Rating Rationale
September 16, 2022 | Mumbai
Finolex Industries Limited
Ratings reaffirmed at 'CRISIL AA+/Stable/CRISIL A1+'; rated amount enhanced for Bank Debt
 
Rating Action
Total Bank Loan Facilities RatedRs.1916.25 Crore (Enhanced from Rs.1378.25 Crore)
Long Term RatingCRISIL AA+/Stable (Reaffirmed)
Short Term RatingCRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to Annexure for Details of Instruments & Bank Facilities

Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AA+/Stable/CRISIL A1+’ ratings on the bank facilities of Finolex Industries Limited (FIL).

 

During the first quarter of fiscal 2023, revenue grew by 23% on y-o-y basis driven by increased demand and low base (previous quarter being impacted by second wave), while operating margins declined to 10.6% compared to 21.7% due to inventory loss owing to correcting PVC prices and increased power & fuel cost. Operating margins are expected to decline in fiscal 2023 from highs of fiscal 2022 and 2021. CRISIL Ratings expect margins to recover as the PVC prices stabilize and also expect to remain higher than historical averages.

 

CRISIL Ratings had upgraded its ratings on the bank facilities of FIL to ‘CRISIL AA+/Stable/CRISIL A1+’ from ‘CRISIL AA/Positive/CRISIL A1+’ through rationale dated May 25, 2022.

 

The upgrade factored in the enhanced product diversity with share of non-agri products rising to around 40% during fiscal 2022, compared to 30-35% two years ago. The rating action also reflected the improved financial risk profile, as indicated by cash position improving to over Rs 1,500 crore as on March 31, 2022, from around Rs 600 crore as on June 30, 2021. Healthy cash accrual, aided by strong operating performance, along with sale of around 34.88 acres of land in Pune in the last quarter of fiscal 2022, has boosted liquidity.

 

Revenue had grown by around 34% during fiscal 2022, aided by higher realisations, though volume rose by a modest 3%. Operating margin was healthy around 22% in fiscal 2022, despite moderating from the peak of around 29% in fiscal 2021. While a correction in prices of polyvinyl chloride (PVC) may lead to further moderation, the margin is likely to be healthy above 18% on a sustainable basis and will be a key monitorable.

 

Cash surplus may be impacted by the yearly dividend payout and sizeable capital expenditure (capex) plans for the pipe division but should still be healthy. However, any large outflow due to a major capex and/or shareholder payout is a key rating sensitivity factor.

 

The ratings continue to reflect the established market position of FIL in the PVC resin and pipe segments, its high operating efficiency, driven by the integrated production process and its strong financial risk profile. These rating strengths are partially offset by susceptibility to volatility in raw material prices.

Analytical Approach

CRISIL Ratings has adjusted the networth of FIL for the circular investments between FIL and Finolex Cables Ltd (rated ‘CRISIL AA+/Stable/CRISIL A1+).

Key Rating Drivers & Detailed Description

Strengths:

  • Established market position in the domestic PVC resin and pipes segments: FIL is amongst the largest players in the domestic PVC resin and pipe segments. It holds a market share of over 20% in the organised PVC pipe market (in terms of volume sold).

 

  • High operating efficiency, driven by in-house PVC resin capacity and 43-megawatt (MW) captive power: FIL is the only large vertically integrated player in the domestic market as it produces its majority requirement of PVC resin, the major raw material used in pipe manufacturing. Interdivisional transfer of raw material has accounted for around 73% of total revenue from PVC resin segment in fiscal 2022, vis-à-vis 11% in fiscal 2008.

 

  • Strong financial risk profile: Financial risk profile is marked by negligible gearing of 0.1 time as on March 31, 2022, in the absence of any long-term debt or major capex plans. Debt protection metrics were strong, with interest cover of around 79 times in fiscal 2022. Liquidity has improved further, as reflected in net cash and equivalent aggregating above Rs 1,500 crore as on March 31, 2022, supported by healthy cash accrual and proceeds from sale of 34.88 acres of land in the last quarter of fiscal 2022.

 

Weakness:

  • Susceptibility to volatility in raw material prices: Profitability remains volatile to movement in international prices of PVC and its raw materials: ethylene dichloride (EDC), ethylene, and vinyl chloride monomer (VCM). Furthermore, as most of the raw material required for manufacturing PVC resin is imported, inventory-related risk is also high.

Liquidity: Strong

Expected cash accrual of over Rs 250 crore per annum will continue to support liquidity in the absence of any debt. Net cash and equivalents were around Rs 1,300 crore as on June 30, 2022. Moderate capex of Rs 150-200 crore per annum is likely to be funded through internal accrual going forward. Bank limit also has adequate cushion to cover the incremental working capital expenses.

Outlook: Stable

CRISIL Ratings believes that FIL will benefit from its strong market position and operating efficiency, while maintaining its healthy financial risk profile over the medium term.

Rating Sensitivity factors

Upward factors 

  • Improvement in business risk profile, driven by increased geographical reach as well as product diversification
  • Sustenance of healthy double-digit revenue growth and operating margin of over 20% along with a healthy financial risk profile

 

Downward factors

  • Steep decline in revenue, with operating margin falling below 16% on sustained basis
  • Significant weakening of the capital structure or debt protection metrics
  • Sizeable reduction in cash surpluses due to higher-than-expected shareholder payouts or large debt funded capex

About the Company

FIL is the third-largest player in the PVC resin market and second largest manufacturer of PVC pipes in India. The company has three manufacturing facilities, one each in Pune and Ratnagiri (both in Maharashtra) and Masar, near Vadodara in Gujarat.  The company is the only backward integrated player, with in-house PVC resin capacity and 43 MW captive power, aiding cost control.

 

For the three months ended June 30, 2022, net profit was Rs 99 crore on income of Rs 1,190 crore, compared with Rs 147 crore and Rs 966 crore, respectively, for the corresponding period of the previous fiscal.

Key Financial Indicators

As on / for the period ended March 31

2022

2021

Revenue

Rs crore

4,647

3454

Profit after tax (PAT)

Rs crore

1,053

728

PAT margin

%

22.7

21.1

Adjusted debt / adjusted networth

Times

0.10

0.09

Interest coverage

Times

78.6

146.4

 

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. The CRISIL Ratings' complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL Ratings' 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 crore)

Complexity

level

Rating assigned with outlook

NA

Cash Credit

NA

NA

NA

125.25

NA

CRISIL AA+/Stable

NA

Letter of credit & Bank Guarantee*

NA

NA

NA

1791.00

NA

CRISIL A1+

*Letter of credit and bank guarantee are interchangeable with buyer's credit.

Annexure - Rating History for last 3 Years
  Current 2022 (History) 2021  2020  2019  Start of 2019
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund Based Facilities LT 125.25 CRISIL AA+/Stable 25-05-22 CRISIL AA+/Stable 29-10-21 CRISIL AA/Positive / CRISIL A1+ 18-12-20 CRISIL A1+ / CRISIL AA/Stable 26-09-19 CRISIL A1+ / CRISIL AA/Stable CRISIL A1+ / CRISIL AA/Stable
Non-Fund Based Facilities ST 1791.0 CRISIL A1+ 25-05-22 CRISIL A1+ 29-10-21 CRISIL A1+ 18-12-20 CRISIL A1+ 26-09-19 CRISIL A1+ CRISIL A1+
All amounts are in Rs.Cr.
Annexure - Details of Bank Lenders & Facilities
Facility Amount (Rs.Crore) Name of Lender Rating
Cash Credit 4 The Hongkong and Shanghai Banking Corporation Limited CRISIL AA+/Stable
Cash Credit 10 HDFC Bank Limited CRISIL AA+/Stable
Cash Credit 50 Axis Bank Limited CRISIL AA+/Stable
Cash Credit 6.25 Citibank N. A. CRISIL AA+/Stable
Cash Credit 50 ICICI Bank Limited CRISIL AA+/Stable
Cash Credit 5 Kotak Mahindra Bank Limited CRISIL AA+/Stable
Letter of credit & Bank Guarantee* 37 Kotak Mahindra Bank Limited CRISIL A1+
Letter of credit & Bank Guarantee* 500 Axis Bank Limited CRISIL A1+
Letter of credit & Bank Guarantee* 58 Kotak Mahindra Bank Limited CRISIL A1+
Letter of credit & Bank Guarantee* 200 Citibank N. A. CRISIL A1+
Letter of credit & Bank Guarantee* 500 ICICI Bank Limited CRISIL A1+
Letter of credit & Bank Guarantee* 96 The Hongkong and Shanghai Banking Corporation Limited CRISIL A1+
Letter of credit & Bank Guarantee* 300 HDFC Bank Limited CRISIL A1+
Letter of credit & Bank Guarantee* 100 Axis Bank Limited CRISIL A1+
This Annexure has been updated on 16-Sep-22 in line with the lender-wise facility details as on 16-Sep-22 received from the rated entity.
*Letter of credit and bank guarantee are interchangeable with buyer's credit.
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

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