Detailed Rationale

CRISIL Ratings has placed its rating on the long-term bank facilities of  Navkar Corporation Limited (NCL), on ‘Rating Watch with Developing Implications’ while reaffirming the short term rating at ‘CRISIL A1’.

 

The rating action follows the announcement by NCL for sale of its Inland Container Depot at Tumb to Adani Logistics Ltd for a purchase consideration of Rs 835 crores. The proceeds will be utilized to prepay its debt obligations, fund its capex requirements and other corporate purposes. CRISIL Ratings is in discussion with the management to seek further details on the transaction and shall resolve the watch once transaction is completed and there is clarity of the impact on the credit profile of NCL.

 

The ratings continue to reflect NCL's established market position backed by extensive industry experience of the promoters and integrated service offerings, strong market presence at the JNPT port and strategically located facilities, healthy relationship with shipping lines and expanding customer base. The ratings also factor in the company’s efficient working capital cycle and established infrastructure with three container freight stations (CFS). Furthermore, controlled debt levels with limited dependence on external debt for working capital despite expected debt funded capex should continue to support its strong financial risk profile. These rating strengths are partially offset by exposure to intense competition in CFS operations, low capacity utilization levels and susceptibility of revenue and profitability to global cargo movements.

Analytical Approach

Unsecured loans of Rs 93.6 crores extended by NCL’s promoters, is treated as neither debt nor equity since these loans are committed to remain in the business over medium term.

 

Preference shares of Rs 16.4 crores, is treated as neither debt nor equity since these loans are expected to remain in the business over medium term.

Key Rating Drivers & Detailed Description

Strengths:

Established market position at JNPT:

NCL’s business risk profile is backed by its established market position at the JNPT port, healthy relationships with shipping lines, and the ability to offer integrated services. The company has a strong presence in container freight stations and inland container depot operations, driven by key competitive advantages, including its own railway siding, warehouse and storage facilities, land and equipment, that enables in servicing its clients in a timely manner. Despite lower volumes due to the DPD (direct port delivery), NCL has increased its share to 7.5% of total TEUs handled at JNPT in fiscal 2021 from 6.8% in fiscal 2019. The volume shift towards DPD in fiscal 2019 resulted in lower volumes and resulted in reduced margins as the competition intensified for CFS facilities, however, integrated service offerings and shift towards railway transportation from road transport is providing NCL competitive advantage supporting its volumes as well as margins.

 

In addition, the promoters have extensive experience in the logistics business, which has helped the group establish a strong market position in CFS operations and diversify its service offerings to include ICDs, domestic transportation solutions, warehouse and temperature-controlled storage facilities, etc.

 

Increasing scale and diversifying operations:

Revenues have grown year-on-year over the past four years and is expected to grow by about 30% in fiscal 2022 to just under Rs. 900 crore  compared to Rs 483 crores in fiscal 2019 driven by volume growth as well as healthy realisation levels. While the CFS segment continues to operate at a steady growth rate driven by existing infrastructure and stable capacity utilisation, increasing volumes from domestic PFT segments is expected to support strong growth over the medium term. As a result of above revenues streams have seen diversification with PFT domestic operations’ contribution increasing to an estimated 26% in fiscal 2022 from 7% in fiscal 2019.

 

Efficient working capital management:

NCL has maintained an efficient working capital cycle, with gross current assets of around 90 to 105 days over the past three fiscals. Debtors have remained in the range of 40-60 days over the past four fiscals ended March 31, 2022, as the company has a strong and reputed clientele, payments from whom are generally received on timely basis. This leads to low dependence on bank lines to fund working capital requirements.

 

Strong financial risk profile:

The financial risk profile is strong as indicated by large adjusted networth of Rs 1485 crore (adjusted for revaluation amount of land) and comfortable gearing and total outside liabilities to adjusted networth ratio of 0.37 times and 0.39 times, respectively, as on March 31, 2022 and further improve over the medium term, aided by steady accretion to reserves and continued focus on repayment of high cost loans.

 

The debt protection metrics are adequate with interest coverage and net cash accrual to adjusted debt ratios remained above 3 times and above 0.15 time, respectively in fiscal 2022 and expected to further improve with higher operating profitability. In the absence of any significant capital expenditure (capex) plan, overall financial risk profile will  remain healthy over the medium term.

 

Weakness:

Competitive environment in CFS operations and susceptibility of revenue to cargo movement and change in customs policy:

NCL faces intense competition from large CFS operators at the JNPT port and from those at other ports.  Most competitors are either owned by or affiliated to dedicated shipping lines. Further, due to DPD gaining traction and overall CFS capacity utilisation coming under pressure, price-based competition has intensified in the CFS as well as inland freight segments, resulting in moderation of profitability. Also, CFS operations are susceptible to the quantum and mix of cargo movement at the port, which can vary with changes in overall import-export trade, regulations and competition from other ports in the vicinity. Sudden increase in DPD volume share at JNPT could constrain growth in revenue and profitability. DPD volumes are expected to stabilise as CFS players have started to give more discounts to retain customers and provide certain elite end-to-end services from custom clearance to transportation to their respective factories at a discounted rate.

 

Moderate margin profile:

Post volumes shifting to DPD, CFS operations are currently operating at 40% to 45% capacity utilisation which is expected to remain stable over the medium term resulting in average profitability of about 24% to 25%. Operating margins was around 21.5% in fiscal 2021 as compared to 39% in fiscal 2018. Although the company is diversifying operations into higher margins segments of domestic PFT, sustenance of healthy margin profile will remain a key monitorable. In addition, the group maintains adequate ROCE of 5% to 7% over the past three fiscal years through 2021

Liquidity: Strong

NCL enjoys strong liquidity driven by expected net cash accrual of Rs 130 to 160 crores in fiscal 2023 and 2024, which should comfortably cover debt repayment of Rs 62 crores in fiscal 2023 and about Rs 115 crores in fiscal 2024 post the recent refinancing of its debt obligations. NCL also has access to working capital limits of Rs. 57 crores, utilized to the tune of 20% on an average over the 12 months ended January 2022. In addition, it has sufficient gearing headroom, to raise additional debt to meet its capex requirement. Its bank lines are expected to meet its incremental working capital requirements, which are assessed to be minimal. Cash and cash equivalents was around Rs 2.98 crores as of March 31 2022.

Rating Sensitivity Factors

Upward factors

• Sustained improvement in scale of operation with revenues of about Rs 1000 crores leading to higher cash accruals
• Substantial and sustained improvement in ROCE levels to over 8%

 

Downward factors

• Pressure on revenues or operating profitability moving below 15% thereby leading to suppressing of cash accruals
• Any large, debt-funded capex weakening the capital structure

About the Company

NCL, promoted by Mr. Nemi Chand Mehta and his family members, operates CFS at the JNPT port. It also has three custom notified CFS yards, at Panvel in Navi Mumbai with a capacity of 5,35,000 TEUs. It is one of the few CFSs operating at JNPT that has dedicated railway sidings carved out of a Konkan Railway line. NCL also has an ICD in Tumb (Valsad) with an aggregate installed capacity of 4,73,800 TEUs per annum and is also facilitated with a PFT. NCL also offers domestic cargo movement through railways under its PFT Domestic business.

 

It is listed on Bombay Stock Exchange and National Stock Exchange.

Any other information: Not applicable