By Krishan Binani

India Ratings and Research (Ind-Ra) has affirmed Finolex Industries Limited’s (FIL) Long-Term Issuer Rating at ‘IND AA’. The Outlook is Stable. The instrument-wise rating actions are as follows:

Instrument Type

Date of issuance

Coupon Rate

Maturity Date

Size of Issue (million)

Rating/Outlook

Rating Action

Fund-based limits

-

-

-

INR1,000

IND AA/Stable

Affirmed

Non-fund-based limits

-

-

-

INR12,957.5

IND A1+

Affirmed

KEY RATING DRIVERS

Strong Credit Metrics: FIL’s credit metrics continued to improve in FY17. EBITDA interest coverage (EBITDA/interest cash expenses) increased to 34.9x in FY17 (FY16: 9.2x) while net leverage (net debt/EBITDA) fell to 0.06x (0.1x). EBITDA margins improved to 21.6% in FY17 (FY16: 16.3%), driven by a larger spread between polyvinyl chloride (PVC)-ethylene dichloride (EDC).

In 9MFY18, revenues grew 13% yoy to INR19.3 billion, led by sharp volume gains of 24% in pipes and fittings and 18% in PVC resin. However, EBITDA fell 22% yoy in 9MFY18, driving down EBITDA margins by over 680bp yoy to 15.2%. This was attributable to FIL’s conscious focus on volume growth through reduction in prices, especially in the aftermath of GST disruption in 2QFY18; maintenance shutdown at its PVC plant, jetty and captive power plant for three weeks in 2QFY18; inventory loss in 1QFY18; and high coal prices. FIL has undertaken 5%-8% price hikes from mid-November 2017 and aims to reduce discounts. Meanwhile, volume growth is likely to accelerate in the seasonally strong October-March period. The gross interest coverage in 9MFY18 improved to 45.5x (9MFY17: 26.5x) due to a sharp fall in interest expenses.

Ind-Ra expects the credit metrics to remain strong through FY18-FY21 with a gradual improvement in EBITDA margins to 18%-19% over FY19-FY21 from around 16% in FY18.

Strong Cash Flow and Strong Liquidity
: FIL has reported strong cash flows with positive cash flow from operations since FY12. Ind-Ra expects cash flow from operations and free cash flows to remain positive over the next three years on strong operating profits and the absence of any major debt-led capex, amid stable working capital cycle. FIL has not used its fund-based limits during the 12 months ended February 2018; while average non-fund based working capital utilisation was at 26% during the same period. 

FIL’s net working capital cycle ranges between 80-100 days, as it needs to stock inventory for five months. This is because the company sources its raw materials through a jetty which remains closed during monsoons. It uses cash and carry model which keeps its debtor days at low levels. Liquidity is also supported by strong cash and cash equivalents of INR621 million at end-FY17.

Shift from PVC Resin to PVC Pipes
: FIL had consumed 63% of its PVC resin produce for captive use in FY17, which rose to 73% in 9MFY18. FIL is shifting its focus from PVC resin to PVC pipes by increasing its captive PVC resin consumption. It plans to raise pipe manufacturing capacity to 370,000 tonnes per annum (tpa) from 290,000tpa over FY17-FY19 at a cost of INR2.50 billion using internal accruals. With the rising proportion of Pipes & Fittings sales, the overall margin volatility is likely to reduce.

Focus on High-margin Products:
FIL witnessed over 40% yoy growth in chlorinated polyvinyl chloride (CPVC) pipes & fittings sales in 9MFY18, following a supply agreement in February 2017 with Lubrizol Corporation, the largest manufacturer of CPVC compound. CPVC commands higher margin than the current portfolio of products, as it can withstand high temperatures, making them suitable for a wide variety of applications. FIL expects to utilise its 20,000tpa CPVC pipes & fittings capacity fully over the next two to three years.  Furthermore, FIL is aiming to increase the share of high-margin fittings volumes from 7%-10% in the next few years in tandem with raising the non-agriculture share to 50% from 30%. As a result of these measures, Ind-Ra expects EBITDA margins to improve.

Improved Spreads between Commodities
: FIL can produce PVC resin through both the EDC and the vinyl chloride monomer (VCM) routes. The average spread between EDC-PVC increased to over USD700 per tonne in 9MFY18 from USD650 per tonne during FY17. VCM spreads in 9MFY18 also widened compared to FY17’s. Yet, PVC profitability was lower as FIL was unable to benefit from higher product spreads in 2QFY18 because it processed the inventory stored at pre-May prices amid a three-week maintenance shutdown. Moreover, FIL produced a higher amount of PVC using the lower-margin VCM route than EDC. 

Leadership Position:
FIL has a leadership position, an established track record and an integrated business model in India’s PVC pipes and fittings and PVC resin industries. The company is the third-largest player in PVC and accounts for almost 20% market share by capacity. It is the second-largest player in plastic pipes with 9% revenue share. 

Raw Material Volatility:
The company faces volatility in raw material prices as they are linked to international crude prices (major raw materials are all crude derivatives) and due to its requirement to stock inventory for five months during monsoons. FIL is also exposed to forex fluctuation risk as it imports 85%-90% of its raw materials. However, it has an economic hedge as PVC’s selling price is linked to the USD/INR movement and to its international price.


RATING SENSITIVITIES

Negative: Deterioration in EBITDA margins and/or debt led capex leading to financial leverage sustaining above 1.5x could lead to a negative rating action.


COMPANY PROFILE

FIL was incorporated in 1981 as a PVC pipe manufacturer. It backward integrated in 1994 and now also manufactures PVC resins at its plant in Ratnagiri. FIL had total installed capacity of PVC pipes and fittings of 2,90,000tpa and PVC resins of 2,72,000tpa at end-FY17. 

FINANCIAL SUMMARY
 

Particulars

9MFY18*

FY17

FY16

Revenue (INR billion)

19,287

26,024

24,819

EBITDA (INR billion)

2,936

5,630

4,044

EBITDA margin (%)

15

22

16

Total debt (INR billion)

NA

942

2,115

Gross interest coverage (x)

45.5

34.9

9.2

Net leverage (x)

NA

0.06

0.10

Source: FIL, Ind-Ra

*9MFY18 results are standalone


RATING HISTORY

Instrument Type

Current Rating/Outlook

Historical Rating/Outlook

Rating Type

Rated Limits (million)

Rating

30 March 2017

28 December 2015

24 September 2014

Issuer rating

Long-term

-

IND AA/Stable

IND AA/Stable

IND AA-/Stable

IND AA-/Stable

Fund-based limits

Long-term

INR1,000

IND AA/Stable

IND AA/Stable

IND AA-/Stable

IND AA-

Non-fund-based limits

Short-term

INR12,957.5

IND A1+

IND A1+

IND A1+

IND A1+


COMPLEXITY LEVEL OF INSTRUMENTS

For details on the complexity levels of the instruments, please visit https://www.indiaratings.co.in/complexity-indicators.

SOLICITATION DISCLOSURES

Additional information is available at www.indiaratings.co.in. The ratings above were solicited by, or on behalf of, the issuer, and therefore, India Ratings has been compensated for the provision of the ratings. 

Ratings are not a recommendation or suggestion, directly or indirectly, to you or any other person, to buy, sell, make or hold any investment, loan or security or to undertake any investment strategy with respect to any investment, loan or security or any issuer.

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Applicable Criteria

Analyst Names

  • Primary Analyst

    Krishan Binani

    Director
    India Ratings and Research Pvt Ltd Wockhardt Towers, 4th Floor, West Wing, Bandra Kurla Complex, Bandra East,Mumbai - 400051
    +91 22 40356162

    Media Relation

    Namita Sharma

    Manager – Corporate Communication
    +91 22 40356121