Rating Rationale
April 29, 2021 | Mumbai
Balkrishna Industries Limited
Ratings Reaffirmed
 
Rating Action
Total Bank Loan Facilities RatedRs.1000 Crore
Long Term RatingCRISIL AA/Stable (Reaffirmed)
Short Term RatingCRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to Annexure for Details of Instruments & Bank Facilities

Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AA/Stable/CRISIL A1+’ rating on the bank facilities of Balkrishna Industries Limited (BIL).

 

Operating income grew 17% in first nine months of fiscal 2021, compared to same period last fiscal, mainly due to realisation growth of 7% and volume growth of 10% backed by healthy demand for agriculture tyres in the export markets. Revenues is expected to grow 10% over the medium term, driven by steady volume growth from the agriculture and mining segment. Operating profitability improved to 31% in the first nine months of fiscal 2021, compared to 25% in the same period last fiscal, due to benign raw material costs and benefits of backward integration with commencement of its carbon black plant. Despite rise in raw material costs, operating profitability is expected to remain healthy, backed by revenue growth, continuing benefits from low-cost manufacturing and backward integration.

 

BIL is undertaking capital expenditure (capex) of Rs 1900 crore over next few years for capacity expansion of tire plant, carbon black plant and for automation and upgradation. The capex will be majorly funded from internal accruals, thereby sustaining its robust financial risk profile and strong liquidity.

 

The ratings continue to reflect BIL’s robust financial risk profile, established market position in the off-highway tyres (OHT) segment, and strong operating efficiency. These strengths are partially offset by vulnerability to fluctuations in raw material prices, susceptibility to regulatory actions in importing countries, and to volatility in foreign exchange (forex) rates.

Analytical Approach

For arriving at the ratings, CRISIL Ratings has combined the business and financial risk profiles of BIL and its subsidiaries. This is because all the entities, collectively referred to as BIL, are in the same business and have operational synergies.

 

Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

  • Strong operating efficiency: Manufacturing OHT is a labour-intensive process and the company benefits from its presence in low-cost locations and hence, strong operating efficiency. As employee cost is lower than those of most global peers, BIL’s products are more competitively priced.

 

  • Established market position: Market share in the international OHT segment has increased steadily over the years to 6-7% currently, on the back of association with major global original equipment manufacturers, wide distribution network in 160+ countries, and a varied product portfolio. The recently commissioned capex should help BIL better leverage the benefits of low-cost manufacturing.

 

  • Robust financial risk profile: Cash accrual is expected to be healthy, along with strong capital structure and debt protection metrics.  Healthy profitability and low interest cost will, likely, keep the metrics stable over the medium term.

 

Weaknesses:

  • Vulnerability to fluctuations in raw material prices: Prices of key raw material, natural and synthetic rubber (raw materials account for approximately 60% of BIL’s aggregate production costs), tend to be volatile as they depend on global demand, area under cultivation, and crude oil prices. Consequently, BIL’s profitability has been volatile 

 

  • Exposure to regulatory risks: In March 2017, the US Department of Commerce issued an order levying countervailing duty of 5.36% on BIL. Though the impact of this levy is limited, given that only around 10% of revenue comes from North America, BIL’s exposure to risks related to regulatory actions by importing countries will persist.

 

  • Volatility in forex rates: Around 60% of the raw material is imported. Also, the entire borrowings are in foreign currency, exposing BIL to the risk of sharp fluctuations in forex rates. However, with the bulk of revenue coming in from exports, the exposure to forex risk is largely naturally hedged. Receivables are also covered by forward contracts.

Liquidity: Strong

BIL's liquidity is strong backed by expected adequate cash accruals of Rs 900 crore over the medium term against nil long term debt. Furthermore, the company has strong liquidity with investments in liquid funds and unencumbered cash & bank balances. As of December 30, 2020, cash and cash equivalents stood at Rs 1423 crore.  Bank limit utilisation has been moderate at about 50% on average for the past twelve months through February 2021.

Outlook: Stable

CRISIL Ratings believes BIL's revenue growth will remain healthy over the medium term, and operating margin will remain stable, supported by the diversity in product mix and geographic reach, and established presence in the OHT segment. Financial risk profile should benefit from strong cash accrual, repayment of term debt, limited capex, and modest working capital debt.

Rating Sensitivity Factors

Upward Factors

  • Sustained revenue growth of 20% annually, while sustaining healthy operating profitability
  • Improvement in return on capital employed (RoCE), backed by healthy profitability and higher capacity utilisation
  • Sustained robust financial risk profile because of strong capital structure

 

Downward Factors

  • Sharp fall, if any, in operating margin to below 15%, coupled with revenue de-growth
  • Weakening in financial metrics, especially liquidity, because of a large capex or acquisition

About the Company

Based in Mumbai, BIL mainly manufactures OHTs that are used in vehicles meant for agricultural, industrial, construction, and earth-moving purposes. Achievable capacity across its plant in Bhuj Gujrat, Waluj, Maharashtra, in Bhiwadi and Chopanki (both in Rajasthan) is 2,85,000 tonne per annum(tpa). The company has a wide product profile and sells in more than 160+ countries. It also has over 2700 stock-keeping units to cater to varied requirements of customers. In fiscal 2020, approximately 80% of revenue was derived from export, with Europe and America accounting for 51% and 12%, respectively. Replacement facility at greenfield location in Waluj for 30000 tpa is likely to commence operations from first quarter of fiscal 2022. Carbon black facility at Bhuj with total achievable capacity of in excess of 1,00,000 has commenced operations and is running at full achievable capacity.

Key Financial Indicators

Particulars

Unit

2020

2019

Revenue

Rs. Crore

4811

5210

Profit After Tax (PAT)

Rs. Crore

960

774

PAT Margin

%

19.9

15.1

Adjusted debt/adjusted networth

Times

0.19

0.19

Interest coverage

Times

152.34

122.51

 

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments.

Annexure - Details of Instrument(s)

ISIN

Name of Instrument

Date of allotment

Coupon rate (%)

Maturity Date

Issue size

(Rs.Crore)

Complexity Level

Rating assigned

with outlook

NA

Packing Credit

NA

NA

NA

645.0

NA

CRISIL A1+

NA

Cash Credit

NA

NA

NA

10.0

NA

CRISIL AA/Stable

NA

Proposed Long Term Bank Loan Facility

NA

NA

NA

55.0

NA

CRISIL AA/Stable

NA

Letter of credit & Bank Guarantee*

NA

NA

NA

290.0

NA

CRISIL A1+

*Interchangeable with packing credit

Annexure – List of entities consolidated

Name of entities consolidated

Extent of consolidation

Rationale for consolidation

BKT Tyres Limited

Full

Subsidiary

BKT Europe S.R.L.

Full

Subsidiary

BKT USA Inc

Full

Subsidiary

BKT Tires (CANADA) Inc

Full

Subsidiary

BKT Exim US, Inc

Full

Subsidiary

BKT Tires Inc

Full

Step-Down Subsidiary

 

Annexure - Rating History for last 3 Years
  Current 2021 (History) 2020  2019  2018  Start of 2018
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund Based Facilities LT/ST 710.0 CRISIL A1+ / CRISIL AA/Stable   -- 30-01-20 CRISIL A1+ / CRISIL AA/Stable   -- 16-10-18 CRISIL A1+ / CRISIL AA/Stable CRISIL A1+ / CRISIL AA/Stable
      --   --   --   -- 30-07-18 CRISIL A1+ / CRISIL AA/Stable --
Non-Fund Based Facilities ST 290.0 CRISIL A1+   -- 30-01-20 CRISIL A1+   -- 16-10-18 CRISIL A1+ CRISIL A1+
      --   --   --   -- 30-07-18 CRISIL A1+ --
All amounts are in Rs.Cr.
 
 
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Cash Credit 10 CRISIL AA/Stable Cash Credit 10 CRISIL AA/Stable
Letter of credit & Bank Guarantee* 290 CRISIL A1+ Letter of credit & Bank Guarantee# 365 CRISIL A1+
Packing Credit 645 CRISIL A1+ Packing Credit 560 CRISIL A1+
Proposed Long Term Bank Loan Facility 55 CRISIL AA/Stable Proposed Long Term Bank Loan Facility 65 CRISIL AA/Stable
Total 1000 - Total 1000 -
*Interchangeable with packing credit
#Includes Rs.100 crore interchangeable with packing credit
Criteria Details
Links to related criteria
CRISILs Approach to Financial Ratios
Rating criteria for manufaturing and service sector companies
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating Criteria for Auto Component Suppliers
CRISILs Criteria for Consolidation

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