derivatives, and sustain its operating profitability at 4-7% over the past 10 years. 

* Comfortable capital structure
KIL's capital structure is comfortable, backed by healthy networth of Rs 333 crore, gearing of 1.17 times, and TOLTNW ratio of 1.41 times as on March 31, 2019. With no major capex requirement and effective working capital management backed by timely realisation of receivables, the capital structure is expected to improve over the medium term.

Weaknesses
* Strong competition from import 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 companies mainly cater to specialty grade compounds focussed more on high- and extra-high-voltage power cables, the business performance of KIL 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
In fiscal 2019, KIL reported modest adjusted interest coverage of 1.97 times. The interest coverage was 1.8-2.5 times over the past five fiscals. Over the medium term, expected healthy annual revenue growth (10-12%) and operating profitability of 5-7% should result in an improvement in the interest coverage to over 2.5 times.

* Susceptibility of profitability to sharp volatility in raw material prices and currency movements
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. Prices of the raw materials 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

KIL has adequate liquidity driven by expected cash accrual of Rs 50-60 crore per annum from fiscals 2020 to 2022 against annual debt obligation of Rs 15-17 crore. The cash and cash equivalent stood at Rs 21 crore as on March 31, 2019. The average utilisation of fund-based bank limit was 83% of drawing power and 31% of sanctioned fund-based limits over the 12 months through June 2019, while non-fund-based limits were utilised at an average of 68%. Availability of unsecured limits of Rs 75 crore and funding support from the promoters in the form of unsecured loans of Rs 30 crore as on March 31, 2019, support financial flexibility. The company plans modest capex of Rs 15-20 crore per annum over the medium term, which is expected to be funded mainly through internal accrual. The current ratio was 1.33 times as on March 31, 2019.

Outlook: Stable

CRISIL believes KIL will maintain its strong business risk profile backed by its leadership in the domestic polymer compounds market and the buoyant growth outlook of the end-user wire and cable industry. Absence of major capex and term debt should improve the financial risk profile.

Upside scenario
* Significant and sustained improvement in operating performance, in terms of revenue, profitability, and return on capital employed (RoCE)
* Continued improvement in financial risk profile backed by deleveraging of capital structure and improvement in debt protection metrics, especially interest coverage and net cash accrual to adjusted debt ratio on a sustainable basis
 
Downside scenario
* Substantial decline in business performance, profitability, and cash accrual
* Increase in debt on account of more-than-expected debt-funded capex/acquisition or dividend payout or weakening in working capital management, limiting the envisaged improvement in key credit metrics

About the Company

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

Key Financial Indicators - CRISIL adjusted numbers
As on/for the period ended March 31  Units 2019 2018
Revenue Rs crore 1992 1723
Profit after tax (PAT) Rs crore 26 20
PAT margin % 1.3 1.2
Adjusted debt/Adjusted networth Times 1.17 1.42
Adjusted interest coverage Times 1.97 1.82

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 260.00 CRISIL A-/Stable
NA Term Loan NA NA 30-Sept-2022 26.39 CRISIL A-/Stable
NA Term Loan NA NA 31-Dec-2022 21.87 CRISIL A-/Stable
NA Term Loan NA NA 31-Mar-2021 9.85 CRISIL A-/Stable
NA Letter of credit &
Bank Guarantee
NA NA NA 525.00 CRISIL A2+

Annexure - List of entities consolidated 
S No Name of Associate/Subsidiary Nature of consolidation
1 Plastic Processors and Exporter Private Limited Fully consolidated
 
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
Fund-based Bank Facilities  LT/ST  318.11  CRISIL A-/Stable      06-07-18  CRISIL A-/Stable    --    --  -- 
Non Fund-based Bank Facilities  LT/ST  525.00  CRISIL A2+      06-07-18  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 260 CRISIL A-/Stable Cash Credit 260 CRISIL A-/Stable
Letter of credit & Bank Guarantee 525 CRISIL A2+ Letter of credit & Bank Guarantee 525 CRISIL A2+
Term Loan 58.11 CRISIL A-/Stable Term Loan 58.11 CRISIL A-/Stable
Total 843.11 -- 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

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