Elongated Collection Period: NPPL’s receivables remain stretched in FY21, with debtor days of 210-220 (FY20: 160; FY19: 143). The net working capital cycle is thus likely to elongate further to 170-180 days in FY21 (FY20: 93, FY19: 83). The company receives a large share of its orders through primary contractors and its order book is entirely project driven. Given the slowdown in the end-use industries and the delays in project execution on account of COVID-19, the receivables remain high despite the low operational revenue. Furthermore, the total debtors exceeding 180 days increased to 36.2% of the total receivables over November-December 2020 (March 2020: 32%; March 2019: 15%), reflecting the ageing of receivables.  Furthermore, delays in realising payments on account of the exposure directly and primarily to the construction and infrastructure sectors could lead to a stretched liquidity position. 

COVID-19 Disruptions to Significantly Impact FY21 Operational Performance: NPPL caters to the infrastructure and construction sectors which were severely impacted over 1HFY21. Furthermore, the delays in project execution over 9MFY21 have resulted in the delays in the receivables and revenue recognition. The fall in revenue is likely to hit profitability despite management's efforts to reduce fixed costs to the extent possible. Accordingly, FY21 revenue is likely to be 35%-38% yoy lower (FY20: INR2,677 million) while EBITDA is likely to be negative with 9MFY21 EBITDA being negative INR234 million. However, management expects both revenue and EBITDA to recover in FY22. NPPL has a healthy order book of around INR4,700 million, which the management expects to execute over FY22 and FY23. Furthermore, NPPL has bid for a substantial number of contracts over 9MFY21 and is likely to secure further orders, basis its win ratio for bids which the management has articulated as improved in 9MFY21 over FY20. The management has informed the agency that it has maintained and further improved its market share in FY21, due its ability to manage larger projects in addition to the Pidilite parentage, which provides further comfort to customers on project execution. 

FY21 Credit Metrics to Deteriorate; Improve in FY22: The credit metrics are likely to deteriorate in FY21 due to the negative EBITDA. However, both FY22 interest cover and net leverage are likely to be comfortable at around 3.5x.  In FY20, NPPL’s interest coverage (operating EBITDA/gross interest expense) fell 2.99x (FY19: 12.95x; FY18: 14.86x) and net adjusted leverage (adjusted debt net of cash/EBITDAR) deteriorated to 6.25x (1.03x; 0.56x), due to a slowdown in the construction and infrastructure industry.  

Strong Parentage and Moderate Strategic & Operational Linkages: Although NPPL’s contribution to PIL’s consolidated revenue was only around 3.7% in FY20 (FY19: around 4.3%), the agency believes it could play a key role in PIL’s plans to become a complete waterproofing solutions provider. While NPPL has complete autonomy in its day-to-day operations, there is a close monitoring by the parent. NPPL benefits from PIL’s strong market reach, and it procures a significant portion of its raw materials from PIL and its supplier base. Furthermore, two out of six members (two independent) on NPPL’s board are representatives of PIL to align with the group strategy. 

Liquidity Indicator - Adequate:  NPPL’s average use of the fund-based and non-fund-based working capital limits was around 71% and 79%, respectively, over the 12 months ended December 2020. NPPL has increased both its sanctioned fund-based and non-fund-based limits to INR1,000 million and INR1,130 million, which will provide liquidity buffer, given the elongated working capital cycle. NPPL did not avail of the the Reserve Bank of India-prescribed moratorium for debt obligations. NPPL does not have any fixed term debt obligations.  This provides certain relief, given that NPPL reported negative cash flow from operations during FY20 which is likely to remain negative in FY21 due to negative EBITDA, while there are incremental working capital requirements to fund the rise in debtor days.  NPPL’s receivables were high at INR1,037.9 million at end-December 2020 despite the lower operational revenue (September 2020: INR1,179.7 million; March 2020: INR1,109.57 million) on account of the delayed payments from customers. However, the management has informed Ind-Ra that it has made adequate provision as per Expected Credit Loss method in FY20 itself. The agency draws comfort from NPPL's parent, PIL’s ability to fund the company in case of any shortfall.  The debt service coverage ratio is likely to be negative in FY21 due to the negative EBITDA generation but improve to around 2.8x in FY22. The company does not have any capital market exposure and relies on banking channels to meet funding requirements.