Rating Rationale
January 19, 2024 | Mumbai
Century Enka Limited
Ratings reaffirmed at 'CRISIL A+/Stable/CRISIL A1+'
 
Rating Action
Total Bank Loan Facilities RatedRs.545 Crore
Long Term RatingCRISIL A+/Stable (Reaffirmed)
Short Term RatingCRISIL A1+ (Reaffirmed)
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 loan facilities of Century Enka Ltd (CEL), an Aditya Birla Group Company.

 

The ratings continue to reflect the healthy financial risk profile and market leadership of CEL in the nylon tyre cord fabric (NTCF) business. These strengths are partially offset by susceptibility of operating margin to volatility in input prices (especially caprolactam), increasing adoption of radial tyres, competition from the unorganised market and cheaper imports.

 

CRISIL Ratings expects CEL’s operating performance to moderate in fiscal 2024, led by continued pressure on its nylon filament yarn (NFY) segment along with weaker demand for its NTCF segment. Operating margin is expected to come in stronger at 6% compared to the first half of the current fiscal, though still lower than fiscal 2023, led by support from tyre industry – which is expected to grow by high single digit levels; along with cost optimisation measures taken up by the company to reduce its power cost among others. The financial risk profile is expected to remain comfortable because of healthy networth, strong gearing, robust debt protection metrics and adequate liquidity. Stability in raw material prices and growth in commercial vehicle (CV) and two-wheeler (2W) sales are expected to aid growth going forward.

 

For the six months ending September 30, 2023, revenue and profit after tax (PAT) were Rs 825 crore and Rs 18 crore, respectively, against Rs 1,131 crore and Rs 66 crore, respectively, for the corresponding period in fiscal 2023. Operating margin declined to 3.7% from 8.8% on-year.

 

During fiscal 2023, operating income was 2% lower at Rs 2,074 crore from Rs 2,099 crore in the previous fiscal over a high base, impacted by weak NFY sales which saw pricing pressure due to cheaper Chinese imports and overall weaker demand especially in the rural segment. Additionally, the NTCF segment was impacted by moderation in replacement demand and lower exports of tyres. Operating margin declined from 12.7% in fiscal 2022 to 6.9% in fiscal 2023, led by volatility in caprolactam prices and increased power costs. Gearing was healthy at 0.05 time and liquid investment high at ~Rs 315 crore as on March 31, 2023, while interest coverage ratio was comfortable at ~65 times in fiscal 2023.

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 ratio at more than 18 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 was Rs 1,324 crore, as on September 30, 2023 (Rs 1,321 crore as on March 31, 2023). Liquidity is adequate, backed by cash and equivalent of Rs ~ 300 crore on the same date (~Rs 315 crore as on March 31, 2023).

 

  • 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 7-12% in the last three fiscals. The clientele is strong and includes tyre manufacturers such as Apollo Tyres Ltd (rated ‘CRISIL AA+/Stable/CRISIL A1+’) and MRF Ltd.

 

The overall demand for NTCF is expected to remain stable in the long term as the radialisation trend in light CVs and medium heavy CV 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 the operating margin. Restrictions on tyre imports and custom duty on NTCF imports have 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 monitorables.

 

  • Increasing adoption of radial tyres: The 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 be operational by the end of fiscal 2024.

Liquidity: Strong

Expected annual cash accrual of Rs 70-100 crore over the medium term will be sufficient to meet debt obligation during fiscals 2024-2026. Liquid investments of Rs ~300 crore as on September 30, 2023, 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 to moderate utilisation of the 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:

  • Improvement in revenue with successful diversification
  • Steady double-digit growth with operating profitability above 12%
  • Sustenance of strong financial risk profile

 

Downward factors:

  • Lower-than-expected revenue or profitability on sustained basis, along with decline in profitability below 6%
  • Sharp decrease in demand for NTCF adversely affecting the business risk profile
  • Large, debt-funded capex/acquisition weakening the capital structure, and decline in liquid surplus

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 the 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

As on/for the period ended March 31

Units

2023

2022

2021

Revenue from operations

Rs crore

2,073.5

2,097.8

1,222.8

Profit after tax (PAT)

Rs crore

90.4

184

71

PAT margin

%

4.4

8.77

5.80

Adjusted debt/adjusted networth

Times

0.05

0.01

0.01

Interest coverage

Times

64.94

227.12

85.59

 

Any other information: Not Applicable

Note on complexity levels of the rated instrument:
CRISIL Ratings` complexity levels are assigned to various types of financial instruments and are included (where applicable) in the 'Annexure - Details of Instrument' in this Rating Rationale.

CRISIL Ratings will disclose complexity level for all securities - including those that are yet to be placed - based on available information. The complexity level for instruments may be updated, where required, in the rating rationale published subsequent to the issuance of the instrument when details on such features are available.

For more details on the CRISIL Ratings` complexity levels please visit www.crisilratings.com. Users may also call the Customer Service Helpdesk with queries on specific instruments.

Annexure - Details of Instrument(s)

ISIN Name of the instrument Date of
Allotment		 Coupon
Rate (%)		 Maturity
Date		 Issue size
(Rs. Crore)		 Complexity
Level		 Rating assigned
with outlook
NA Cash credit* NA NA NA 30 NA CRISIL A+/Stable
NA Cash credit  NA NA NA 2.5 NA CRISIL A+/Stable
NA Cash credit* NA NA NA 25 NA CRISIL A+/Stable
NA Cash credit NA NA NA 30 NA CRISIL A+/Stable
NA Cash credit* NA NA NA 5 NA CRISIL A+/Stable
NA Bill discounting NA NA NA 20 NA CRISIL A+/Stable
NA Term loan NA NA Dec-27 24 NA CRISIL A+/Stable
NA Term loan NA NA Mar-27 33.6 NA CRISIL A+/Stable
NA Letter of credit NA NA NA 50 NA CRISIL A1+
NA Letter of credit NA NA NA 25 NA CRISIL A1+
NA Letter of credit NA NA NA 70 NA CRISIL A1+
NA Letter of credit$ NA NA NA 40 NA CRISIL A1+
NA Letter of credit^ NA NA NA 105 NA CRISIL A1+
NA Letter of credit  NA NA NA 50 NA CRISIL A1+
NA Proposed Fund-Based Bank Limits NA NA NA 34.9 NA CRISIL A+/Stable

 * 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
  Current 2024 (History) 2023  2022  2021  Start of 2021
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund Based Facilities LT 205.0 CRISIL A+/Stable   -- 17-04-23 CRISIL A+/Stable 25-02-22 CRISIL A+/Stable   -- CRISIL A+/Stable
      --   --   --   --   -- CRISIL A+/Stable
Non-Fund Based Facilities ST 340.0 CRISIL A1+   -- 17-04-23 CRISIL A1+ 25-02-22 CRISIL A1+   -- CRISIL A1+ / CRISIL A+/Stable
All amounts are in Rs.Cr.
Annexure - Details of Bank Lenders & Facilities
Facility Amount (Rs.Crore) Name of Lender Rating
Bill Discounting 20 Kotak Mahindra Bank Limited CRISIL A+/Stable
Cash Credit* 5 Citi Bank CRISIL A+/Stable
Cash Credit* 25 ICICI Bank Limited CRISIL A+/Stable
Cash Credit* 30 Axis Bank Limited CRISIL A+/Stable
Cash Credit 2.5 Bank of Maharashtra CRISIL A+/Stable
Cash Credit 30 HDFC Bank Limited CRISIL A+/Stable
Letter of Credit 70 Axis Bank Limited CRISIL A1+
Letter of Credit 25 Bank of Maharashtra CRISIL A1+
Letter of Credit$ 40 HDFC Bank Limited CRISIL A1+
Letter of Credit 50 Citi Bank CRISIL A1+
Letter of Credit^ 105 Kotak Mahindra Bank Limited CRISIL A1+
Letter of Credit 50 ICICI Bank Limited CRISIL A1+
Proposed Fund-Based Bank Limits 34.9 Not Applicable CRISIL A+/Stable
Term Loan 33.6 HDFC Bank Limited CRISIL A+/Stable
Term Loan 24 Kotak Mahindra Bank Limited CRISIL A+/Stable

* 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
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
Understanding CRISILs Ratings and Rating Scales

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