Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AA-/Stable/CRISIL A1+’ ratings on the bank loan facilities of Lohia Corp Limited (LCL).

 

The ratings continue to factor in the dominant market position of LCL in the domestic high-density polyethylene/polypropylene (HDPE/PP) woven-bag machine manufacturing industry, efficient working capital management and healthy financial risk profile. These strengths are partially offset by susceptibility to cyclicality and increasing competition, and volatility in raw material prices and foreign exchange (forex) rates.

 

The domestic industry has started witnessing uptick in demand with orders picking up. The company has a confirmed order book of over Rs 900 crore as on Sep’24. The company is also focusing on the export business and is increasingly getting more orders from overseas business as economic conditions improve in developing countries. Further, LCL has recently started selling smaller sized processing and conversion machines to increase its market share, as currently it has much lower market share in the domestic market in this segment, thus there is a significant opportunity for it to increase its market share in this segment.

 

Revenue is accordingly expected to sustain at improved levels of Rs 1300-1600 crore going forward driven by healthy order book across domestic and export demand due to pick-up in capex cycle for HDPE/PP bags manufacturing industry and China plus one policy sustaining. Also, the operating margin is expected to improve to 12-15% in the medium term with increasing scale, better operational efficiency (post implementation of plans laid down by leading consultant in the recent past), timely pass through of adverse movement in material costs and no major one-time consultancy fees.

 

Diversification of product mix is expected to further add stability to operational performance going forward and will remain a key monitorable. The financial risk profile remains strong, with expected gearing of less than 1 times for March 2025. Debt protection metrics are also expected to remain comfortable with interest coverage ratio of above 14 times and net cash accruals to total debt ratio expected to remain above 0.5 times over the medium term.

Analytical Approach

CRISIL Ratings has considered the standalone business and financial risk profiles of LCL for arriving at its ratings.

Key Rating Drivers & Detailed Description

Strengths:

Strong market position in HDPE/PP woven fabric/sacks machines manufacturing segment

LCL has established a strong position in the domestic and global markets for HDPE/PP woven fabric/sack machines. It is the largest player in the HDPE/PP woven machinery segment in India, with a market share of over 80%. Revenue concentration in the domestic market remained above 50% in the past. Healthy orders will continue to drive steady revenue growth over the medium term.

 

Strong focus on the export market led to significant increase in overall revenue. Share of exports remained healthy at 35-50% over the last few years. A balanced mix of export and domestic sales enables the company to withstand slowdown in any one region. Moreover, diversified end-user segments provide stability in revenue and protect sales against downturn in any one end-user segment.

 

Robust financial risk profile

Financial risk profile of LCL is likely to remain strong with sizeable networth, despite restructuring of the company into core business (technical textile machines manufacturing Business) and non-core business (real estate/financial assets holdings) which will reduce the networth by around Rs 300-320 crore in core business. However, with profit getting accrued, the networth is expected to improve to Rs. 340-530 crores over the medium term. Debt level is expected to remain modest at Rs 150-220 crore over the medium term, in the absence of any major debt funded capex or acquisitions. Debt protection metrics are expected to remain healthy with interest coverage ratio and net cash accruals to total debt ratio sustaining above 14 times and above 0.5 times, respectively, over the medium term, supported by healthy accruals and modest debt level. However, any sizeable dividend or buyback reducing networth and cash surplus or any large, debt-funded capex or acquisition impacting debt metrics will remain key rating sensitive factors.

 

Efficient working capital management

Working capital is prudently managed, as reflected in gross current assets of 130-150 days in the recent past and healthy current ratio maintained above 1.0. Exports, which form about 35-50% of revenues are to developing countries in Central America, Africa etc. where the economies are facing challenges with currency depreciation and political instability. Despite the same, Lohia Corp has been able to manage to keep its receivables lower as most of its export orders are LC backed. Further, efforts on strengthening of supply chain and material procurement will benefit LCL to maintain inventory at 80-100 days in the medium term. Moreover, LCL’s dominant presence in the market as well as strong relationship with its suppliers and customers has given them the advantage to dictate the terms in their favour. Going forward, working capital management to remain efficient with gross current assets to remain in the range of 130-150 days. 

 

Weaknesses:

Susceptibility of revenue to cyclicality in the HDPE/PP woven bag machine industry

Demand for HDPE/PP woven machines comes essentially from capacity expansion in end-user industries and replacement of old technology. Capacity expansion by HDPE/PP bag manufacturers is in turn linked to overall growth in the economy, especially in sectors such as cement, fertilisers and chemicals. This may cause volatility in revenue and order flow, and in turn impact the operating efficiency.

 

Vulnerability to competition and volatile raw material prices and forex rates

Operating margin is susceptible to the price of metals, which is a key input and a highly volatile commodity. Raw material costs have been 57-65% of the revenue in the past five years. Besides, the company derives about 35-50% of its revenue through exports and imports about 10% of the total raw material requirement. This exposes the operating margin to fluctuations in forex rates. The company also faces competition from cheaper Chinese imports. Increasing competition and volatility in raw material prices may continue to constrain profitability despite improvement in operating efficiency.

Liquidity: Strong

Lohia enjoys strong liquidity driven by expected cash accruals of more than Rs. 110 crores per annum in FY25 and FY26. It also has access to fund-based limits of Rs. 145 crores, utilized to the tune of 35% on an average over the 12 months ended Sep 2024 (~Rs. 79 crores unutilized as of Oct’24). The company has long term repayment obligations around Rs. 70 crores and Rs. 40 crores each in FY25 and FY26, with minimal capex expectations. Low gearing and healthy networth provide the financial cushion to any adverse conditions or downturns in the business.

Outlook: Stable

CRISIL Ratings believes LCL will continue to benefit from its established operational track record and dominant market position in the domestic HDPE/PP woven-bag machine manufacturing industry and its longstanding relationships with the customers. Financial risk profile should remain robust, supported by healthy cash accrual, moderate capex and prudent working capital management.

Rating Sensitivity Factors

Upward Factors

• Substantial and sustainable increase in revenue and operating profitability, leading to cash accrual more than Rs 200 crore
• Sustenance of healthy financial risk profile, debt metrics and liquidity

 

Downward Factors

• Substantial decline in operating performance resulting in cash accruals less than Rs 100 crore per annum
• Material deterioration in debt metrics due to sizeable debt funded capex or acquisitions leading to gearing increasing above 1 time.
• Substantial reduction in liquidity, most likely because of investment in unrelated ventures or high dividend payout, or buyback.

About the Company

LCL, incorporated in 1981, is a part of the Lohia group. The company manufactures complete range of machines for producing HDPE/PP bags. These machines include extrusion lines, winders, circular looms, processing machines, conversion machines and other machines. The Lohia family holds 100% stake in LCL through individual holdings.

Key Financial Indicators (CRISIL Ratings-adjusted numbers)

Particulars	Unit	2024*	2023
Revenue	Rs crore	1,102	1,817
Profit after tax (PAT)	Rs crore	39	82
PAT margin	%	3.5	4.5
Adjusted debt/adjusted networth	Times	0.46	0.56
Interest coverage	Times	5.8	10.4

*Fiscal 2024 consolidated figures for the core and non-core business as demerger was effective April 1, 2024.

Any other information: Not Applicable