By Abhishek Rathi

India Ratings and Research (Ind-Ra) has affirmed Polycab India Limited’s (PIL) 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 (INR million)

Rating/Outlook

Rating Action

External commercial borrowing

-

-

June 2020

INR440

WD

Withdrawn (repaid in full)

Fund-based working capital limit

-

-

-

INR4,500 (reduced from INR7,060 million)

IND AA/Stable/IND A1+

Affirmed

Proposed fund-based working capital limit

-

-

-

INR1,440

WD

Withdrawn (the company did not proceed with the instrument as envisaged)

Non-fund-based working capital limit

-

-

 

-

INR21,640

IND A1+

Affirmed

Non-fund-based working capital limit *

-

-

-

INR8,360

IND A1+

Assigned

Non-fund-based working capital limit

-

-

-

INR500

IND A1+

Assigned

Term loan

-

-

March 2022

INR80 (reduced from INR120 million)

IND AA/Stable

Affirmed

*The final ratings have been assigned based on sanction documents received by the agency. 

Analytical Approach: Ind-Ra continues to take a consolidated view of PIL and its subsidiaries Tirupati Reels Pvt Ltd. (TRPL; 55%); Polycab Wires Italy SRL (100%); Polycab Electricals and Electronics Private Limited (100%); Polycab USA LLC (100%); Dowells Cable Accessories Pvt Ltd (51%) and Ryker Base Private Limited (RBPL; 100% with effect from 6 May 2020) to arrive at the ratings, because of its majority shareholding in these entities. However, the subsidiaries’ contribution to PIL’s revenue and profitability is immaterial.
    

KEY RATING DRIVERS

Synergies from Acquisition of JV (RBPL): RBPL was formed as a 50:50 JV between PIL and Trafigura, a global trader of commodities, in 2016 to aid PIL in controlling product quality, providing energy savings and strengthening domestic market position in its core markets of CW. n May 2020 PIL acquired the balance 50% in its JV (RBPL) from Trafigura Pte Ltd, Singapore and the agency expects the same would lead to an improvement in backward integration, product diversification, and working capital management. However, the agency believes the impact of the same on PIL’s financial profile would be limited, given RBPL’s modest scale of operations and PIL's net adjusted leverage (including Ryker's debt) is expected to remain comfortable around 1x in FY21-FY22.

Ind-Ra believes the synergies to PIL would be enabling seamless integration of Ryker with its core operations, controlling product quality, providing energy savings and strengthening domestic market position. PIL would consume about half of Ryker’s production capacity to meet its copper requirement while the balance would be sold through various tolling or partnership opportunities. Ryker commissioned a 225,000 million tonnes per annum copper wire rods manufacturing plant in FY20 by incurring a capex of around INR2.5 billion which was funded by INR0.52 billion of equity and the balance by debt. Ryker had borrowings of around INR2 billion as at end-June 2020. 

Improved Operating Performance Amid Challenging Environment: PIL is a leading company in the Indian cable and wire (CW) industry with about 18% market share in the organised markets in FY20. Despite a challenging economic environment led by weak consumption and volatile commodity prices in FY20 along with the outbreak of COVID-19 towards the end of FY20, PIL's revenue grew 11% yoy to INR88.3 billion. PIL's wires and cable segment grew 7% yoy driven by traction in exports and new product categories. However, the company’s fast-moving electrical goods (FMEG) and engineering, procurement and construction contracts (EPC) segment recorded higher growth of 30% and 29% yoy, respectively, on the back of portfolio re-designing across price points, better product mix and distribution expansion. Further, the company’s expansion into newer domestic and overseas geographies helped PIL post a healthy performance in FY20. 

PIL has been looking to expand its footprints in overseas markets of the USA and Australia to diversify and mitigate its high contribution of domestic sales to overall revenue, which stood at 88% in FY20 (FY19: 97%). Ind-Ra expects PIL’s revenue to decline 10%-15% in FY21 owing to the muted institutional demand in the industry and a gradual economic recovery.

During 1QFY21, PIL reported lower revenue of INR9.7 billion (1QFY20: INR19.5 billion) as the company lost business for 40-45 days owing to the lockdowns. PIL has a considerable market share in the northern and southern regions of India contributing about 56% to its overall revenue. Further, its share of exports increased to 10% in 1QFY21 (1QFY20: 5%).

Resilient Operating Margins: PIL's margins expanded 92bps yoy (excluding other income) to 12.9% in FY20 as a result of improved sales mix, realisations and cost management. The CW segment contributed the highest margin of 13%-14% in FY20 and the agency expects the margins to moderate to around 11% in FY21 due to the muted demand and offtake in the economy. In FY20, the margin contribution from FMEG and EPC segment was around 1.5% and 4%-5% respectively. PIL has been expanding in all segments and is focusing on the FMEG segment, resulting in its increased growth. The company’s FMEG business has the lowest EBITDA margins owing to the intense competition, vertical organisation structure of FMEG business and economies of scale. The company’s other income increased yoy by INR0.3 billion to INR0.93 billion in FY20 on account of an increase in mutual fund gains and interest on financial assets.

PIL’s operating margins contracted to 6% during 1QFY21 owing to the COVID-19 led disruptions in trade and adverse operating leverage. PIL also focussed on cost-saving initiatives curtailing its advertisement and promotional expenses to less than 0.3% of sales in 1QFY21 (1QFY20: 1.97%) and 12% yoy lower staff costs. The FMEG segment recorded operating loss in 1QFY21 due to lower trade sentiments and consumer footfalls leading to substantially lower volumes, along with stalled EPC executions. PIL’s other income during 1QFY21 was flat yoy at INR0.34 billion including the one-off interest income of INR0.16 billion on a favourable Income Tax Appellate Tribunal order of INR0.84 billion, along with foreign exchange depreciation gains.

Liquidity Indicator- Superior: During the 12 months ended August 2020, the company’s monthly average utilisation of the fund-based limits was less than 10%. The unutilised fund-based and non-fund based working capital limits stood at INR4.1 billion and INR9.3 billion, respectively at end-August 2020. The agency expects the company’s liquidity to remain comfortable, supported by healthy operational cash flows and cash position of around INR6 billion, as of end-1QFY21. However, the company’s cash flow from operations declined to INR2.2 billion in FY20 (FY19: INR11.6 billion) due to an elongation in its net working capital cycle to 127 days (114 days).

The agency expects PIL's net adjusted leverage (net debt/operating EBITDA; including acceptances) to remain below 1x in FY21 (FY20: 0.7x: FY19: 1x) and the interest coverage (operating EBITDA/gross interest) to moderate to 14x-18x (22.9x; 8.2x) for the next two years. It has scheduled debt repayments (including RBPL: INR0.5 billion; TRPL:  INR0.04 billion) of INR0.85 billion for FY21 and INR0.56 billion for FY21 with a debt service coverage ratio of over 4x.

Low Capex Execution Risks: PIL incurred a capex of INR2.9 billion in FY20 (FY19:INR2.86 billion) and the agency expects additional capex of around INR2.5 billion capex over FY21, mainly for CW manufacturing; FMEG products; setting up of robotic warehouses and debottlenecking. The company expects to fund the capex with internal accruals.

Inherent Industry Risks: PIL’s major raw materials include copper, aluminium and poly vinyl chloride compound. While copper constituted 57% of the raw materials consumed in FY20 (FY19: 54.2%) aluminium and PVC compounds constituted around 13.5% (16.6%) and 12.7% (13.2%), respectively. To mitigate raw material price volatility between procurement and selling, PIL has a 90-day window from its major suppliers to pass on the same at the time of selling. The volatility is also passed on by way of a periodic adjustment of selling prices. PIL carries significant unhedged forex payables; however, the risk is partly mitigated by a demonstrated pass-through of input price movements. PIL is exposed to significant competition from both the organised and unorganised CW players.

Intense Competition: The CW industry is characterised by several organised and unorganised players leading to intense competition, and the resultant pressure on prices. From the organised sector PIL has stiff competition from players such as Havells India Ltd., KEI Industries Ltd., Finolex Cables Ltd and RR Kabel Limited (‘IND A+’/Stable). The unorganised sector has been also been piling inventories, thereby creating high supply-low price risk in the market. However, during 1Q-2QFY21, unorganised sector players have been grappling with liquidity issues leading to market share gain by stronger organised players.


RATING SENSITIVITIES

Positive: A significant improvement in sales contribution from the FMEG and data/industrial cables segment and sustained improvement in the cash flow from operations margins, while maintaining the credit metrics and/or increased availability of granular data for monitoring performance at frequent intervals, all on a sustained basis, could lead to a positive rating action.

Negative: A significant increase in the net adjusted leverage exceeding 2x on account of an increase in debt for the capex or increased working capital requirements and/or deterioration in the margins, all on a sustained basis, could lead to a negative rating action.


COMPANY PROFILE

Incorporated in 1996, PIL (formerly Polycab Wires Private Limited) manufactures and sells CW, and FMEG, as well as executes limited EPC projects. It has 25 manufacturing facilities across Gujarat, Maharashtra and Uttarakhand, and Daman and Diu, including three FMEG facilities.

 

FINANCIAL SUMMARY

Particulars

FY20

FY19

Revenue (INR billion)

88.3

79.9

Operating EBITDA (INR billion)

11.4

9.5

Operating EBITDA margin (%)

12.9

11.9

Interest coverage(x)

22.9

8.2

Net leverage (x) including acceptances

0.7

1.0

Sources: PIL, Ind-Ra

 

 


RATING HISTORY

Instrument Type

Current Rating/Outlook

Historical Rating/Outlook

Rating Type

Rated Limits
(million)

Rating/Outlook

27 September 2019

14 January 2019

3 May 2017

 

Issuer rating

Long-term

-

IND AA/Stable

IND AA/Stable

IND AA/Stable

IND AA-/Stable

 

Term loan

Long-term

INR80

IND AA/Stable

IND AA/Stable

IND AA/Stable

IND AA-/Stable

 

External commercial
borrowings

Long-term

INR440

WD

IND AA/Stable

IND AA/Stable

IND AA-/Stable

 

Fund-based limits

Long-term/Short-term

INR4,500

IND AA/Stable/IND A1+

IND AA/Stable/IND A1+

IND AA/Stable/IND A1+

IND AA-/Stable/IND A1+

 

Non-fund-based limits

Short-term

INR30,500

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.

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.

ABOUT INDIA RATINGS AND RESEARCH

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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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