By Ragini Surve

India Ratings and Research (Ind-Ra) has revised Kandui Industries Private Limited’s (KIPL) Outlook to Positive from Negative while affirming its Long-Term Issuer Rating at ‘IND BBB-'. The instrument-wise rating actions are given below:

 Instrument Type

Date of Issuance

Coupon Rate

Maturity Date

Size of Issue (million)

Rating/Outlook

Rating Action

Fund-based working capital limits

-

-

-

INR290 (increased from INR250)

IND BBB-/Positive

Affirmed; Outlook revised to Positive from Negative

Non-fund-based working capital limits

-

-

-

INR170 (reduced from INR210)

IND A3

Affirmed

Term Loans

April 2025

INR108.90 (reduced from INR190)

IND BBB-/Positive

Affirmed; Outlook revised to Positive from Negative

The Outlook revision reflects the likely improvement in the revenue and profitability, backed by higher capacity utilisation and increased realisations, as well as the credit metrics in near-to-medium term. In addition, the rating action factors in the absence of any significant impact of the pandemic on the company’s operational as well as financial performance in FY21, against Ind-Ra’s earlier expectations.

KEY RATING DRIVERS

Revenue and Profitability Likely to Improve:  The agency expects KIPL’s revenue to improve in the near-to-medium term owing to better realisations from value-added products, and higher capacity utilisation (9MFY21: 42%; FY20:51%). Considering the company’s modest revenue growth in FY20 (INR2,085 million; FY19: INR2,023 million) and the impact of COVID-19-led disruptions, Ind-Ra had expected a substantial deterioration in the revenue in FY21. However, the company’s manufacturing activity was only affected during the first two months of the year. KIPL reported a top-line of INR1,508 million in 9MFY21, nearly 95% of the revenue witnessed in 9MFY20 (9MFY20: INR1,582 million). Furthermore, the company had achieved revenue of INR1,700.00 million in 10MFY21, and had an order book worth  INR400.00 million, scheduled to be executed over the remaining two months of FY21. Consequently, the management expects the company to record revenue of over INR2,100 million in FY21.

Ind-Ra expects KIPL’s profitability to improve over the  near-to-medium term on the back of increased realisations from value-added products, considering the accretive benefits from the research and development activity carried out by the entity over the past few years.

KIPL has reported a moderate EBITDA of INR135.3 million  in 9MFY21 (FY20: INR153 million), with an EBITDA margin of about 9% (7.33%). The margin increased due to  a decline in operating expenses. KIPL's ROCE had stood at 10% in FY20 (FY19:10%).  During 9MFY21, KIPL was able to pass on the decline in raw material costs to its customers, albeit with a time lag.  While the realisation per metric tonne (MT) declined by13% to INR59,850 per MT in  9MFY21 compared to FY20 levels, the raw material cost per MT fell by 15% to INR44,344 per MT. This helped protect the company’s revenue and profitability from any major impact of the pandemic-led issues. 

Debt Reduction to Strengthen Credit Metrics: KIPL’s debt declined to INR428 million in FY20 (FY19: INR535 million). Consequently, despite a decline in the absolute EBITDA  to INR153 million in FY20 (FY19: INR176 million), KIPL’s net leverage(debt/EBITDA) improved  slightly to 2.79x (FY19: 3.00x).The interest coverage (operating EBITDA/gross interest expense) deteriorated to 3.02x in FY20 (FY19: 3.17x) due to the fall in the absolute EBITDA. However, the coverage improved to 6x in 9MFY21 owing to healthy EBITDA of INR134.30 million and lower interest expenses.

Since July 2020 onwards, KIPL has been classified as micro, small  and medium enterprises (MSMEs) in line with the government’s revised definition of the same. This has resulted in the direct linking of the interest rate to the Reserve Bank of India’s repo rate, instead of the marginal cost of fund-based lending rate. As informed by the management, this will lead to a substantial drop in the interest costs. In addition, the company has prepaid a part of term loan in FY21, resulting in reduced debt levels. The agency had expected the leverage to exceed 3x in FY21. However, due to the fall in debt along with faster recovery in operations, the leverage remained below 3x in 9MFY21. 

KIPL's facilities are being renewed  and the management expects less than 8% rate of interest for FY22, which will further strength the coverage indicators. The abovementioned factors along with the absence of any major debt-led capex plans would help the credit metrics remain healthy in the medium term too, as per the agency.

Promoter Experience: The ratings factor in the promoter’s experience of over four decades in the manufacturing of master batches, resulting in an established relationship with its customers.

Liquidity Indicator - Adequate:  KIPL’s cash flow from operation remained positive during FY17-FY20.  The cash flow from operation improved to INR138 million in FY20 (FY19: INR87.30 million), mainly on account of favourable changes in the working capital.  The company’s average maximum utilisation of the fund-based limits was 68.46% over the nine months ended December 2020. KIPL's free cash flow from operation also remained positive and increased to INR116.20 million in FY20 (FY19: INR50.70 million) owing to the limited capex incurred during the year. Ind Ra expect, the free cash flow to remain positive in FY21 and upcoming years on account of absence of any major capex. 

KIPL’s gross working capital cycle (debtors+ inventory) remained elongated due to the working capital-intensive nature of the operations but improved to 122 days in FY20 (FY19: 127 days) due to a decline in the receivables period to 66  days (77 days). In 9MFY21, the receivable days exceeded 88 days; the timely receipt of receivables that have been due for more than 90 days will be a key monitorable. As informed by the management, KIPL's liquidity remains insulated from any occurrence of bad debts as the company has also entered into a credit insurance contract. As of December 2020, the company has repayment obligation of only INR37.40 million in FY21. In addition, the prepayment of a portion of the term loan in FY21 reflects the availability of sufficient liquidity. As informed by the management, KIPL did not avail the Reserve Bank of India-prescribed debt moratorium and also did not avail any additional loan during the lockdown period.

Fluctuations in Raw Material Prices: Raw material costs have always been a key component of KIPL’s cost structure, accounting for more than 70% of sales). Consequently, the EBITDA is susceptible to raw material price fluctuations. The prices of polymers and pigments, which are key components of the company’s raw material,  are typically volatile. Furthermore, KIPL imports 25%-30% of its raw material requirement, which it does not hedge. A natural hedge of about 50% is available because of the export revenue; however, any adverse foreign exchange fluctuations will adversely affect KIPL’s EBITDA.


RATING SENSITIVITIES

Positive: A sustainable improvement in the revenue and EBITDA, leading to the interest coverage remaining above 3.25x, will result in a positive rating action.

Negative: Lower-than-expected growth in the revenue and EBITDA, leading to the interest coverage falling below 3.25x, could lead to the Outlook being revised to Stable.


COMPANY PROFILE

Established in 2006, KIPL manufactures master batches that are used in the plastic and polyester industries for adding colour shades to the final product. Till FY18, the company had two manufacturing units in Daman, with a combined annual installed capacity of 30,000MT. In FY19, with an expansion of its capacities, KIPL's installed capacity increased to 60,000MT per annum. The day-to-day operations of the company are handled by Ashwin Agarwal and Umakant Dash.

FINANCIAL SUMMARY

Particulars

9MFY21

FY20

FY19

Revenue (INR million)

1,508.11

2,086.00

2,022.50

EBITDA (INR million)

134.30

153.00

176.90

EBITDA margin (%)

8.91

7.33

8.75

Interest coverage (x)

6.12

3.02

3.17

Net leverage (x)

2.82

2.79

3.00

Source: KIPL


RATING HISTORY

Instrument Type

Current Rating/Outlook

Historical Rating/Outlook

Rating Type

Rated Limits (million)

Rating

15 May 2020

18 March 2019

27 March 2018

27 March 2017

Issuer rating

Long -term

-

IND BBB-/Positive

IND BBB-/Negative

IND BBB-/Stable

IND BBB-/Stable

IND BBB-/Stable

Fund-based working capital limits

Long-term

INR290.00

IND BBB-/Positive

IND BBB-/Negative

IND BBB-/Stable

IND BBB-/Stable

IND BBB-/Stable

Term loan

Long-term

INR108.90

IND BBB-/Positive

IND BBB-/Negative

IND BBB-/Stable

IND BBB-/Stable

IND BBB-/Stable

Non-fund-based limits

Short-term

INR170.00

IND A3

IND A3

IND A3

IND A3

IND A3


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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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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