Rating Rationale
December 05, 2019 | Mumbai
Century Enka Limited
Ratings Reaffirmed
 
Rating Action
Total Bank Loan Facilities Rated Rs.545 Crore
Long Term Rating CRISIL A+/Stable (Reaffirmed)
Short Term Rating CRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has reaffirmed its 'CRISIL A+/Stable/CRISIL A1+' ratings on the bank facilities of Century Enka Limited (CEL).
 
The ratings continue to reflect the company's healthy financial risk profile and established market position in the nylon tyre cord fabric (NTCF) division. These strengths are partially offset by increasing radialisation in the tyre industry, limited revenue diversity, and susceptibility of operating margin to volatility in input prices, especially caprolactum.

Key Rating Drivers & Detailed Description
Strengths:
* Healthy financial risk profile
Gearing was strong at 0.04 time and networth large at Rs 949 crore, as on March 31, 2019. Debt protection metrics were also robust for fiscal 2019: net cash accrual to adjusted debt and interest coverage ratios were 2.69 times and 49.14 times, respectively. Also, liquidity is superior, backed by liquid investments (including cash and cash equivalents) of over Rs 200 crore as on September 31, 2019. Financial risk profile is likely to remain stable in the absence of any large, debt-funded capital expenditure (capex) over the medium term.
 
* Market leadership in the NTCF business
CEL is the second-largest player in the domestic NTCF industry, with a market share of around 25%. It has backward integrated into manufacturing nylon chips, which has helped to maintain high operating margin. The company also has strong relationship with clients, including 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 (LCV/MHCV) segments would be partially offset by overall growth in India's tyre market.
 
Weaknesses:
* Susceptibility to volatility in input prices because of commoditised products 
Cost of production and profit margin hinge on crude oil prices as the company uses petrochemical-based raw material, mainly caprolactum. Hence, operating margin has fluctuated between 8-15% over the five fiscals through 2019. A sharp decline in caprolactum prices during the second-half of fiscal 2019 led to inventory loss. This, coupled with higher sales in the lower-margin (since commoditised) nylon filament yarn (NFY) business, led to a subdued margin in the fiscal, in line with fiscal 2018.
 
Furthermore, in NTCF, with domestic prices following import price parity, large-scale dumping in the Indian market by Southeast Asian players have exerted pressure on margins. While imposition of anti-dumping duty on NTCF imports has helped domestic players to increase prices, business remains vulnerable to volatility in raw material prices account for 65-70% of net sales). Sustenance of anti-dumping duties will continue to be a key rating sensitivity factor.
 
* 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) is set to have increased to over 40% in fiscal 2019 from 33% in fiscal 2015, and is likely to reach 60-65% over the next five years through 2024. This warrants players to enter the polyester tyre cord fabric (PTCF) segment (used in radial tyres). Market leader, SRF Ltd (rated 'CRISIL AA+/Stable/CRISIL A1+'), is already catering to PTCF demand in India, while CEL is testing commercial samples and plans to commence production in the long term.
 
Despite bias tyres being more suited to Indian roads, the increased adoption of radial tyres in the LCV/MHCV segments will moderately affect demand outlook for NTCF. However, overall demand for NTCF is expected to remain stable as pick-up of radialisation trend in LCVs/MHCVs would be offset by overall growth in India's tyre market (4-6% compound annual growth rate during 2019-24).
Liquidity Superior

Liquidity is superior due to healthy cash accrual sufficient to meet maturing debt obligations, fund routine capex and meet working capital requirement. The company had liquid investments (including cash and cash equivalents) of over Rs 200 crore as on September 30, 2019; these are expected to remain at a similar level over the medium term. In addition, financial flexibility is high due to bank limits of Rs 50 crore, the average utilisation of which was nil during the 12 months through October 2019.

Outlook: Stable

CRISIL believes CEL will continue to benefit from its established market position in the NTCF division, and healthy financial risk profile over the medium term.

Rating Sensitivity factors
Upward Factors:
*  Improvement in revenue with successful diversification into PTCF
* Better operating performance, with profitability improving above 12% on a sustained basis
* Sustenance of healthy financial risk profile
 
Downward Factors:
* Lower-than-expected revenue or profitability on a sustained basis, along with decline in profitability to below 6%
* Sharp decrease in demand for NTCF adversely affecting business risk profile
* Large, debt-funded capex /acquisition thereby weakening capital structure
* 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. Its NTCF plants in Pune and Bharuch (Gujarat) have a combined capacity of 33,355 tonne per annum (tpa), while synthetic yarn plants in Pune and Bharuch have a combined capacity of 40,876 tpa. CEL suspended operations at its polyester unit in November 2013 as it was incurring losses on account of a weak industry environment.
 
For the six months ended September 30, 2019, net profit was Rs 65 crore on an operating income of Rs 710 crore, against Rs 46 crore and Rs 885 crore, respectively, in the corresponding period of the previous fiscal.

Key Financial Indicators
As on / for the period ended March 31 Units 2019 2018
Operating income Rs crore 1802 1,422
Profit after tax (PAT) Rs crore 77 70
PAT margin % 4.3 4.9
Adjusted debt/adjusted networth Times 0.04 0.05
Interest coverage Times 49.14 36.26
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 Cr)		 Rating Assigned with Outlook
NA Cash Credit* NA NA NA 30 CRISIL A+/Stable
NA Cash Credit# NA NA NA 5 CRISIL A+/Stable
NA Cash Credit NA NA NA 6 CRISIL A+/Stable
NA Bill Discounting NA NA NA 20 CRISIL A+/Stable
NA Term Loan NA NA Dec- 2020 16 CRISIL A+/Stable
NA Term Loan NA NA Oct- 2020 17 CRISIL A+/Stable
NA Term Loan NA NA Apr-2023 10 CRISIL A+/Stable
NA Working Capital
Demand Loan%		 NA NA NA 40 CRISIL A+/Stable
NA Proposed Fund-
Based Bank Limits		 NA NA NA 110 CRISIL A+/Stable
NA Letter of credit &
Bank Guarantee		 NA NA NA 105 CRISIL A1+
NA Letter of Credit$ NA NA NA 20 CRISIL A1+
NA Letter of Credit^ NA NA NA 75 CRISIL A1+
NA Letter of Credit@ NA NA NA 25 CRISIL A+/Stable
NA Proposed Non Fund
based limits		 NA NA NA 66 CRISIL A1+
*Interchangeable with WCDL and other non-fund based facilities
#Interchangeable with other fund based facilities
%Interchangeable with Overdraft to the extent of Rs.20 crore
$Interchangeable with Buyers credit
^Fully interchangeable with Buyers credit and interchangeable with BG to the extent of Rs.10 crore
@Fully interchangeable with Bank guarantee and interchangeable with Cash credit, WCDL and Bill discounting to the extent of Rs.15 crore 
Annexure - Rating History for last 3 Years
  Current 2019 (History) 2018  2017  2016  Start of 2016
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Short Term Debt  ST    --    --  16-11-18  Withdrawal  02-08-17  CRISIL A1+  12-09-16  CRISIL A1  CRISIL A1 
            23-08-18  CRISIL A1+           
Fund-based Bank Facilities  LT/ST  254.00  CRISIL A+/Stable      16-11-18  CRISIL A+/Stable  02-08-17  CRISIL A+/Stable  12-09-16  CRISIL A+/Stable  CRISIL A+/Stable 
            23-08-18  CRISIL A+/Stable           
Non Fund-based Bank Facilities  LT/ST  291.00  CRISIL A+/Stable/ CRISIL A1+      16-11-18  CRISIL A+/Stable/ CRISIL A1+  02-08-17  CRISIL A1+  12-09-16  CRISIL A1  CRISIL A1 
            23-08-18  CRISIL A1+           
All amounts are in Rs.Cr.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Bill Discounting 20 CRISIL A+/Stable Bill Discounting 20 CRISIL A+/Stable
Cash Credit* 30 CRISIL A+/Stable Cash Credit* 30 CRISIL A+/Stable
Cash Credit# 5 CRISIL A+/Stable Cash Credit# 5 CRISIL A+/Stable
Cash Credit 6 CRISIL A+/Stable Cash Credit 6 CRISIL A+/Stable
Letter of Credit@ 25 CRISIL A+/Stable Cash Credit 14 Withdrawn
Letter of Credit$ 20 CRISIL A1+ Letter of Credit$ 20 CRISIL A1+
Letter of Credit^ 75 CRISIL A1+ Letter of Credit^ 75 CRISIL A1+
Letter of credit & Bank Guarantee 105 CRISIL A1+ Letter of Credit$ 25 CRISIL A+/Stable
Proposed Fund-Based Bank Limits 110 CRISIL A+/Stable Letter of credit & Bank Guarantee 105 CRISIL A1+
Proposed Non Fund based limits 66 CRISIL A1+ Letter of credit & Bank Guarantee 104 Withdrawn
Term Loan 43 CRISIL A+/Stable Proposed Fund-Based Bank Limits 110 CRISIL A+/Stable
Working Capital Demand Loan% 40 CRISIL A+/Stable Proposed Non Fund based limits 66 CRISIL A1+
-- 0 -- Term Loan 43 CRISIL A+/Stable
-- 0 -- Working Capital Demand Loan% 40 CRISIL A+/Stable
Total 545 -- Total 663 --
*Interchangeable with WCDL and other non-fund based facilities
#Interchangeable with other fund based facilities
%Interchangeable with Overdraft to the extent of Rs.20 crore
$Interchangeable with Buyers credit
^Fully interchangeable with Buyers credit and interchangeable with BG to the extent of Rs.10 crore
@Fully interchangeable with Bank guarantee and interchangeable with Cash credit, WCDL and Bill discounting to the extent of Rs.15 crore
Links to related criteria
CRISILs Approach to Financial Ratios
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating criteria for manufaturing and service sector companies
Understanding CRISILs Ratings and Rating Scales

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