Rating Rationale
June 04, 2020 | 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 reflects improvement in the financial risk profile in fiscal 2020 marked by improving capital structure and presence of healthy liquidity. Disciplined working capital management and efforts to reduce the dependence on external borrowings has led to improvement in the gearing from 1.18 times in fiscal 2019 to estimated 0.75 times in fiscal 2020. 
 
The performance in fiscal 2021 will be impacted due to temporary closure of facilities and Covid induced slowdown leading to decline in volume offtake from the end user industry, mainly wires & cables industry. However owing to increased offtake from other major end user industry i.e. packaging, the revenue de-growth is expected to be arrested. That said, Overall revenue are expected to decline by 15-20% in fiscal 2021 compared to earlier fiscal. Operating profitability, may be impacted due to lower volumes however the lower raw material prices will support the same.
 
Liquidity remains healthy, with unutilized limits of around Rs 50 crore (fully backed by drawing power) and cash and equivalents of Rs 23 crore as on 30th April 2020. As against, the debt repayments stand at around Rs 17 crore for the fiscal. After initial shutdown of the plants post announcement of the lockdown, the company resumed operations in April.
 
Earlier in fiscal 2020, operating performance remained muted due to sluggish demand mainly in first half of fiscal. Revenue is estimated to have declined by 10% and margins estimated at 5% for fiscal 2020 against 5.9% in fiscal 2019. Financial risk profile improved with reduction in gearing. Over medium term, the same is expected to remain comfortable with low capex intensity and efficient working capital management. Interest coverage is expected to improve to over 2.2 times in fiscal 2021 as against estimated 2.10 times in 2020. 
 
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 as well as extensive experience of the promoters in the polymer compounds industry. These strengths are partially offset by high competitive intensity in the industry, susceptibility of profitability to sharp volatility in raw material prices and currency fluctuations as well as moderate 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 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 - 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, 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 2020, 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 above Rs 1700 crore in fiscal 2020) 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 estimated healthy networth of Rs 353 crore, gearing of 0.75 times, and TOLTNW ratio of 1.1 times as on March 31, 2020. 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, with operating profitability of 4-6% and lower debt level, the interest coverage of over 2 times should sustain.
 
* 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 Adequate
KIL has adequate liquidity driven by expected cash accrual of Rs 40-50 crore per annum from fiscals 2021 to 2022 against annual debt obligation of Rs 10-17 crore. The cash and cash equivalent stood at Rs 23 crore as on April 30, 2020. The average utilisation of fund-based bank limit was 56% of drawing power over the 6 months through April 2020 while utilisation of non-fund based limits remained at 51%.  The company plans modest capex of Rs 10 crore per annum over the medium term, which is expected to be funded mainly through internal accrual. The current ratio was 1.4 times as on March 31, 2020.
Outlook: Stable

CRISIL believes despite challenging business environment, KIL is expected to benefit from its healthy business risk profile backed by its leadership in the domestic polymer compounds market despite the sluggish demand outlook for the end-user wire and cable industry in wake of Covid. Absence of major capex and term debt should improve the financial risk profile.

Rating Sensitivity factors
Upward factors
* Sharp and sustained improvement in operating profitability supported by improving diversity
* Improvement in debt metrics such as interest coverage and TOL/TNW i.e. sustained improvement of interest coverage above 3 times
 
Downward factors
* Deterioration in operating performance
* Weakening of capital structure and debt protection metrics leading to interest coverage below 1.9 times.
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.
 
In fiscal 2020, KIL is estimated to have revenue of Rs 1760 crore.

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 192.00 CRISIL A-/Stable
NA Term Loan NA NA 30-Sept-2022 14.63 CRISIL A-/Stable
NA Term Loan NA NA 31-Dec-2022 11.30 CRISIL A-/Stable
NA Term Loan NA NA 31-Mar-2021 4.60 CRISIL A-/Stable
NA Letter of credit & Bank Guarantee NA NA NA 590.00 CRISIL A2+
NA Proposed Long Term Bank Loan Facility NA NA NA 30.58 CRISIL A-/Stable
 
Annexure - List of Entities Consolidated
Names of Entities Consolidated Extent of Consolidation Rationale for Consolidation
Plastic Processors and Exporter Private Limited Fully consolidated Operational linkages and common management
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  253.11  CRISIL A-/Stable      29-07-19  CRISIL A-/Stable  06-07-18  CRISIL A-/Stable    --  -- 
Non Fund-based Bank Facilities  LT/ST  590.00  CRISIL A2+      29-07-19  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 192 CRISIL A-/Stable Cash Credit 260 CRISIL A-/Stable
Letter of credit & Bank Guarantee 590 CRISIL A2+ Letter of credit & Bank Guarantee 525 CRISIL A2+
Proposed Long Term Bank Loan Facility 30.58 CRISIL A-/Stable Term Loan 58.11 CRISIL A-/Stable
Term Loan 30.53 CRISIL A-/Stable -- 0 --
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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