Detailed Rationale

CRISIL Ratings has reaffirmed its ratings on the bank facilities of Netafim Irrigation India Private Limited (Netafim) at ‘CRISIL A/Negative/CRISIL A1’.

 

The ratings continue to reflect the established position of the company in the micro irrigation system (MIS) industry, moderate financial risk profile, and strong financial and operational support from the parent. These strengths are partially offset by large working capital requirement and susceptibility to any change in government policy and volatility in raw material prices.

 

Revenue is estimated to increase to over Rs 650 crore in fiscal 2023 (year-on-year growth of over 15%), supported by continuation of healthy demand and price hikes taken by the state government for MIS. Revenue in fiscal 2022 declined by over 40% year-on-year to Rs 558 crore despite healthy demand, mainly due to delay in price hikes taken by the state government that led to the company not selling in the subsidy segment.

 

Higher capacity utilisation with improving scale will lead to better absorption of fixed costs, thereby resulting in operating leverage and turnaround in operating profitability (5.5-6% in fiscal 2023). Despite the impact on revenue, margin improved to 7.6% in fiscal 2022 from 3.9% in fiscal 2021 due to reversal of provisioning amount of Rs 40 crore. Though the improvement in operating profitability is slower than expected, it is likely to increase to over 6% in fiscal 2024 and over 6.5% over the medium term on the back of better capacity utilisation and healthy product mix. Hence, cash accrual is expected to be Rs 10-20 crore by fiscal 2023. Though slower-than-expected recovery in operating performance has impacted the standalone credit risk profile of Netafim, it continues to be supported by the parent company, which has infused Rs 106.85 crore in Netafim over the last two fiscals to keep gross debt levels (including bill discounting) controlled at Rs 398.7 crore as on March 31, 2022.

 

Financial risk profile was impacted in fiscal 2022 by lower cash accrual and stretched working capital cycle. Adjusted gearing was above 1 time as on March 31, 2022. Return on capital employed (RoCE) is estimated to have weakened to 4.5% in fiscal 2022 from 9.6% in fiscal 2020. Debt protection metrics were also affected, with interest coverage ratio below 1.5 times for fiscal 2022.

 

Receivables deteriorated to over 400 days as on March 31, 2022, from 281 days as on March 31, 2021 (fiscal 2020: 231 days). Receivables exceeding six months comprised 38% of the total outstanding as on March 31, 2022, up from 28% and 14% as on March 31, 2020, and March 31, 2019, respectively. The increase in receivables was primarily due to focus on community irrigation projects (CIPs) that are working capital intensive, and payments pending from the governments of Andhra Pradesh (AP), Gujarat and Tamil Nadu. The high receivables are partly funded by the parent, Netafim Ltd, Israel (Netafim Israel), by giving higher credit period. Hence, payables increased to 225 days as on March 31, 2022, from 179 days as on March 31, 2020. Receivables are likely to improve over the medium term with realisation of dues expected from the governments of AP, Karnataka and CIPs in the first quarter of fiscal 2023. However, this will remain a key monitorable.

Analytical Approach

CRISIL Ratings has factored in the support from the ultimate parent, Orbia Advance Corp SAB (Orbia Advance; formerly, Mexichem S A B de C V [rated ‘BBB-/Stable‘ by S&P Global Ratings]) and parent, Netafim Israel, due to their stated stance of supporting Netafim financially given the strategic importance of the India business, operational linkages and common management.

Key Rating Drivers & Detailed Description

Strengths:

Established market position: Netafim is one of the largest players in the domestic MIS segment with a healthy market share, diversified product portfolio and wide distribution network (over 2,500 dealers). The company is executing seven CIPs, which will aid revenue growth over the medium term. Support from the government to popularise MIS in order to tackle water shortage issues and improve yield should also benefit performance. Netafim is geographically diversified, with a single state contributing not more than 40% to overall revenue. It has strong presence in Gujarat, Maharashtra, Tamil Nadu, AP, Telangana and Karnataka, and is likely to increase penetration in Madhya Pradesh, Chhattisgarh, Uttar Pradesh, Bihar and Jharkhand over the medium term.

 

Strong support from the parent and ultimate parent: The company receives robust financial, operational and technical support for product innovation from Netafim Israel and Orbia Advance and leverages the extensive experience of its parents in the global market. For Orbia Advance, Netafim has strong business potential in India and will support it through its subsidiary, Netafim Israel. The parent had infused equity of Rs 107 crore in fiscal 2020 to support working capital requirement and CIP undertaking. Liquidity is further aided by the flexible credit period provided by the parent. The parent has also given corporate guarantee on loan the company has availed of from the International Finance Corporation in fiscal 2022. Netafim will continue to receive financial support from the parent over the medium term; the extent of support will be a key monitorable.

 

Healthy financial risk profile: Debt increased to Rs 398.7 crore as on March 31, 2022, from Rs 291 crore as on March 31, 2021, to support large working capital requirement. The debt is expected to remain below Rs 350 crore over the next two fiscals with reduction in short-term borrowings following expected improvement in receivables. Any additional working capital requirement can be funded through a combination of short-term debt guaranteed by the parent or intercorporate deposits extended by Netafim Israel. Capital structure is expected to remain comfortable with expected total outside liabilities to tangible networth ratio below 2 times in fiscal 2023Net cash accrual is expected to improve to Rs 10-25 crore over the medium term. Networth and gearing are estimated to be healthy at Rs 340 crore and 1.17 times, respectively, as on March 31, 2022. Debt protection metrics will remain weak: interest coverage and net cash accrual to total debt ratios were 1.5 times and 4%, respectively, in fiscal 2022 and will remain below 1.75 times and 10%, respectively, in fiscal 2023. Financial risk profile will remain comfortable over the medium term in the absence of any major debt-funded capital expenditure (capex) and strong liquidity.

 

Weaknesses:

Large working capital requirement: Gross current assets are estimated to have deteriorated to over 500 days as on March 31, 2022, from 361 days as on March 31, 2021, due to stretched receivables of 439 days (as majority of clients are government bodies). The company has undertaken several CIPs, which entail larger working capital requirement (receivables of over 400 days). However, there has been no commensurate increase in operating margin, thus impacting RoCE. Working capital requirement is likely to remain large over the medium term.

 

Susceptibility to changes in government policy: Policy related to government subsidies drive growth for the MIS sector. State governments provide up to 60% capital subsidy to farmers, and the central government around 30%. The government will continue to offer subsidies because of growing concern over the drop in water levels and agriculture productivity. However, any change in the schemes or reduction in subsidies may impact revenue. Around half the revenue is derived from government-related projects; state governments pay subsidies up to six months after installation/completion of the project. Additionally, pricing flexibility is limited as prices are determined by the state governments. Although working capital requirement is partly met through payables, operations will remain vulnerable to the credit extended to government agencies.

 

Susceptibility to volatility in raw material prices: The company is vulnerable to adverse fluctuations in raw material prices and the inability to completely pass on any increase in price to end users as unit prices are fixed by the government and reviewed periodically. Raw materials (high- and low-density polyethylene) are predominantly crude oil derivatives, and their prices move in line with crude oil rates. Earnings before interest, tax, depreciation and amortisation (Ebitda) margin for fiscal 2021 fell to 3.9% from 6.7% in the previous fiscal due to rise in raw material prices. Also, as seen in fiscal 2022, any delay in increase in price hikes taken by the governments can impact operating income and financial risk profile.

Liquidity: Strong

Bank limit utilisation was moderate at 73% during the 12 months through December 2021. Term debt obligation was negligible as on March 31, 2022, till fiscal 2024. The company does not have any large, debt-funded capex plans in the near term. Cash accrual is expected to be healthy at Rs 35-45 crore per annum over the medium term. Unencumbered cash and equivalent stood at Rs 6.2 crore as on March 31, 2022. Liquidity is also supported by the flexible payment terms offered by the parent. No dividend payments to the parent have been made in the past, and this policy is likely to continue over the medium term as well.

Outlook: Negative

The working capital cycle of Netafim will remain stretched over the medium term. However, the company will continue to benefit from its strong market position in the MIS sector, backed by its established relationships with farmers and diversified distribution network.

Rating Sensitivity Factors

Upward factors:

• Stabilisation of operating performance with operating profitability sustaining above 6% and net cash accrual above Rs 15 crore on a sustained basis
• Improvement in financial risk profile backed by cash accrual and controlled debt levels, resulting in gearing below 1 time

 

Downward factors:

• Deterioration in working capital cycle
• Weakening of credit metrics due to decline in revenue or profitability, or any large, debt-funded capex leading to gearing above 1.3-1.4 times
• Change in stance of support or in ultimate parent rating by one notch

About the Company

Incorporated in 1997, Netafim is a wholly owned subsidiary of Netafim Israel. It manufactures and sets up MIS projects. Facilities are in Vadodara, Gujarat; and Chennai, Tamil Nadu. The company also has 15 warehouses across India.

Key Financial Indicators

As on/for the period ended March 31,	Unit	2022*	2021	2020
Operating income	Rs crore	558	990	979
Profit after tax (PAT)	Rs crore	0	4	14
PAT margin	%	-	0.4	1.5
Adjusted debt/adjusted networth	Times	1.17	0.85	0.66
Interest coverage	Times	1.40	1.85	2.30

*Provisional

Any other information

Netafim Israel is the world’s leading manufacturer of irrigation equipment with over 30% market share. It has 17 manufacturing plants with reach in 100 countries. The company produces drippers, dripper lines, sprinklers and micro-emitters. Netafim is the third-largest company of the group.

 

Orbia Advance, a global leader in plastic piping and chemicals and petrochemicals, has 80% stake in Netafim Israel. It is the third-largest chemical and petrochemical company in Latin America with presence in more than 100 countries.

 

Through its subsidiary, Dura-Line Corporation, Orbia Advance has plants in Hyderabad, Goa and Neemrana (Rajasthan). It produces cable ducts and pressure pipes for the water, datacom and gas industries.