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

-

-

-

INR17,457.5 (increased from INR12,957.5)

IND A1+

Affirmed

KEY RATING DRIVERS

Strong Credit Metrics: FIL’s credit metrics remained resilient in FY18, despite lower EBITDA generation (FY18: INR4,839 million, FY17: INR5,631 million). EBITDA interest coverage (EBITDA/interest expenses) improved to 49.3x in FY18 (FY17: 36.6x), while net leverage (net debt/EBITDA) was stable at 0.06x (0.06x). EBITDA margin fell to 17.7% (FY17: 21.6%), driven by lower margin in both polyvinyl chloride (PVC) and pipes & fittings (P&F) segments. The decline in P&F segment margins (FY18: 7.1%, FY17: 9.2%) was due to the company’s focus on volume growth through price discounting in the wake of demonetisation and goods and services tax-related disruption. PVC segment margins declined marginally (FY18: 19.7%, FY17: 20.9%) due to inventory loss in 1QFY18 and maintenance-related shutdown in 2QFY18.

However, in 9MFY19, EBITDA surged 56% yoy to INR4,577 million, driven by strong margin growth in the PVC and P&F segments. The PVC segment margins surged in 1HFY19 due to higher share of ethylene dichloride (EDC)-led production and inventory gains from low-cost EDC inventory stored in May ahead of monsoon-related jetty shutdown. The P&F segment margins improved in 9MFY19 due to discontinuing of discounts provided in FY18; although the volume growth slowed to 1% yoy (FY18: 20% yoy). FIL’s gross interest coverage improved to 46.6x in 9MFY19 (9MFY18: 45.5x). FIL turned net debt negative in 1HFY19.

Ind-Ra expects the credit metrics to remain strong through FY20-FY22 with net cash position, led by stable EBITDA margins and moderate capex funded by internal accruals.
 

Strong Liquidity
: FIL reported positive cash flow from operations since FY12. Ind-Ra expects the cash flow from operations and free cash flow to remain positive over FY20-FY22 on the back of strong operating profits and the absence of any major debt-led capex, amid stable working capital cycle. FIL’s utilisation of its fund-based limits was less than 1% and its average non-fund-based working capital utilisation was 30% during the 12 months ended March 2019.

 

FIL’s net working capital cycle ranges between 80 days and 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 primarily uses cash and carry model, which keeps its debtor days at low levels. The company’s liquidity is also supported by strong cash and cash equivalents of INR1,891 million at 1HFYE19. FIL does not have any term debt since FY16.

Shift from PVC Resin to PVC Pipes
: FIL consumed 74%-75% of its PVC resin produce for captive use in FY18-9MFY19 (FY17: 63%). FIL is shifting its focus to PVC pipes from PVC resin sales by increasing its captive PVC resin consumption. It increased its pipe manufacturing capacity to 370,000 tonnes per annum (tpa) as of March 2019 (FY18: 330,000tpa, FY17: 290,000tpa). FIL will raise capacities by 10%-15% annually in the segment with an annual capex of INR1,500 million (including maintenance capex) over the next few years, funded through internal accruals. With the rising proportion of P&F sales, the overall margin volatility is likely to reduce.

 

Focus on High-Margin Products: FIL witnessed over 50% yoy volume growth in chlorinated polyvinyl chloride (CPVC) P&F with sales of 6,000 tonnes in 9MFY19. It entered into 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. FIL expects to utilise its 20,000tpa CPVC P&F capacity fully over the next two-to-three years. The company has also tripled its capacity of high-margin column pipes. Furthermore, FIL is aiming to increase the share of high-margin fittings volumes to 10% from 7% 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 the EBITDA margins to improve in the P&F segment.

 

Falling Spreads between Commodities: FIL can produce PVC resin through both EDC and vinyl chloride monomer (VCM) routes. The average spread between PVC-EDC fell to around USD625 per tonne in 9MFY19 (FY18: USD725). VCM spreads has largely stayed stable. Yet, PVC profitability was higher as FIL benefitted from processing lower cost inventory stored at pre-May prices in 2QFY19. Moreover, FIL produced a higher amount of PVC using EDC route rather than the lower-margin VCM route. In 3QFY19, EBIT margin of the PVC segment declined to 16.2% (1HFY19: 27%). Current PVC-EDC margin of around USD525 per tonne is near long-term average of around USD550-575 per tonne, suggesting limited downside.

 

Leadership Position: FIL has a leadership position, an established track record and an integrated business model in India’s PVC P&F and PVC resin industries. The company is the third-largest player in PVC and accounts for almost 20% market share by capacity. It is also one of the top players 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), demand/supply balance in EDC and VCM markets, 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 dollar/rupee movement and to its international price. 


RATING SENSITIVITIES

Positive: A sustained increase in profitability along with higher product and end-market diversification, while maintaining the credit metrics will be positive for the ratings.


Negative: Deterioration in EBITDA margins and/or debt-led capex leading to financial leverage increasing above 1.5x on a sustained basis 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 manufactures PVC resins at its plant in Ratnagiri. FIL had a total installed capacity of PVC P&F of 3,70,000tpa and PVC resins of 2,72,000tpa at end-FY19.


FINANCIAL SUMMARY

Particulars

9MFY19 (Unaudited)

FY18

FY17

Revenue (INR billion)

21,271

27,378

26,024

EBITDA (INR billion)

4,577

4,839

5,631

EBITDA margin (%)

22

18

22

Total debt (INR billion)

n.a.

1,007

942

Gross interest coverage (x)

46.6

49.3

36.6

Net leverage (x)

n.a.

0.06

0.06

Source: FIL, Ind-Ra

 


RATING HISTORY

Instrument Type

Current Rating/Outlook

Historical Rating/Outlook

Rating Type

Rated Limits (million)

Rating

13 April 2018

30 March 2017

28 December 2015

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-/Stable

Non-fund-based limits

Short-term

INR17,457.5

IND A1+

IND A1+

IND A1+

IND A1+


COMPLEXITY LEVEL OF INSTRUMENTS

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

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Applicable Criteria

Analyst Names

  • Primary Analyst

    Krishan Binani

    Associate 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