Rating Rationale
July 28, 2021 | Mumbai
PPG Asian Paints Private Limited
Ratings Reaffirmed
 
Rating Action
Total Bank Loan Facilities RatedRs.95 Crore
Long Term RatingCRISIL AA/Stable (Reaffirmed)
Short Term RatingCRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to Annexure for Details of Instruments & Bank Facilities

Detailed Rationale

CRISIL Ratings has reaffirmed its 'CRISIL AA/Stable/CRISIL A1+’ ratings on the bank facilities of PPG Asian Paints Private Limited (PPG Asian Paints).

 

The ratings continue to reflect the established position of PPG Asian Paints in the automotive paint industry, the operational support it receives from the parents -- Asian Paints Ltd (Asian Paints; 'CRISIL AAA/Stable/CRISIL A1+') and PPG Industries Inc, USA (PPG Industries; rated 'BBB+/Negative/A-2' by S&P Global Ratings), and a strong financial risk profile. These strengths are partially offset by exposure to cyclicality in the automotive industry and volatility in raw material prices and limited pricing flexibility.

 

Decline in demand and temporary shutdown of plants in March-April 2020 due to the nationwide lockdown to contain the spread of Covid-19 led to lower sales in the first half of fiscal 2021. However, the business activity bounced back in the second half of fiscal 2021, thereby restricting y-o-y de-growth in consolidated sales at 10% to Rs 1,110 crore. Further, the ongoing second wave of the pandemic may constrain the business levels in the first quarter of fiscal 2022.

 

Operating margin declined y-o-y by 240 basis points to 11.1% in fiscal 2021 due to lower capacity utilization levels, which resulted in lower fixed-cost absorption and increase in commodity prices in the later part of the fiscal. However, the margins should benefit over the medium term with cost rationalization measures undertaken and expectations of improvement in capacity utilization levels. With the increase in raw material prices currently, ability of the company to pass on the same to the customers will be a key monitorable.

 

Financial risk profile remains strong, supported by debt-free balance sheet and sizeable liquid surplus of around Rs 203 crore as on March 31, 2021. Healthy cash accruals expected over the medium term should be sufficient to meet nominal capital expenditure (capex) along with incremental working capital requirement. Hence, the company should sustain its net debt-free balance sheet over the medium term as well.

Analytical Approach

For arriving at its ratings, CRISIL Ratings has combined the business and financial risk profiles of PPG Asian Paints and its wholly owned subsidiaries -- PPG Asian Paints Lanka Pvt Ltd and Revocoat India Pvt Ltd -- as they are in the same line of business.

 

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:

  • Established position in the automotive paint segment for original equipment manufacturers (OEMs), and market leadership in the automotive refinish segment: PPG Asian Paints should maintain its established market position over the medium term, supported by its strong clientele and wide product portfolio. It is the second-largest player in the automotive OEM paint segment; Kansai Nerolac Paints Ltd (‘CRISIL AAA/Stable/CRISIL A1+’) is the market leader. PPG Asian Paints is also the market leader in the automotive refinish business. It has a strong presence in the premium segment, with renowned brands such as 2K Nexa Autocolor; further, it is the front runner in the economy polyurethane and alkyd segments, with its Bilux and Aspa brands, respectively.

 

  • Strong support from parent companies: PPG Asian Paints is an equal joint venture (JV) of Asian Paints, India’s largest producer of decorative paints, and the US-based PPG Industries, a leading supplier of automotive and industrial paints. PPG Asian Paints has emerged as a strong player in the industrial paints segment in India, benefitting from the brands of PPG Industries and Asian Paints. It also benefits from the wide distribution network of Asian Paints and strong technological support from PPG Industries.

 

  • Healthy financial risk profile: The company had nil debt and strong networth of about Rs 966 crore as on March 31, 2021. Company had undertaken a capex of Rs. 107 crore in fiscal 2020 years towards building a resin manufacturing unit at Dahej which has been completed and commercialized. Going forward, no major capex is envisaged over the medium term.Nominal maintenance capex along with increase in working capital requirements is expected to be funded entirely through internal accruals and the liquid surplus, leading to continued strong credit metrics.

 

Weaknesses:

  • Susceptibility of profitability to volatility in input prices and limited pricing flexibility: Raw material cost accounts for around 60% of sales. The main raw materials include titanium dioxide, crude oil derivatives, pigments and resins. Hence, volatility in crude oil/derivative prices, coupled with fluctuations in the exchange rate, have a direct impact on the industry margins.. Moreover, the company has limited flexibility to pass on input price increases due to its relatively low pricing power with automotive OEMs.

 

  • Vulnerability to cyclicality in the automotive segment: PPG Asian Paints derives about 75% of its revenue from the automotive paint and general industrial segments, which depend on economic activity in the country. Consequently, revenue remains exposed to cyclicality in the end-user industries.

Liquidity: Strong

PPG Asian Paints enjoys strong liquidity driven by healthy cash accruals and liquid surplus of about Rs 203 crore as on March 31, 2021. Further, it has access to fund based limits of Rs 70 crore, which is largely unutilised. Besides, no major capex is envisaged over the medium term. .Nominal maintenance capex along with increase in working capital requirements should be comfortably met from internal accruals and liquid surplus.

Outlook: Stable

PPG Asian Paints will continue to benefit from its established market position and strong clientele, leading to steady business performance over the medium term. The financial risk profile should also remain strong, supported by healthy cash accrual, prudent working capital management and moderate capex plan.

Rating Sensitivity factors

Upward factors

  • Healthy revenue growth of over 15% and better revenue diversity, strengthening the market position
  • Sustained improvement in operating margin to over 15%, aiding cash generation
  • Sustenance of strong financial risk profile

 

Downward factors

  • Decline in revenue by around 25% or in profitability to below 7%, leading to lower-than-expected cash generation
  • Large, debt-funded capex resulting in moderation in the financial risk profile, with gearing weakening to over 0.5 time

About the Company

PPG Asian Paints manufactures automotive paints and other industrial paints for automotive OEMs, and caters to the automotive refinish, marine and packaging segments.

 

The company was set up in 1997 as Asian PPG Industries, which restructured its business in fiscal 2013. As part of the restructuring, PPG Coatings India Pvt Ltd (a wholly owned subsidiary of PPG Industries) and AP Coatings Ltd (a wholly owned subsidiary of Asian Paints) were amalgamated with Asian PPG Industries. Thereafter, the liquid industrial paints, protective coatings, and powder business were demerged into Asian Paints PPG Pvt Ltd (a newly formed JV between PPG Industries and Asian Paints). Simultaneously, Asian PPG Industries was reconstituted as a private limited company and renamed PPG Asian Paints Pvt Ltd.

Key Financial Indicators

Particulars

Unit

2021

2020

Revenue

Rs crore

1110

1235

Profit after tax (PAT)

Rs crore

58

101

PAT margin

%

5.2

8.2

Adjusted debt/adjusted networth

Times

-

-

Interest coverage

Times

40.2

41.3

 

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL Ratings' complexity levels are assigned to various types of financial instruments. The CRISIL Ratings' complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL Ratings' 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 crore)

Complexity

level

Rating assigned

with outlook

NA

Working Capital Demand Loan&

NA

NA

NA

70

NA

CRISIL AA/Stable

NA

Bill Discounting

NA

NA

NA

25

NA

CRISIL A1+

&Interchangeable with letter of credit/bank guarantee

Annexure – List of entities consolidated

Names of entities consolidated

Extent of consolidation

Rationale for consolidation

PPG Asian Paints Lanka Pvt Ltd

Full

Strong business and financial linkages

Revocoat India Pvt Ltd

Full

Strong business and financial linkages

 

Annexure - Rating History for last 3 Years
  Current 2021 (History) 2020  2019  2018  Start of 2018
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund Based Facilities LT/ST 95.0 CRISIL A1+ / CRISIL AA/Stable   -- 16-07-20 CRISIL A1+ / CRISIL AA/Stable 18-04-19 CRISIL A1+ / CRISIL AA/Stable 08-01-18 CRISIL A1+ / CRISIL AA/Stable CRISIL AA-/Positive / CRISIL A1+
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
Bill Discounting 25 CRISIL A1+ Bill Discounting 25 CRISIL A1+
Working Capital Demand Loan& 70 CRISIL AA/Stable Working Capital Demand Loan& 70 CRISIL AA/Stable
Total 95 - Total 95 -
& - Interchangeable with letter of credit/bank guarantee
Criteria Details
Links to related criteria
CRISILs Approach to Financial Ratios
Rating criteria for manufaturing and service sector companies
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating Criteria for Chemical Industry
CRISILs Criteria for rating short term debt
CRISILs Criteria for Consolidation

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