Rating Rationale
November 24, 2020 | 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 operating performance for fiscal 2021 is expected to be impacted with revenues estimated to de-grow by 25-30% on account of weak performance in Q1 fiscal 2021 due to government imposed lockdown for containment of covid-19 and slower demand recovery for Nylon Filament Yarn (NFY). Moderation in operating margin is expected to be around 200-250 bps due to lower scale of operations and fluctuation in raw material prices. However, the financial risk profile is expected to remain strong backed by healthy net worth, low gearing, strong debt protection metrics and superior liquidity.
 
For the six months ending September 30, 2020 the company reported revenues and operating margin of Rs 378 crore and -2.5%, compared to Rs. 710 crore and 6.9% respectively, for the corresponding period in fiscal 2020. The revenue recovery for three months ending September 2020 was healthy at 83%.
 
The operating income de-grew by 20% to Rs 1445 crore in fiscal 2020 due to slowdown in the automobile sector, lower realisation in NFY and disruption of operations in March on account of covid-19. The impact on the operating margin was 70 bps (7.9% in fiscal 2020 compared to 8.6% in fiscal 2019). However, the financial risk profile was strong with low gearing at 0.02 time, comfortable interest cover of over 35 times and high liquid investments to the tune of Rs 265 crore.
 
The ratings continue to reflect the company's healthy financial risk profile and established market position in the nylon tyre cord fabric (NTCF) and NFY. 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
Financial risk profile is expected to remain healthy with gearing below 0.02 time and high liquidity of over Rs 250 crore in the absence of any large debt-funded capital expenditure (capex) over the medium term. Gearing was strong at 0.01 time with healthy net worth of Rs 1004 crore as on September 30, 2020. Liquidity is superior, backed by liquid investments (including cash and cash equivalents) of around Rs 280 crore as on September 30, 2020.
 
* Market leadership in the NTCF business
CEL is the second-largest player (market share of around 25%) in the domestic NTCF industry after SRF Limited (rated CRISIL AA+/Stable/CRISIL A1+). It has backward integrated into manufacturing nylon chips, which has helped to maintain operating margin in the range of 8-9% in the recent three fiscals. 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, particularly in two wheelers and Off the Road (OTR) tyres.
 
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 between 8% and 15% over the five fiscals through 2020. The operating margin declined from 15.6% in fiscal 2017 to 7.9% in fiscal 2020. Fluctuation in raw material prices along with higher revenue contribution from the lower-margin NFY, led to lower operating margin in fiscal 2020.
 
Furthermore, in NTCF, with domestic prices following import price parity, large-scale dumping in the Indian market by Southeast Asian players has exerted pressure on margins. While imposition of the anti-dumping duty on NTCF imports has helped domestic players to maintain prices, 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 2020 from 33% in fiscal 2015, and is likely to reach 60-65% by fiscal 2025. This warrants players to enter the polyester tyre cord fabric (PTCF) and steel tyre cord fabric (STCF), used in radial tyres. The market leader, SRF Ltd, caters to PTCF (used in radial tyres) demand in India, while CEL has completed testing of commercial samples and plans to commence production in the medium term.  
Liquidity Strong
Liquidity is strong due to healthy expected cash accrual of over Rs 45 crore per fiscal over the medium term, against maturing debt obligation of Rs 3 crore each over the next 2 fiscals. The company had liquid investments (including cash and cash equivalents) of Rs 280 crore as on September 30, 2020; these are expected to remain at a similar level over the medium term. There are no major capex plans over the medium term and hence cash accrual would be sufficient to fund routine capex and meet working capital requirement. Financial flexibility is further supported by unutilised bank limits.
Outlook: Stable

CRISIL believes CEL 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
* Double digit revenue growth with operating profitability improving to 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.

Key Financial Indicators*
As on / for the period ended March 31 Units 2020 2019
Operating income Rs crore 1445 1802
Profit after tax (PAT) Rs crore 95 77
PAT margin % 6.6 4.3
Adjusted debt/adjusted networth Times 0.02 0.04
Interest coverage Times 35.47 49.14
*CRISIL adjusted numbers

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL 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. For more details on the CRISIL complexity levels, please visit www.crisil.com/complexity-levels.
Annexure - Details of Instrument(s)
ISIN Name of instrument Date of Allotment Coupon Rate (%) Maturity Date Issue Size
(Rs Cr)		 Complexity level Rating Assigned with Outlook
NA Cash Credit* NA NA NA 30 NA CRISIL A+/Stable
NA Cash Credit# NA NA NA 5 NA CRISIL A+/Stable
NA Cash Credit NA NA NA 6 NA CRISIL A+/Stable
NA Bill Discounting NA NA NA 20 NA CRISIL A+/Stable
NA Term Loan NA NA Dec-20 16 NA CRISIL A+/Stable
NA Term Loan NA NA Oct-20 17 NA CRISIL A+/Stable
NA Term Loan NA NA Apr-23 10 NA CRISIL A+/Stable
NA Working Capital
Demand Loan%		 NA NA NA 40 NA CRISIL A+/Stable
NA Proposed Fund-
Based Bank Limits		 NA NA NA 110 NA CRISIL A+/Stable
NA Letter of credit &
Bank Guarantee		 NA NA NA 105 NA CRISIL A1+
NA Letter of Credit$ NA NA NA 20 NA CRISIL A1+
NA Letter of Credit^ NA NA NA 75 NA CRISIL A1+
NA Letter of Credit@ NA NA NA 25 NA CRISIL A+/Stable
NA Proposed Non Fund based limits NA NA NA 66 NA 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
$Interchangeable with Buyers credit
^Fully interchangeable with Buyers credit and interchangeable with BG to the extent of Rs.10 crore
@Fully interchangeable with Bank guarantee and interchangeable with Cash credit, WCDL and Bill discounting to the extent of Rs.15 crore
Annexure - Rating History for last 3 Years
  Current 2020 (History) 2019  2018  2017  Start of 2017
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Short Term Debt  ST    --    --    --  16-11-18  Withdrawal  02-08-17  CRISIL A1+  CRISIL A1 
                23-08-18  CRISIL A1+       
Fund-based Bank Facilities  LT/ST  254.00  CRISIL A+/Stable      05-12-19  CRISIL A+/Stable  16-11-18  CRISIL A+/Stable  02-08-17  CRISIL A+/Stable  CRISIL A+/Stable 
                23-08-18  CRISIL A+/Stable       
Non Fund-based Bank Facilities  LT/ST  291.00  CRISIL A+/Stable/ CRISIL A1+      05-12-19  CRISIL A+/Stable/ CRISIL A1+  16-11-18  CRISIL A+/Stable/ CRISIL A1+  02-08-17  CRISIL A1+  CRISIL A1 
                23-08-18  CRISIL A1+       
All amounts are in Rs.Cr.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Bill Discounting 20 CRISIL A+/Stable Bill Discounting 20 CRISIL A+/Stable
Cash Credit* 30 CRISIL A+/Stable Cash Credit* 30 CRISIL A+/Stable
Cash Credit# 5 CRISIL A+/Stable Cash Credit# 5 CRISIL A+/Stable
Cash Credit 6 CRISIL A+/Stable Cash Credit 6 CRISIL A+/Stable
Letter of Credit@ 25 CRISIL A+/Stable Letter of Credit@ 25 CRISIL A+/Stable
Letter of Credit$ 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 & Bank Guarantee 105 CRISIL A1+
Proposed Fund-Based Bank Limits 110 CRISIL A+/Stable Proposed Fund-Based Bank Limits 110 CRISIL A+/Stable
Proposed Non Fund based limits 66 CRISIL A1+ Proposed Non Fund based limits 66 CRISIL A1+
Term Loan 43 CRISIL A+/Stable Term Loan 43 CRISIL A+/Stable
Working Capital Demand Loan% 40 CRISIL A+/Stable Working Capital Demand Loan% 40 CRISIL A+/Stable
Total 545 -- Total 545 --
*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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