By Abhishek Rathi

India Ratings and Research (Ind-Ra) has revised Ram Ratna Wire Limited’s (RRWL) Outlook to Negative from Stable while affirming its Long-Term Issuer Rating at ‘IND BBB+’. 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

Term loans

-

-

December 2023

INR600.8 (reduced from INR946.5)

IND BBB+/Negative

Affirmed; Outlook revised to Negative from Stable

Fund-based limits

-

-

-

INR1,760

IND BBB+/Negative/IND A2

Affirmed; Outlook revised to Negative from Stable

Non-fund based limits

-

-

-

INR70 (increased from INR60)

IND A2

Affirmed

Proposed working capital limits

-

-

-

INR213.5

WD

Withdrawn (the company did not proceed with the instrument as envisaged)

 

Analytical Approach: To arrive at the ratings, Ind-Ra has taken a consolidated view of RRWL and its subsidiary, Global Copper Limited (GCL; 60% stake), in view of the moderate-to-strong operational and strategic linkages between the entities. The subsidiary has minimal impact on the financial profile of RRWL, and the latter’s standalone performance is in line with the consolidated performance.

 

The Outlook revision reflects Ind-Ra’s expectation of a breach of negative sensitivities in FY20 and FY21, with a slower-than-expected pick-up in demand and delay in the commercialisation of capex leading to a fall in operational cash flows.

KEY RATING DRIVERS

Credit Metrics to Deteriorate in FY21: RRWL’s credit metrics deteriorated over FY17-FY19 due to debt-funded capex and lower operating cash flows. The net leverage is likely to have been marginally above 4.5x in FY20 (FY19: 4.6x; FY18: 3.7x) due to an increase in debt-funded capex and a fall in absolute EBITDA. The net leverage is likely to reach a peak of 5.0x-5.5x in FY21, owing to a decrease in cash flows and decline in volumes, resulting from a lower demand due to the extended lockdown led by the COVID-19 outbreak. The interest coverage is also likely to moderate to 1.5x-2x over FY20-FY21 (FY19: 2.3x; FY18: 3.9x) owing to a reduction in the operating margins amid a higher interest cost. The agency expects the credit metrics to improve in FY22 due to growth in the EBITDA, resulting from an improvement in volumes due to the capex executed over FY17-FY20.

COVID-19 Disruptions to Impact Revenue & Operating Profitability in FY21: With the ongoing pandemic and nationwide lockdown that began at end-March 2020, demand has plummeted to near zero levels and manufacturing activity has been negligible. This could cause volumes to drop by 20%-25% yoy in FY21. Furthermore, as RRWL is dependent on industries/sectors wherein a pick-up in consumption might take longer than that for other discretionary goods, the company’s overall revenue is also likely to decline in FY21 before recovering in FY22. During 1QFY21, demand and capacity utilisation are likely to be substantially lower than FY20 levels, with disruptions in logistics and social distancing in workplace. The operating EBITDA margin is also likely to be impacted in FY21, primarily due to higher absorption of fixed costs during 1QFY21, resulting in lower cash flows. However, the agency expects the operating margins to recover to 4.5%-5% over the medium term.

RRWL’s EBITDA margin fell to 4.2% during 9MFY20 (FY19: 4.7%; FY18: 6.1%) due to fluctuations in copper prices and an increase in fixed costs. The company’s revenues for 9MFY20 were INR11,017 million (FY19: INR14,226 million; FY18: INR11,382 million) and are likely to have been at the FY19 levels in FY20 on account of a slowdown in consumption and lower demand.

Significant Experience of Promoters; Wide Product Portfolio: The ratings factor in the company’s promoters’ experience of around five decades in manufacturing wires and cables. Furthermore, the company has developed a range of winding wire products over the years. RRWL’s product line includes 16 products that broadly fall into five groups, i.e. enamelled copper wires, enamelled copper strips, submersible winding wires, bare copper strips and enamelled aluminium wires. The company’s products are utilised in the transmission and distribution industry, automobile industry, capital goods manufacturing, consumer electricals, batteries, generators, etc.

Strong Distribution Network; Established Brand: The company has a network of more than 130 dealers spread across the country. The dealers sell the company’s products to original equipment manufacturers and also cater to the replacement demand through retailers. RRWL, which sells its products under the RR Shramik brand, has an established presence in the industry, with an operational track record of more than two decades.

Established Relationships with Reputed Clientele: RRWL has over 15 years of relationships with reputed original equipment manufacturers such as Cummins Generator Technologies India Pvt Ltd (parent – Cummins Inc), Godrej & Boyce Manufacturing Co. Ltd , Karad Projects & Motors Ltd. and Emerson Climate Technologies India Limited. The customer profile is fairly diversified, with the top 10 domestic customers contributing less than 35% to the total domestic revenue of the company in FY19. Exports account for less than 10% of the total sales.

No Major Capacity Expansion Plans: RRWL completed its capex of INR1,500 million during FY17-FY20 for capacity expansion and widening its product portfolio. Under the capex executed, the capacity of enamelled copper wires, enamelled copper strips, and submersible winding wires was increased by 15%-20%. According to the management, the plans to set up fresh capacity of enamelled copper foil of 520 metric tonnes per month had been shelved in 2QFY20 owing to weak market sentiments. The agency believes that RRWL will not execute any further major operating capex owing to the weak demand on account of the COVID-19 outbreak and the likelihood of capacity utilisations in existing facilities being low for the next two years.

Liquidity Indicator - Adequate: RRWL’s utilisation of the fund-based limits was around 90% (of the drawing power; 61% of sanctioned limits) over the 12 months ended March 2020. The non-fund-based utilisation was around 84% over the same period. RRWL’s standalone gross working capital cycle was moderate at 90 days in FY19 (FY18: 87 days) but it is likely to be stretched over FY21 due to expected support to dealers. Its major working capital requirement is towards funding its receivables; the receivables period fell to 60 days in FY19 (FY18: 70 days). The gross working capital cycle is likely to improve by 15 days over FY19 on account of efficient utilisaton of dealer financing and improved receivables management.

RRWL cash flow from operations and free cash flow were negative over FY18-FY19 on account of incremental working capital requirements to support the growing scale and the capex being incurred for capacity expansion.  The company is likely to record marginal improvement in free cash flow in FY20, as an improvement in receivables collection would lead to lower working capital requirement. Considering the absence of any major capex plans and the likely fall in working capital requirements owing to low volumes, the free cash flow is likely to turn positive over FY21-FY22 and then would subsequently turn negative again towards incremental working capital requirements for revenue growth. RRWL has availed a partial moratorium from some banks. The agency expects RRWL to meet its stretched working capital requirements from the secured and unsecured lines. The company has repayment obligations of INR219 million and INR210 million in FY21 and FY22, respectively.

Key Business Risks: RRWL remains exposed to intense competition from several organised and unorganised players in the industry. Furthermore, its profitability remains exposed to fluctuations in copper prices, with raw material cost contributing around 90% to the revenue. Although the raw material price risk is largely managed by back-to-back purchases for copper, the company’s inventory continues to be vulnerable to sharp variations in raw material prices. Moreover, the margins are exposed to currency fluctuations, although the same is largely mitigated by prudent hedging policies.


RATING SENSITIVITIES

Outlook Revision to Stable: A shortening of the working capital cycle along with an improvement in the revenue and operating profitability, leading to increased visibility on the net adjusted leverage falling below 4.5x (consolidated) on a sustained basis, would lead to the Outlook being revised back to Stable

Negative: Any further decline in its EBITDA margins and/or an elongation of its working capital cycle, resulting in increased visibility of the net adjusted leverage rising above 4.5x (consolidated) on a sustained basis would be negative for the ratings.   


COMPANY PROFILE

Incorporated in 1995, RRWL primarily manufactures copper winding wires. The company has three manufacturing units, one each in Silvassa, Dadar & Nagar Haveli.

 

FINANCIAL SUMMARY

Particulars

9MFY20

FY19

FY18

Revenue (INR million)

11,017

14,226

11,382

EBITDA (INR million)

463

672

685

EBITDA margin (%)

4.2

4.7

6.1

Profit after tax

128

160

277

Gross interest coverage (x)

2.2

2.3

4.0

Net adjusted leverage (x)

4.3

4.6

3.7

Source: RRWL, Ind-Ra


RATING HISTORY

Instrument Type

Current Rating/Outlook

Historical Rating/Outlook

Rating Type

Rated Limits (million)

Rating

25 March 2019

Issuer rating

Long-term

-

IND BBB+/Negative

IND BBB+/Stable

Term loan

Long-term

INR600.8

IND BBB+/Negative

IND BBB+/Stable

Fund-based limits

Long-term/Short-term

INR1,760

IND BBB+/Negative/IND A2

IND BBB+/Stable/IND A2

Non-fund-based limits

Short-term

INR70

IND A2

IND A2

Proposed working capital limits

Long-term/Short-term

INR213.5

WD

Provisional IND BBB+/Stable/Provisional IND A2


COMPLEXITY LEVEL OF INSTRUMENTS

For details on the complexity level 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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About India Ratings and Research: India Ratings and Research (Ind-Ra) is India's most respected credit rating agency committed to providing India's credit markets accurate, timely and prospective credit opinions. Built on a foundation of independent thinking, rigorous analytics, and an open and balanced approach towards credit research, Ind-Ra has grown rapidly during the past decade, gaining significant market presence in India's fixed income market. 

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Applicable Criteria

Analyst Names

  • Primary Analyst

    Abhishek Rathi

    Senior Analyst
    India Ratings and Research Pvt Ltd Wockhardt Towers, 4th floor, West Wing Plot C-2, G Block. Bandra Kurla Complex Bandra (East), Mumbai 400051
    +91 22 40356110

    Media Relation

    Ankur Dahiya

    Manager – Corporate Communication
    +91 22 40356121