By Pallavi Bhati

India Ratings and Research (Ind-Ra) has assigned Apollo International Limited (AIL) a Long-Term Issuer Rating of ‘IND BBB-’. 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 working capital limit

-

-

-

INR270

IND BBB-/Stable/IND A3

Assigned

Non-fund-based working capital limit

-

-

-

INR1,161.1

IND BBB-/Stable/IND A3

Assigned

Short-term loans

-

-

-

INR550

IND BBB-/Stable/IND A3

Assigned

Long-term loans

-

-

FY37

INR339

IND BBB-/Stable

Assigned

Proposed working capital term loan

-

-

-

INR679.9

IND BBB-/Stable/IND A3

Assigned

The ratings reflect AIL’s diversified revenue profile, a likely improvement in operational performance and credit metrics from FY22, and funding support from the promoters. However, the ratings are constrained by the company’s exposure to high competition and execution-related risks, large investment in subsidiary, and qualified financial statements.

KEY RATING DRIVERS

Diversified Revenue & Customer Profile: AIL primarily operates through three divisions - international business (FY21: accounted for 56% of the revenue, FY20: 37%), leather or fashion (44%, 59%), and trading (nil, 4%). Under the international business, AIL undertakes engineering, procurement and construction activities for government and private infrastructure projects, both in India and overseas. Under the leather division, the company manufactures and sells leather garments and accessories to international retail brands. AIL was historically engaged in the trading of automotive tyres to the international markets, although the management reduced its focus on this division in FY20-FY21. AIL’s diversified revenue profile has aided the revenue as the decline in turnover from the leather and tyre trading divisions was partly offset by the growth in the international business division. The company primarily exports to Africa, Middle East, Europe and the US, which contributed about 70% to the revenue in FY21 (FY20: 90%). AIL has a diversified customer base, however, due to the presence of several large customers the contribution from the top three customers, although improved, was high at 38% of the revenue in FY21 (FY20: 52%).

Moderate Operational Performance; Revenue Growth Expected from FY22:
AIL’s revenue declined to INR2,744 million in FY21 (FY20: INR3,256 million) on account of lower demand in the leather division due to the Covid-19 pandemic, partly offset by an increase in internal business division revenue. In 7MFY22, the company recorded revenue of INR1,451 million. However, the pick-up in the international business division in YTDFY22 was impacted by the second wave of Covid-19 infections as well as delays in order approvals. Although, the company has a strong revenue visibility backed by an order book of INR15,000 million, largely executable over the next 18 months. The leather division is also witnessing strong demand and is operating at full capacity. The management expects the company to achieve revenue of INR4,000 million in FY22, however, the agency expects the same could be lower at around INR3,500 million, given risks relating to project execution and approvals. AIL is expanding its product profile and venturing into textile and vegan leather accessories in the leather division, which are likely to induce growth. Moreover, it plans to re-enter the tyre trading activities and expand the scope to other products such as automotive batteries, which would also support scale in FY23.

AIL has moderate EBITDA margins due to weak operating leverage and increasing raw material prices. However, the margins improved in FY21-7MFY22 (7MFY22: 10.2%, FY21: 10.3%, FY20: 5.2%, FY19: 6.7%) backed by an increase in the scale of operations in the internal business division in FY21 and healthy demand from the leather division in 7MFY22. Ind-Ra expects the EBITDA margins to remain around 10% in FY22 backed by the healthy demand in the leather segment and the likely pick-up in international business division. However, the agency expects the margins to decline following the recommencement of operations in the low-margin trading division.

Funding Support from Promoters:
AIL’s shareholders infused equity of INR458 million over FY20-FY21 and also received unsecured loans of INR499 million from shareholders and related parties over FY19-FY21, which has been used for operational purpose, debt repayments as well as investments in subsidiaries. In October 2021, AIL entered into an agreement with KKR India Financial Services Ltd (KKR India) for repayment of debt obligations totalling INR750 million, of which INR450 million was to be repaid by 2 November 2021 and the remaining INR300 million by 31 January 2022. The loan was originally repayable in July 2022. AIL received preference shares of INR450 million from Classic Industries & Exports Limited in October 2021 to meet KKR India’s repayment in a timely manner. AIL has also discharged further about INR260 million through a mix of internal accruals and promoter loans. The company expects the remaining funds of INR40 million to be timely repaid through internal accruals. The agency, as per its discussions with AIL’s management, expects promoter support to be forthcoming. Timely availability of funding support from the group to AIL, as and when required, will remain a key rating monitorable.

Liquidity Indicator
- Adequate: AIL’s average use of the fund-based and the non-fund-based limits was 87% and 60% for the 12 months ended October 2021, respectively. The company has large working capital requirements with a lengthy net working capital of 158 days in FY21 (FY20: 71 days), primarily on account of a long receivable period, largely owing to a further increase in the receivables in the leather segment during the pandemic, as well as the milestone-based billing method in the international business division. The company’s large working capital requirements coupled with moderate profitability over the last few years, led to negative cash flow from operations in three of the last four years (FY21: negative INR357 million, FY20: INR53 million, FY19: negative INR251 million).

The company had unencumbered cash and bank balances of INR34 million at FYE21. It also has investments in listed entities, Apollo Tyres Limited (
‘IND AA+’/Stable; 0.16% shareholding as of 30 September 2021) and UFO Moviez India Limited (7.99%), however, the same is pledged towards its external borrowings. Other than KKR India’s repayments of INR750 million in FY22, AIL has scheduled debt repayments of INR44.5 million and INR61.2 million for FY22 and FY23, respectively. The debt repayment for FY22 will be met through a mix of internal accruals and refinancing, however, the agency expects internal accruals to be adequate for debt servicing in FY23.  AIL has availed additional loans of INR137 million and additional working capital limits of INR500 million in FY22, and is in discussions for further enhancement of limits to meet its future funding requirements. Majority of the new loans are at lower interest rates, which would control the interest expenses for AIL.

Weak Credit Metrics; Although Likely to Improve from FY22:
High borrowings combined with muted profitability over FY17-FY20, resulted in weak credit metrics for AIL. The company’s interest coverage (EBITDA/interest expense) has remained below 1.2x in the last few years (7MFY22: 1.0x, FY21: 1.2x, FY20: 0.5x) while the adjusted net leverage (net debt including outstanding corporate guarantees/EBITDA) remained elevated (6.8x, 8x, 15.6x) in the last few years. The agency expects the adjusted net leverage to reduce below 5x in FY22 and the interest coverage to remain around 1.0x backed by the healthy revenue growth and moderate profitability levels, along with full repayment of KKR India loans. The interest coverage is expected to improve above 2.0x from FY23, on account of a reduction in high-cost debt and absence of any large debt-funded capex plan, along with the sustaining of EBITDA.

Large Investments in Subsidiary:
AIL has exposure to its subsidiaries and group companies in the form of equity, and loans and advances totaling INR1,888 million as of FY21 (FY20: INR1,901 million, FY17: INR1,110 million). Of this, INR1,795 million is invested in its 79.8%-owned subsidiary, Apollo Logisolutions Limited (ALS). AIL had previously also extended a corporate guarantee for ALS's borrowings, however, the same was withdrawn in FY21. The total investments excluding the corporate guarantees amounted to 111% of AIL’s net worth as of FY21 (FY20: 134%). AIL had availed a loan from KKR India of INR1,000 million in FY17, which was largely utilised towards the purchase of stake in ALS. As per AIL's management, further direct support to ALS is not anticipated, and AIL has also provided an undertaking for the same to its lenders. This will remain a key monitorable for the agency.

High Competition & Execution Risks:
AIL, through its diverse business divisions, operates in highly competitive industries with fragmented market shares. To retain the market share with customers in the fashion segment, the company offered longer credit terms during the Covid-19 pandemic. Also, in its international business division, the orders are tender based, which can limit any significant upside in margins. Furthermore, delays in execution of projects on account of delays in receipt of approvals or necessary clearances can lead to lower-than-expected revenue and weaker operating leverage, thereby further impacting the company’s profitability margins.

Corporate Governance:
AIL’s FY21 auditor report carries a disclaimer of opinion by the auditor on the accounting methodology of the waiver of interest on KKR India loan, non-provision of impairment value towards AIL’s investment in ALS, and certain other matters. As per AIL’s management, as the KKR India loan would be fully repaid in January 2022, a disclaimer of opinion on this matter would not reflect in FY22 audited financials. Unqualified auditor opinion for AIL’s financials would remain a key monitorable.


RATING SENSITIVITIES

Positive: A significant increase in the revenue and sustained profitability, along with a reduction in the gross working capital cycle, leading to an improvement in the interest coverage above 2.5x, and an improvement in corporate governance issues including unqualified auditor report, all on a combined and sustained basis, could result in a positive rating action.

Negative: 
A decline in the revenue and profitability, or a further elongation of the gross working capital cycle, or incremental investments in subsidiaries, further stretching the liquidity position or a deterioration in the credit metrics, could result in a negative rating action.


COMPANY PROFILE

AIL was set up in 1994 as an export arm of Apollo Tyres to lead the marketing and export of Apollo Tyres worldwide. Later it forayed into manufacturing and export of leather garments and into construction and infrastructure development.

Since FY17, AIL is 100% owned by Raaja Kanwar and entities controlled by him. Raaja Kanwar is the eldest son of Onkar Singh Kanwar, the Chairman and Managing Director of Apollo Tyres.

FINANCIAL SUMMARY

Particulars

FY21

FY20

Revenue (INR million)

2,744

3,256

EBITDA (INR million)

282

168

EBITDA margin (%)

10.3

5.2

Interest coverage (x)

1.2

0.5

Adjusted net leverage (x)

8.0

15.6

Source: AIL, Ind-Ra



COMPLEXITY LEVEL OF INSTRUMENTS

Instrument Type

Complexity Indicator

Fund-based based working capital limits

Low

Non-fund based working capital limits

Low

Short-term loans

Low

Long-term loans

Low

 

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. 

Ind-Ra currently maintains coverage of corporate issuers, financial institutions (including banks and insurance companies), finance and leasing companies, managed funds, urban local bodies and project finance companies. 

Headquartered in Mumbai, Ind-Ra has seven branch offices located in Ahmedabad, Bengaluru, Chennai, Delhi, Hyderabad, Kolkata and Pune. Ind-Ra is recognised by the Securities and Exchange Board of India, the Reserve Bank of India and National Housing Bank. 

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For more information, visit www.indiaratings.co.in.

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Analyst Names

  • Primary Analyst

    Pallavi Bhati

    Senior Analyst
    India Ratings and Research Pvt Ltd DLF Epitome, Level 16, Building No. 5, Tower B DLF Cyber City, Gurugram Haryana - 122002
    0124 6687256

    Media Relation

    Ankur Dahiya

    Manager – Corporate Communication
    +91 22 40356121