Rating Rationale
July 27, 2020 | Mumbai
Finolex Plasson Industries Private Limited
Ratings upgraded to 'CRISIL A-/Stable/CRISIL A2+'
 
Rating Action
Total Bank Loan Facilities Rated Rs.99 Crore
Long Term Rating CRISIL A-/Stable (Upgraded from 'CRISIL BBB+/Positive')
Short Term Rating CRISIL A2+ (Upgraded from 'CRISIL A2')
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has upgraded its ratings on the bank facilities of Finolex Plasson Industries Private Limited (Finolex Plasson) to 'CRISIL A-/Stable/CRISIL A2+' from 'CRISIL BBB+/Positive/CRISIL A2'.
 
The upgrade reflects a healthy 10% growth in Finolex Plasson's revenue during fiscal 2020, while the operating margin rose to 15% from 11% in the previous year owing to favourable raw material prices. Working capital cycle also improved, with gross current assets (GCAs) reducing to 207 days as on March 31, 2020, from 215 days a year ago due to lower contribution of Andhra Pradesh (AP) (which have higher realisation period) in the overall revenue during the fiscal. Recovery of debtors from AP will remain a key monitorable.
 
The nationwide lockdown imposed by the government to curb the spread of Covid-19 led to closure of the company's factory for a month after March 2020. Consequently, revenue dropped by 9% in the first quarter of fiscal 2021 as compared to the corresponding period of the previous fiscal. However, demand is likely to pick up during the rest of the year owing to healthy monsoon. Revival in operating performance and pick-up in demand post easing of lockdown measures will remain closely monitored.
 
The ratings continue to factor in Finolex Plasson's healthy financial risk profile with strong capital structure and an established market position in the micro irrigation system (MIS) segment. These strengths are partially offset by large working capital requirement and susceptibility to government policies.

Analytical Approach

For arriving at its ratings, CRISIL has taken a standalone view on the company.

Key Rating Drivers & Detailed Description
Strengths:
* Healthy financial risk profile with strong capital structure
The financial risk profile may continue to be adequate, supported by minimal debt and the absence of any large, debt-funded capital expenditure (capex). Networth increased to Rs 179 crore as on March 31, 2020, from Rs 142 crore a year ago, while gearing has been below 0.25 time for the past five fiscals. Debt protection metrics were also strong; interest coverage and net cash accrual to total debt ratios improved to 19.38 times and 6.04 times respectively in fiscal 2020 from 7.9 times and 1.4 times in fiscal 2019.
 
* Established position in the MIS industry
Finolex Plasson is the third largest player in the domestic MIS industry after Jain Irrigation Systems Ltd and Netafim Irrigation Pvt Ltd ('CRISIL A/Stable/CRISIL A1'). Revenue is also geographically diversified with no single state contributing more than 40% to overall revenue. Tamil Nadu and Maharashtra are the largest contributors to the revenue followed by AP. The company also benefits from its presence in both project and retail micro-irrigation system segments and its wide reach across 400 dealers. Operating revenue is expected to grow steadily over the medium term, given the government's strong focus on agriculture and irrigation.
 
Weaknesses:
* Large working capital requirement
The working capital cycle may remain stretched over the medium term because of large receivables and inventory; the receivables are dues from various state government bodies against the subsidy portion. The company has higher receivables due to business from AP, where the realisation period is higher. However, gross current assets improved to 207 days as on March 31, 2020, from 219 days as on March 31, 2018, due to reducing exposure to AP; this state contributes over 50% to overall receivables, timely recovery of which remains a key monitorable. Given the subsidy support for MIS, the working capital cycle is exposed to timely realisation of these subsidies. A focus on the cash-and-carry business model helps to partly offset the high working capital requirement in the project business.
 
* Vulnerability to changes in government policies
Policies related to government subsidies are a key growth driver for the MIS segment in India. State governments provide up to 60% capital subsidy to farmers, and the central government around 30%. Subsidies should continue in light of the growing concern over the drop in water levels and agriculture productivity. However, any change in the schemes or reduction in subsidies could impact revenue. Furthermore, a large portion of revenue is derived from government-related projects; state governments pay subsidies up to six months after installation/completion of the project. Additionally, pricing flexibility in the project business is limited as the prices are determined by the respective state governments; this also impacts overall profitability. Although working capital requirement is partly met through payables, operations will remain vulnerable to the large credit extended to government agencies.
Liquidity Strong

Liquidity is likely to remain healthy. Cash accrual of around Rs 48 crore in fiscal 2020 was more than sufficed to cover term loan repayment of around Rs 2.87 crore and repayment of term debt of Rs 10 crore. Steady cash accrual expected over the next three fiscals should be sufficient to finance the working capital requirement and meet negligible annual repayment obligation of Rs 2 crore. Consequently, bank limit utilisation remained almost negligible in fiscal 2020. Current ratio was strong at 2.01 times as on March 31, 2020. Cash & cash equivalents were around Rs 4 crore as on March 31, 2020, which are unencumbered.

Outlook: Stable

Finolex Plasson should continue maintain its healthy operating performance, backed by an established market position in the MIS segment and a wide distribution network.

Rating Sensitivity factors
Upward scenarios
* Significant improvement in the working capital cycle, with GCAs moderating to below 180 days along with timely realisation of dues from the AP government.
* Substantial and sustainable increase in revenue and profitability
 
Downward scenarios
* Further stretch in the working capital cycle, with GCAs sustaining beyond 230 days or write off of debtors with difficulties in realising older dues
* Large, debt-funded capex, or substantial flow of funds to the parent
About the Company

Finolex Plasson (formerly, Plastro Plasson Industries [India] Ltd) was incorporated in 1992 as an equal joint venture between the Finolex group and Plastro Gvat, Israel (Plastro) for manufacturing and trading in drip irrigation systems. In 1998, Plastro sold 17.3% of its stake to another Israeli company, Plasson Ltd (Plasson), which produces various fittings used in water irrigation projects. In 2008, Plastro's international operations were acquired by John Deere Co (US) and Plastro sold its entire remaining stake, in equal proportion, to Finolex Industries Ltd and Plasson. The exit of Plastro also led to the renaming of Plastro Plasson Industries (India) Ltd as Finolex Plasson Industries Ltd; the company was then reconstituted into a private-limited company with the current name.

Key Financial Indicators
Particulars Unit 2020 2019
Revenue Rs crore 438 397
Profit after tax (PAT) Rs crore 39 19
PAT margin % 8.9 4.8
Adjusted gearing Times 0.04 0.14
Interest coverage Times 19.38 7.9

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 crore)		 Complexity Level Rating assigned
with outlook
NA Term Loan NA NA  31-Jan-24 15.5 NA CRISIL A-/Stable
NA Cash Credit# NA NA NA 10.5 NA CRISIL A-/Stable
NA Letter of Credit* NA NA NA 73 NA CRISIL A2+
#Interchangeable with L.C. limits to the extent of Rs.3.5 crore
*B.G sublimit of L.C of Rs.41.5 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
Fund-based Bank Facilities  LT/ST  26.00  CRISIL A-/Stable      30-04-19  CRISIL BBB+/Positive  31-01-18  CRISIL BBB+/Stable      CRISIL BBB+/Stable 
Non Fund-based Bank Facilities  LT/ST  73.00  CRISIL A2+      30-04-19  CRISIL A2  31-01-18  CRISIL A2      CRISIL A2 
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
Cash Credit 10.5 CRISIL A-/Stable Cash Credit 10.5 CRISIL BBB+/Positive
Letter of Credit 73 CRISIL A2+ Letter of Credit 73 CRISIL A2
Term Loan 15.5 CRISIL A-/Stable Term Loan 15.5 CRISIL BBB+/Positive
Total 99 -- Total 99 --
#Interchangeable with L.C. limits to the extent of Rs.3.5 crore
*B.G sublimit of L.C of Rs.41.5 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
Rating Criteria for Construction Industry
CRISILs Criteria for rating short term debt

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