Rating Rationale
February 24, 2020 | Mumbai
Pokarna Limited
Ratings continues on 'Watch Developing' 
 
Rating Action
Total Bank Loan Facilities Rated Rs.131 Crore
Long Term Rating CRISIL BBB- (Rating Continues on 'Rating Watch with Developing Implications')
Short Term Rating CRISIL A3 (Rating Continues on 'Rating Watch with Developing Implications')
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL's ratings on the bank facilities of Pokarna Limited (Pokarna; part of the Pokarna group) remain on 'Rating Watch with Developing Implications'.
 
CRISIL had, on November 27, 2019 placed its ratings on Watch following the announcement by the US Department of Commerce (DOC) to impose higher countervailing duty (CVD) of 83.79% (from 4.32%) on quartz surface products imported from India based on its preliminary determination that producers of quartz surface products in India and Turkey have received subsidies from their governments. Also US DOC had preliminarily determined anti-dumping duty of 2.62% on quartz surface products shipped by Pokarna Engineered Stone Ltd (PESL; wholly-owned subsidiary of Pokarna) to the US. The final determination of the duties by US DOC is expected to be made by April, 2020.
 
CRISIL will continue to monitor the impact, if any, of the outcome on the group's credit risk profile and take appropriate rating action, if required. The ratings will be removed from watch once CRISIL has clarity on these aspects.
 
The ratings continue to reflect the group's established market position in the granite and engineered stones industry'supported by the extensive experience of the promoters, and established relations with clients'and healthy operating efficiencies. These strengths are offset by exposure to project implementation risk, and susceptibility to fluctuations in foreign exchange rates and demand from key markets.

Analytical Approach

For arriving at the ratings, CRISIL has combined the business and financial risk profiles of PESL and Pokarna Ltd, collectively referred to as the Pokarna group as both are engaged in the same line of business and PESL is a wholly-owned subsidiary of Pokarna.
 
Unsecured loans of Rs 7.32 crore (as on March 31, 2019) extended by the promoters have been treated as debt, as these may not be retained in the business over the medium term.

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 granite and engineered stones industry: The Pokarna group is the largest exporter of quartz surfaces, and finished granite in India. PESL is the only domestic company to use the Bretonstone technology for quartz surfaces. The promoters' experience of over two decades in the stone industry, long track record of operations, and healthy relations with customers have helped establish a strong market position.
 
*Healthy operational efficiencies, resulting in high profitability: Sales of high-margin premium quartz stones, and cost rationalisation initiatives have helped maintain a healthy operating margin of over 30% in the four fiscals through March 2019.
 
Weaknesses
Exposure to project implementation risk: The ongoing debt-funded capital expenditure (capex) of about Rs 420 crore, for setting-up a new quartz surfaces manufacturing unit, leads to high project implementation risk. Achievement of commercial operations date by April, 2020 and ramp up of revenue from the new unit will be closely monitored.
 
*Susceptibility to fluctuations in foreign exchange (forex) rates, and demand from key markets: About 85-90% of the revenue is derived from exports; hence, growth in revenue is linked to demand from key markets, such as USA and China, which together account for 80% of the total sales. Further, operating margin remains susceptible to forex rate fluctuations.
Liquidity Adequate

Liquidity is expected to be adequate despite the large repayment obligations. This is because strong net cash accrual, aided by healthy operating margin, should ensure there is adequate cushion between net cash accrual and maturing debt. Also bank limit utilisation was moderate at 69% over the 6 months through December 2019. Unencumbered cash & bank balances averaging over Rs 23 crore was available in its current and EEFC accounts over the 6 months ended December 31, 2019, supporting liquidity.
 
Rating Sensitivity Factors
Upward Factor
*Continued healthy business performance backed by healthy order flow along with timely completion of its ongoing capex
*Increase in net cash accrual to over Rs 100 crore
 
Downward Factor
*Significant decline in revenue and profitability of the group resulting in subdued debt protection metrics
*Any sharp increase in CVD or anti-dumping duty, adversely impacting the group's credit profile
*Substantial delay in commencement of commercial operations at the new quartz unit, impacting the business and financial risk profiles
*Sharp increase in gearing to over 1.25 times.

About the Group

Set up in 1991 by Mr Ashok Jain, Mr Gautam Jain, Mr Prakash Jain, and their family members, Pokarna Ltd exports granite slabs from its quarries in Andhra Pradesh, Telangana, and Tamil Nadu. It also processes and sells granite slabs.
 
PESL, incorporated in 2001, manufactures and markets quartz surfaces (also known as engineered stones) under the Quantra brand.

Key Financial Indicators
Particulars Unit 2019 2018
Revenue Rs crore 146.4 146.6
Profit After Tax (PAT) Rs crore 6.9 12.3
PAT margin % 4.7 8.36
Adjusted debt/Adjusted networth Times 0.4 0.6
Interest coverage Times 5.0 5.16

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 Cash credit NA NA NA 2 CRISIL BBB-/Watch Developing
NA Foreign currency term loan NA NA Mar-2022 16.85 CRISIL BBB-/Watch Developing
NA Letter of credit NA NA NA 10.5 CRISIL A3/Watch Developing
NA Long term loan NA NA Mar-2024 28.57 CRISIL BBB-/Watch Developing
NA Foreign documentary bills purchase NA NA NA 20 CRISIL A3/Watch Developing
NA Export packing credit NA NA NA 20 CRISIL BBB-/Watch Developing
NA Proposed long term bank loan facility NA NA NA 61.65 CRISIL BBB-/Watch Developing
 
Annexure - List of Entities Consolidated
Names of entities consolidated Extent of Consolidation Rationale for consolidation
Pokarna Ltd Full Same line of business with common promoters
Pokarna Engineered Stone Ltd Full Wholly-owned subsidiary of PL engaged in the same line of business
Annexure - Rating History for last 3 Years
  Current 2020 (History) 2019  2018  2017  Start of 2017
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund-based Bank Facilities  LT/ST  120.50  CRISIL BBB-/(Watch) Developing/ CRISIL A3/(Watch) Developing      27-11-19  CRISIL BBB-/Watch Developing/ CRISIL A3/Watch Developing  31-07-18  CRISIL BBB-/Stable/ CRISIL A3  07-07-17  CRISIL BBB-/Stable/ CRISIL A3  CRISIL BB+/Stable/ CRISIL A4+ 
            24-09-19  CRISIL BBB-/Stable/ CRISIL A3           
Non Fund-based Bank Facilities  LT/ST  10.50  CRISIL A3/(Watch) Developing      27-11-19  CRISIL A3/Watch Developing  31-07-18  CRISIL A3  07-07-17  CRISIL A3  CRISIL A4+ 
            24-09-19  CRISIL A3           
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
Cash Credit 2 CRISIL BBB-/Watch Developing Cash Credit 2 CRISIL BBB-/Watch Developing
Export Packing Credit 20 CRISIL BBB-/Watch Developing Export Packing Credit 20 CRISIL BBB-/Watch Developing
Foreign Currency Term Loan 16.85 CRISIL BBB-/Watch Developing External Commercial Borrowings 8.15 CRISIL BBB-/Watch Developing
Foreign Documentary Bills Purchase 20 CRISIL A3/Watch Developing Foreign Currency Term Loan 16.85 CRISIL BBB-/Watch Developing
Letter of Credit 10.5 CRISIL A3/Watch Developing Foreign Documentary Bills Purchase 20 CRISIL A3/Watch Developing
Proposed Long Term Bank Loan Facility 61.65 CRISIL BBB-/Watch Developing Letter of Credit 10.5 CRISIL A3/Watch Developing
-- 0 -- Proposed Long Term Bank Loan Facility 53.5 CRISIL BBB-/Watch Developing
Total 131 -- Total 131 --
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 Mining Industry
CRISILs Bank Loan Ratings
CRISILs Criteria for Consolidation

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