Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL A+/Stable/CRISIL A1’ ratings on the bank facilities of ION Exchange India Limited (IEIL; part of the Ion Exchange group).

 

The ratings continue to reflect the IEIL’s strong market position in domestic water treatment segment, healthy business risk profile and comfortable financial risk profile. These strengths are partially offset by the working capital-intensive operations and exposure to intense competition in the Engineering segment and susceptibility to economic downturns. The company is also exposed to project execution risks in Roha project, including risks of delays and cost overruns. Timely commissioning of the project within budgeted cost and ramp up in operations post commissioning would remain a key monitorable.

 

The business risk profile of the company stood healthy, driven by healthy operating performance across engineering and chemical segments, sustained healthy return on capital employed and healthy engineering orderbook. The consolidated operating income grew by 18% in fiscal 2024 driven by growth in engineering segment due to healthy order execution while the Earnings before interest taxes depreciation amortization (operating) margins moderated to 11.7% in fiscal 2024 (13.3% in fiscal 2023) due to change in project mix of order book and high investments being made in infrastructure and manpower in last few quarters within Engineering and Consumer Products segments. CRISIL expects the consolidated operating income to grow by 12-15% in fiscal 2025  as well as medium term on the back of strong order book for Engineering segment of Rs. 3580 crore as on Sep 30, 2024 (~Rs 3,351 crore as on June 30, 2023), expected order inflow over the medium term and steady demand across chemical segment. Further, the scale up in operations of Roha plant within chemical segment will aid the growth in revenue from fiscal 2026 onwards. Operating margin is expected to remain at  11.5-12% in fiscal 2025 which will improve in medium term with increase in contribution from chemical segment as well as increase in exports.

 

The company’s financial risk profile stood strong with the company remaining net debt negative. The debt metrics such as net cash accrual to adjusted debt (NCAAD) ratio and total outside liabilities to networth (TOL/TNW) ratio stood at 1.6 times and 1.4 times respectively in fiscal 2024 (4.0 and 1.3 times respectively in previous fiscal). The financial risk profile is likely to remain comfortable with expected strong cash accruals of over Rs 230-330 crore in medium term, project debt repayments well-spaced out over 7 years till FY2031 and a prudent dividend policy. The TOL/TNW ratio is expected to remain around 1.3-1.6 times in medium term while NCAAD is expected to remain 0.5-1 times amid the greenfield expansion in the chemical division for Resins manufacturing in Roha, Maharashtra. Liquidity remains strong with healthy unencumbered cash and cash equivalents of Rs 206 crore as on Sep 30, 2024 and cushion in the working capital limits.

Analytical Approach

For arriving at its ratings, CRISIL Ratings has combined the business and financial risk profiles of IEIL and its subsidiaries. This is because all these companies, collectively referred to as the Ion Exchange group, have a common management, have significant transactional linkages and operate in the same or related businesses. IEIL has also extended corporate guarantees for a portion of debt contracted by some of its subsidiaries. Furthermore, CRISIL Ratings has factored in the debt of one associate company, Aquanomics Systems Ltd (ASL), as IEIL has extended corporate guarantees for the debt as working capital limit contracted by ASL.

 

Please refer Annexure - List of Entities Consolidated, which highlights entities considered and their analytical treatment of consolidation

Key Rating Drivers & Detailed Description

Strengths:

Strong market position in domestic water treatment segment: The company has a strong market position in the domestic water treatment segment with established relationships with its customers and suppliers. The varied product range find usage in various industries like - Petrochemical & Refinery, Power, Steel, Sugar, Electronics, Pharma, Pulp & Paper, Textile, Cement, Automobile etc. Further, it has an established track record and strong expertise of around six decades in providing the full range of products in the water treatment segment. Longstanding presence of the promoters and a robust nationwide aftersales service have helped the group to establish the brand. Revenue is well-diversified, with the engineering, chemicals and consumer products divisions contributing around 61%, 29% and 10%, respectively, to sales in fiscal 2024. The diversified revenue stream support the company from any downturn in any particular segment. Diversified product profile and customer base spread over various industries like - Petrochemical & Refinery, Power, Steel, Sugar, Electronics, Pharma, Pulp & Paper, Textile, Cement, Automobile etc. The recent acquisition of a Portugal based company MAPRIL (acquisition completed in first quarter of fiscal 2024), will provide better access to IEIL in and around the European market.

 

The engineering segment had orders worth Rs. 3580 crore as on Sep 30, 2024 (Rs 3,351 crore as on June 30, 2023), with strong bid pipeline of Rs 8,695 crore which offers strong revenue visibility.

 

Healthy operating performance: Consolidated revenue grew 18% in fiscal 2024 due to healthy order execution in the engineering segment (17% increase y-o-y) and strong demand from end-user industries in the chemical segment (5% increase y-o-y). Driven by the strong Engineering order book and healthy demand in the chemical segment duly supported by new acquisition, IEIL’s consolidated revenue growth in fiscal 2025 is expected to remain around 12-15% in fiscal 2025 as well as medium term.

 

Operating margins moderated to 11.7% in fiscal 2024 (13.3% in fiscal 2023) due to change in project mix of order book and high investments being made in infrastructure and manpower in last few quarters within the Engineering and Consumer Products segments. Operating margin is expected to remain at 11.5-12.0% in fiscal 2025 which will improve in medium term with increase in contribution from chemical segment as well as increase in exports.

 

Strong financial risk profile: The company’s financial risk profile stood strong with the company remaining net debt negative. The debt metrics such as NCAAD ratio and TOL/TNW ratio stood at 1.6 times and 1.4 times respectively in fiscal 2024 (4.0 and 1.3 times respectively in previous fiscal). The financial risk profile is likely to remain comfortable with expected strong cash accruals of over Rs 230-330 crore in medium term, project debt repayments well-spaced out over 7 years till FY2031 and a prudent dividend policy. The TOL/TNW ratio is expected to remain around 1.3-1.6 times in medium term while NCAAD is expected to remain 0.5-1 times amid the Roha capex project.

 

Weaknesses:

Working capital-intensive operations: Gross current assets are high at 266 days as on March 31, 2024 (257 days as on March 31, 2023), led by receivables of 147 days (against 130 days) and modest inventory of 51 days. Payables increased to 170 days as on March 31, 2024, from 159 days, a year ago. Back-to-back arrangements with suppliers and advances from the clients partly aid working capital management.

 

Exposure to intense competition and cyclicality in the Engineering segment and susceptibility to economic cycles along with risk related to contingent liabilities: Revenue remains susceptible to economic cycles that impact the Engineering segment. Furthermore, the company also caters to government agencies and PSUs, expenditure of which is directly linked to the economy. Any delay or deferment of capital expenditure (capex) in end-user industries or any slowdown in the Indian economy could adversely affect IEIL’s revenue. However, diversified revenue stream from other segments viz Chemical and Consumer Product segments support the company from any downturn in Engineering segment.

 

Furthermore, due to the nature of business, IEIL has sizeable off-balance sheet liabilities, primarily bank guarantees given to clients. Hence, the company is exposed to the liquidity risk that may arise out of these contingent liabilities.

 

Exposure to risks related to ongoing capex: The company is undertaking a greenfield capex project related to the manufacturing of resins within the chemical segment in Roha, Maharashtra with an estimated capex outlay of ~Rs 432 crore (to be funded in the debt equity ratio of 4:1), to be phased out in fiscal 2024 and fiscal 2025. As on Sep 30, 2024, the physical progress of the project stood at around 78% and the project is expected to commission by first quarter of fiscal 2026. However, the company is exposed to project execution risk, including risks of delays and cost overruns. The company’s ability to commission the Roha project within the budgeted cost and estimated timeframe, stabilization of the plant and ramp up of sales post commissioning would remain a key monitorable.

Liquidity: Strong

The unencumbered cash and cash equivalents stood at Rs 206 crore as on Sep 30, 2024 and the fund based working capital limits utilization was nil over the past 12 months through Sep 2024. Expected annual cash accrual of over Rs 230-330 crore which should comfortably cover the yearly debt obligation of Rs 15-80 crore, incremental working capital requirements and equity requirements of the ongoing capex over the medium term. Liquidity should remain strong over the medium term, with expected strong cash accruals, project debt repayments well-spaced out over 7 years till FY2031 and a prudent dividend policy.

Outlook: Stable

CRISIL Ratings believes IEIL group will continue to benefit from its established market position, healthy order pipeline in the engineering division, healthy margins in the chemicals division and a strong financial risk profile.

Rating Sensitivity Factors

Upward Factors

• Substantial and sustained increase in revenue supported by improvement in diversity and more equitable contribution in the cash accruals from the segments
• Timely commissioning, stabilization and ramp-up of the Roha project within the budgeted cost
• Prudent working capital management and capital structure leading to TOL/TNW going below 1.5 times on a sustained basis

 

Downward Factors

• Significant decline in revenue and operating margin, leading to lower-than-expected net cash accrual
• Substantial cost / time-overrun in the existing Roha Project and/or any other large debt funded capex or acquisitions and/or significant stretch in the working capital cycle, resulting in deterioration in the financial risk profile – TOL/TNW ratio going above 1.7 - 2 times on a sustained basis.

About the Group

The flagship company of the ION Exchange group, IEIL was incorporated in 1964 as a 60% subsidiary of the UK-based Permutit Company. The foreign holding was reduced in a phased manner and it became wholly owned Indian company in 1985. IEIL began manufacturing ion-exchange resins at its plant in Ambernath, Maharashtra in 1965 and diversified into chemical treatment of water in 1982.

 

IEIL operates in three key segments - engineering, chemical, and consumer products and has six factories in five states. Each business is managed by a dedicated team. The engineering segment plans and executes orders for installation of large and medium-sized water and effluent treatment plants. The chemicals division manufactures ion-exchange resins and industrial chemicals and sells them in India, North America, Middle East, Europe, and South-East Asia. The consumer products segment offers a range of water-care products for homes, institutions and community to provide pure & safe drinking water under Zero-B brand and sustainable waste management.

Key Financial Indicators*

As on/for the period ended March 31	Unit	2024	2023
Operating Income	Rs.Crore	2348	1990
Profit after tax	Rs.Crore	195	195
PAT margin	%	8.3	9.8
Adjusted debt/adjusted networth	Times	0.1	0.1
Adjusted Interest coverage	Times	20.6	24.9

    *CRISIL Ratings adjusted numbers

Any other information: Not Applicable

Annexure - List of Entities Consolidated

Name of entities consolidated	Extent of consolidation	Rationale for consolidation
Ion Exchange Enviro Farms Ltd	Full	Common management, same business, and significant transactional linkages
Watercare Investments (India) Ltd
Aqua Investments (India) Ltd
Ion Exchange Asia Pacific Pte Ltd, Singapore
IEI Environmental Management (M) Sdn Bhd, Malaysia
Ion Exchange Environment Management (BD) Ltd, Bangladesh
Ion Exchange Asia Pacific (Thailand) Limited, Thailand
PT Ion Exchange Asia Pacific, Indonesia
Ion Exchange LLC, USA
Ion Exchange And Company LLC, Oman
Ion Exchange WTS (Bangladesh) Ltd, Bangladesh
Ion Exchange Projects and Engineering Ltd
Global Composites and Structurals Ltd
Ion Exchange Safic Pty Ltd, South Africa
Ion Exchange Arabia for Water, Saudi Arabia
Ion Exchange Europe LDA, Portugal
Mapril - Produtos Químicos e Máquinas Para A Industria, LDA, Portugal
Total Water Management Services (India) Ltd.
Ion Exchange Purified Drinking Water Pvt Ltd
Ion Exchange Environment Management Ltd
Aquanomics Systems Ltd	Moderate	Based on support extended to these companies
Ion Exchange PSS Co Ltd, Thailand
Ion Exchange Financial Products Pvt Ltd