Detailed Rationale

CRISIL Ratings has assigned its ‘CRISIL A-/Stable/CRISIL A2+’ ratings to the bank facilities of Ddev Plastiks Industries Limited (DPIL)

 

On December 11, 2020, Kkalpana Jndustries Ltd (KIIL) (rated CRISIL BBB/Stable/CRISIL A3+ (ratings withdrawn)) announced a scheme of arrangement wherein the polymer compounding business (contributing ~97% of the total revenue) would be demerged to a separate entity DPIL, whereas the reprocessing segment would remain with KIIL.  Approval from National Company Law Tribunal and order copy for the same has been received. The objective of the demerger is to explore growth opportunities separately in both the segments as each have their own strengths and dynamics in the form of risks, challenges and business models. Separation of the same will help in developing targeted strategies for both the businesses, which will aid in optimising profitability.

 

Incorporated in December 2020, DPIL will now become a pure play polymer compounding entity and would also be listed with the mirror shareholding of KIIL.

 

The rating reflects DPIL’s healthy business risk profile on the back of strong market position, extensive experience of the promoters, wide product range, and strong clientele, disciplined inventory management and comfortable capital structure.   These strengths are partially offset by exposure to intense competition in the compounds market and dependence on large players in the oil and gas industry for raw material, susceptibility to sharp volatility in raw material prices and currency fluctuations, as well as a modest although interest coverage ratio.

 

Company’s revenues de-grew 10% year on year in fiscal 2021 to Rs. 1535 crores owing to COVID-19 induced slowdown in the wire and cable segment (contributing ~80%-85% of total revenues) and temporary closure of facilities during the nationwide lockdown in the first quarter. Operating margins however remained stable at 4%.

 

With resumption of normal business activity and demand picking up in wires and cables segment, company recorded a sharp improvement in performance and clocked revenues of Rs 1604 crore during first nine months of fiscal 2022 with operating margins of 4.5%. Revenues are expected to cross Rs. 2,100 crore during the full fiscal 2022 and grow at 10-12% annually thereafter over the medium term. Margins are expected to remain stable in the range of 4-5% given the ability of the company to pass on increase in raw material prices to the customer with a lag of 7-14 days.

 

Financial risk profile of the company is comfortable with estimated gearing of  1.00 times as on March 31, 2022 Networth is estimated to be  ~Rs 380 crore as on March 31, 2022 and entire debt is in the form of working capital. Debt protection metrics are expected to be adequate with Interest Coverage and Net Cash Accruals to Total debt estimated at ~2.5 times and ~15% as on March 31, 2022. Debt protection metrics are expected to gradually improve over the medium term with increase in scale benefitting cash generation and efficient working capital management.

Analytical Approach

CRISIL Ratings has considered the standalone business and financial risk profiles of DPIL.

Key Rating Drivers & Detailed Description

Strengths:

• Healthy business risk profile on the back of strong market position, extensive experience of the promoters, wide product range, and strong clientele:

DPIL is promoted by Kolkata-based Surana family that has been associated with the polymer compounding industry for over five decades. Over the years, the promoters have diversified the product profile, developed a strong understanding of market dynamics, and established healthy relationships with suppliers and customers. Clientele includes large wire and cable companies such as KEI Industries Ltd, Havells India Ltd, Apar Industries Ltd, and KEC International Ltd; apart from some key international manufacturers.

 

DPIL is the largest polymer compounder in India with capacity of 292,500 tonne per annum (tpa), with market leadership in PE compounds catering to the low- and medium-voltage power cable industry, supported by diversified products used for manufacturing building wires, control and instrumentation cables, and for insulation and jacketing of wires in the wire and cable industry, as well as in the packaging segment. The company’s strong market position is underpinned by large scale of operations (turnover of Rs 1,604 crore in the nine months ended December 31, 2022) and a diverse customer base

 

• Disciplined inventory management and strategic location of facilities:

The company has manufacturing facilities on the east and west coasts of India (West Bengal, Daman, and Silvassa). Strategic location of its plants provides logistical advantages for import of raw materials as well as for exports of products. Proximity to suppliers and ports also helps keep a tight control over inventory (20-40 days in the past eight fiscals). Volatility in raw material prices (crude oil derivatives) impacts operating profitability. However, the discipline in inventory management has helped DPIL to protect its business from sharp changes in raw material prices and sustain operating profitability at 5-6% over the past 10 fiscals. 

 

• Comfortable capital structure:

Net worth is estimated to be healthy at ~ Rs 380 crore as on March 31, 2022 resulting in comfortable gearing of 1.00 times . Further, company doesn’t have any term loans and entire debt is in form of working capital. With no major capital expenditure (capex) and effective working capital management backed by timely realization of receivables, capital structure is expected to improve over the medium term

 

Weaknesses:

• Exposure to intense competition in the compounds market and dependence on large players in the oil and gas industry for raw material

The domestic polymer compounding industry faces intense competition from import from global chemical giants such as Borealis AG, Dow Chemical Company, and Solvay SA. These players have an advantage of large capacity and economies of scale. While these entities mainly cater to specialty grade compounds focused more on high- and extra-high-voltage power cables, DPIL’s business performance remains susceptible to competition from imports. Also, the company procures around 70% of its raw material from Reliance Industries Ltd (rated CRISIL AAA/Stable/CRISIL A1+), Indian Oil Corporation Ltd (rated CRISIL AAA/Stable/CRISIL A1+), and ONGC Petro-additions Ltd, leading to low bargaining power with suppliers. 

 

• Susceptibility to sharp volatility in raw material prices and currency rates:

Raw materials, such as LDPE/HDPE and PVC resin, used to manufacture polymer compounds are crude derivatives and a significant portion of the same is imported. Input prices and currency exchange rates have been volatile in the past because of sharp fluctuations in crude oil prices. While the company has demonstrated discipline in working capital management in the past, its profitability is susceptible to any sharp movement in raw material prices and currency rates. 

 

• Modest, although improving, interest coverage ratio:

Interest coverage has historically remained in the range of 2-2.5 times over the past 5 fiscals. However, with increase in scale of operations benefitting cash generation and increased efficiency in working capital management, same is expected to improve to over ~3 times over the medium term.

Liquidity: Adequate

Liquidity is expected to be adequate with annual expected cash accruals of Rs.50-60 crore and nil repayment obligations. Further company has access to fund based limits of Rs. 147 crore against which utilization has been in the range of 65-75% over the past 12 months ending January 2022.  The company has no plans to undertake any large capex currently and maintenance capex of Rs 8-10 crore is expected to be funded through internal accruals.

Outlook: Stable

CRISIL Ratings believes DIPL will maintain its strong business risk profile backed by its leadership position in the domestic polymer compounds market and the buoyant growth outlook of its key end-user segments. Increase in scale of operations resulting in increased cash generation and absence of major capex should improve the financial risk profile over the medium term.

Rating Sensitivity factors

Upward factors

• Sharp and sustained improvement in operating profitability supported by improving product diversity
• Improvement in debt protection metrics with interest coverage ratio sustained at above 3.25 times

 

Downward factors

• Deterioration in overall operating performance
• Debt funded capex and stretch in working capital resulting in weakening of capital structure and debt protection metrics; interest coverage ratio below 2.0 times.

About the Company

DPIL, incorporated in December 2020 and promoted by the Surana family, houses the polymer compounding business of the Kkalpana Group. In March, 2022, Kkalpana Industries (India) Limited received NCLT approval for demerging its compounding business into Ddev Plastiks Industries Ltd. The The compounding business was started in 1985, with a unit in Daman for manufacturing PVC compounds. Sustained expansion has resulted in a diverse product portfolio consisting of PE compounds, PVC compounds, master batches, engineering plastics, and reprocessed compounds. Currently, the company has five plants across West Bengal and Daman & Diu, Dadra & Nagar Haveli; with aggregate installed capacity of 261,500 tonne per annum (tpa).

Key Financial Indicators

Particulars	Unit	2021**	2020*
Revenue	Rs crore	1534.6	NA
Profit after tax (PAT)	Rs crore	21.1	NA
PAT margin	%	1.4	NA
Adjusted debt/adjusted networth	Times	1.01	NA
Interest coverage	Times	1.72	NA

* assets were transferred wef from April 1, 2021

** provisional financials

Any other information: Not applicable

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	Fund-Based Facilities	NA	NA	NA	147	NA	CRISIL A-/Stable
NA	Non-Fund Based Limit	NA	NA	NA	502	NA	CRISIL A2+