Rating Rationale
November 26, 2019 | Mumbai
Orient Bell Limited
Rating outlook revised to 'Negative'; ratings reaffirmed
 
Rating Action
Total Bank Loan Facilities Rated Rs.236.15 Crore
Long Term Rating CRISIL A-/Negative (Outlook revised from 'Stable' and rating reaffirmed)
Short Term Rating CRISIL A2+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has revised its rating outlook on the long-term bank facilities of Orient Bell Limited (OBL) to 'Negative' from 'Stable' and reaffirmed the rating at 'CRISIL A-'; the short-term rating has been reaffirmed at 'CRISIL A2+'.
 
The outlook revision reflects the weakening of OBL's business risk profile due to slowdown in the industry and muted demand. Revenue reduced to Rs 583 crore in fiscal 2019 from Rs 672 crore a year before, while the operating margin declined to 6.5% in fiscal 2019 from 8.4% two years ago because of continuous increase in gas prices; this trend may continue going forward as well due to weak demand and reduced realisations. Cash accrual dropped to Rs 24.56 crore in fiscal 2019 from Rs 54.21 crore in the previous fiscal (extraordinary income of Rs 22.43 crore due to liquidation of holdings), and is expected to remain at Rs 20-25 crore over the medium term. Debt protection metrics also weakened: interest coverage ratio reduced to 4.3 times from 5.2 times. Operating margin is expected to remain moderate over the medium term, and any decline may further weaken debt protection metrics.
 
The ratings continue to reflect OBL established market position in the tiles industry, diversified geographical and customer profiles, and a comfortable financial risk profile. These strengths are partially offset by vulnerability to demand from end-user industry, and exposure to intense competition and fluctuations in gas and raw material prices.

Analytical Approach

Unsecured loans (outstanding at Rs 15 crore as on March 31, 2019) extended by promoters have been treated as neither debt nor equity as these loans are subordinated to bank debt and may remain in business over the medium term.

Key Rating Drivers & Detailed Description
Strengths
* Established market position
With capacity of 29 million square meters, OBL is one of the leading organised tiles manufacturers in India. After acquisition of Bell Ceramic Ltd in 2010, it has become a pan-India player with plants in the northern, southern, and western regions. OBL is focused on improving its brand presence over pan-India and has thus increased the budget for marketing and branding spends.
 
* Diversified geographical and customer profiles
Clientele is varied, comprising institutional buyers and over 4,000 dealers across the country. Thus, revenue and profitability remain insulated from adverse fluctuations in the preferences of any particular customer or region.
 
* Comfortable financial risk profile
Gearing was healthy at 0.37 time as on March 31, 2019, and should remain below 0.50 time over the medium term. Interest coverage and net cash accrual to total debt ratios were 4.3 times and 0.29 time, respectively, in fiscal 2019 and are projected at 3.6-4.7 times and 0.3-0.4 time, respectively, over the medium term. Financial risk profile should remain adequate, supported by prudent working capital management, leading to low debt levels.
 
Weaknesses
* Vulnerability to demand from end-user industry
The ceramic tiles industry reported a decline in fiscal 2019 due to slowdown in the real estate market. OBL's turnover fell 18% for the fiscal and was Rs 582.99 crore; sales are likely to reduce further in fiscal 2020. Dependence on the real estate market and its economic scenarios should continue to constrain business.
 
* Exposure to intense competition
Intense competition (from the unorganised sector and reputed brands such as Kajaria Ceramics Ltd, Nitco Ltd, Somany Ceramics Ltd, and HR Johnson India) may continue to restrict scalability and limit pricing power, thereby constraining profitability.
 
* Susceptibility to fluctuations in gas and raw material prices
Expenses incurred to procure raw materials (different types of clays, feldspar, silica, kaolin, and carbonates) comprise 50-60% of total operating cost, while gas and power costs comprise 20-25%. Hence, even a slight variation in input prices will drastically impact profitability, as seen in fiscal 2018, when increase in gas prices led to a fall in margin to 7.3% from 8.4% in fiscal 2017.

Liquidity: Strong
Expected net cash accrual of Rs 21 crore and Rs 25 crore will be sufficient to meet debt obligation of Rs 12.8 crore and Rs 11.8 crore in fiscals 2020 and 2021, respectively. Bank limit utilisation averaged 27% over the 12 months ended September 2019. Current ratio was 1.47 times as on March 31, 2019.
Outlook: Negative

CRISIL believes OBL's revenue and operating margin will remain under pressure over the medium term due to weakened demand scenario.

Rating sensitivity factors
Upward Factors
*Improvement in operating income by more than 20% and in margin by 400 basis points
*Reduction in working capital cycle

Downward Factors
*Decline in operating income by more than 20% from fiscal 2019 level
*Fall in operating profitability by 200 basis points
* Larger-than-expected debt-funded capital expenditure weakening financial risk profile.

About the Company

OBL (formerly, Orient Ceramics and Industries Ltd) is a public limited company listed on the Bombay Stock Exchange and National Stock Exchange, and promoted by Mr Daga and family. It manufactures glazed ceramic wall, floor, and vitrified tiles under Orient Bell brand. Facilities are in Sikanderabad (Uttar Pradesh), Dora (Gujarat) and Hoskote (Karnataka).

Key Financial Indicators
Particulars Unit 2019 2018
Revenue Rs crore 582.99 671.80
Profit After Tax (PAT) Rs crore 8.90 40.05
PAT margin % 1.53 6.0
Adjusted debt/adjusted networth Times 0.37 0.28
Interest coverage Times 4.3 5.2

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 Letter of credit & Bank Guarantee NA NA NA 80 CRISIL A2+
NA Long Term Loan NA NA Mar-2023 49.15 CRISIL A-/Negative
NA Working Capital Facility NA NA NA 107 CRISIL A-/Negative
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  156.15  CRISIL A-/Negative      07-08-18  CRISIL A-/Stable  24-07-17  CRISIL A-/Stable  16-09-16  CRISIL BBB+/Positive  CRISIL BBB+/Stable 
            30-07-18  CRISIL A-/Stable           
Non Fund-based Bank Facilities  LT/ST  80.00  CRISIL A2+      07-08-18  CRISIL A2+  24-07-17  CRISIL A2+  16-09-16  CRISIL A2  CRISIL A2 
            30-07-18  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
Letter of credit & Bank Guarantee 80 CRISIL A2+ Letter of credit & Bank Guarantee 80 CRISIL A2+
Long Term Loan 49.15 CRISIL A-/Negative Long Term Loan 49.15 CRISIL A-/Stable
Working Capital Facility 107 CRISIL A-/Negative Working Capital Facility 107 CRISIL A-/Stable
Total 236.15 -- Total 236.15 --
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 Construction Industry
CRISILs Approach to Recognising Default
CRISILs Criteria for rating short term debt

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