| Century Enka Limited | ||||||
| Ratings Reaffirmed | ||||||
| Rating Action | ||||||
| ||||||
| Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings. | ||||||
| 1 crore = 10 million | ||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has reaffirmed its ‘CRISIL A+/Stable/CRISIL A1+’ ratings on the bank facilities of Century Enka Limited (CEL).
Operating performance for fiscal 2023 is expected to sustain on account of stable trends in nylon tyre cord fabric (NTCF) prices, steady demand from tyre manufacturers, and continued demand in the latter part of the fiscal for nylon filament yarn (NFY) that caters to the garment industry. Growth over the medium term would be driven by healthy demand from the tyre industry and growth in the ethnic wear segment and Athleisure. Operating profit is expected to be remain steady in fiscal 2023, in line with healthy volumes and stabilisation of raw material prices.Financial risk profile is expected to remain comfortable because of a healthy networth, strong gearing, robust debt protection metrics and adequate liquidity. Stability in raw material prices post opening of Chinese economy should help in margins going forward.
For the nine months ended December 31, 2022, revenue, and profit after tax (PAT) were Rs 1,599 crore and Rs 76 crore, respectively, against Rs 1,522 crore and Rs 135 crore, respectively, for the corresponding period in fiscal 2022. Operating margin declined to 7.5% from 12.73%.
Operating income had improved in fiscal 2022 to Rs 2,099 crore from Rs 1,225 crore in the previous fiscal due to healthy demand in the NTCF business, better prices in the domestic market and NFY segment sale in the first-half with the removal of Covid restrictions; operating margin had increased to 12.7% from 10.1%. Gearing was healthy at 0.01 time and liquid investment high at ~Rs 332 crore as on March 31, 2022; while interest coverage ratio was comfortable at over 227 times for fiscal 2022.
The ratings continue to reflect the healthy financial risk profile and market leadership of CEL in the NTCF business. These strengths are partially offset by susceptibility of operating margin to volatility in input prices (especially caprolactam) and increasing radialisation in the tyre industry. |
Key Rating Drivers & Detailed Description Strengths: Healthy financial risk profile Gearing is expected to be strong at below 0.1 time and debt protection metrics robust, with interest coverage ratios at more than 20 times over the medium term. This is because the company does not have any capital expenditure (capex) plan, apart from existing capex of over Rs 300 crore.
Gearing was less than 0.1 time and networth Rs 1,294 crore, as on September 30, 2022 (Rs 1,249 crore as on March 31, 2022). Liquidity is adequate, backed by cash and equivalent of Rs ~303 crore (~Rs 332 crore).
Market leadership in the NTCF business With a share of 23%, CEL is the one of the top three players in the domestic NTCF industry (SRF Ltd [‘CRISIL AA+/Stable/CRISIL A1+’] being the market leader). It has backward integrated into manufacturing nylon chips, which has helped to maintain operating margin at 8-12% in the last three fiscals. Clientele is strong and includes tyre manufacturers such as Apollo Tyres Ltd (rated ‘CRISIL AA+/Stable/CRISIL A1+’), MRF Ltd, and Ceat Ltd.
The overall demand for NTCF is expected to remain stable in the long term as pick-up of radialisation trend in the light commercial vehicle and medium heavy commercial vehicle segments would be partially offset by overall growth in the tyre market in India.
Weaknesses: Susceptibility to volatility in input prices because of commoditised products Cost of production and profit margin are affected by movement in crude oil prices as the company uses petrochemical-based raw material, mainly caprolactam. Hence, operating margin has fluctuated over the last five fiscals.
Furthermore, in NFY, with domestic prices following import price parity, large-scale dumping by China has exerted pressure on margins. Restrictions on tyre imports and custom duty on NTCF imports has helped domestic players to maintain prices. Sustenance of the custom duties and ability of CEL to maintain healthy operating profitability by passing on any rise in input prices to clients will remain key monitorable.
Increasing adoption of radial tyres Adoption of radial tyres is expected to accelerate over the medium term, in line with global trends. The radialisation in truck and bus tyres (largest category for NTCF) was set to have increased to around 50% in fiscal 2020 from 33% in fiscal 2015 and is likely to reach 60-62% by fiscal 2025. This warrants players to enter the polyester tyre cord fabric (PTCF) and steel tyre cord fabric (STCF) segments, which are used in radial tyres. The market leader, SRF Ltd, caters to PTCF demand in India, while CEL is currently undertaking capex to set up PTCF facilities that are expected to operationalise by the end of fiscal 2024. |
Liquidity: Strong Expected annual cash accrual of Rs 110-130 crore over the medium term will be sufficient to meet debt obligation during fiscals 2023-2025. Liquid investments of Rs 302 crore as on September 30, 2022, are expected to remain at a similar level over the medium term. The company is not expected to undertake any large capex, apart from the exiting capacity expansion that is being funded through internal accrual and available liquidity. Financial flexibility is further supported by low utilisation of bank limit. |
Outlook: Stable The company will continue to benefit from its established market position, and healthy financial risk profile over the medium term. |
Rating Sensitivity Factors Upward Factors
Downward Factors
|
About the Company Set up in 1965 by the BK Birla group and Enka International (part of the Netherlands-based Akzo Nobel group), CEL manufactures industrial and textile yarn and fabric such as NTCF and NFY. CEL is part of Aditya Birla Group. The NTCF is used as a reinforcement material in bias/cross ply tyres that are primarily used in trucks, buses, 2/3-wheelers, and off-the-road (OTR) vehicles used in mining, forestry, farming, and heavy earthmoving. NFY is mainly used in sarees, dupattas, dress material and ethnic dresses. |
Key Financial Indicators: CRISIL Ratings-adjusted numbers
|
Any other information: Not applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
*Interchangeable with working capital demand loan and other non-fund based facilities $Interchangeable with buyer’s credit ^Fully interchangeable with buyer’s credit, and bank guarantee to the extent of Rs 10 crore; also interchangeable with working capital demand loan of Rs 40 crore and overdraft of Rs 20 crore |
| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| All amounts are in Rs.Cr. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annexure - Details of Bank Lenders & Facilities | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
*Interchangeable with working capital demand loan and other non-fund based facilities
$Interchangeable with buyer’s credit
^Fully interchangeable with buyer’s credit, and bank guarantee to the extent of Rs 10 crore; also interchangeable with working capital demand loan of Rs 40 crore and overdraft of Rs 20 crore
Criteria Details
|