Detailed Rationale

CRISIL Ratings has reaffirmed it rating on the long term bank facilities of Indo-National Limited (INL) at ‘CRISIL A/Stable’ and assigned its ‘CRISIL A1’  rating to the short term bank facility.

 

Operating performance in fiscal 2022 is expected to be steady driven by improved performance of dry cell batteries and execution of sizeable order book (Rs.200 crore) in the subsidiary, Kineco Ltd (Kineco). While revenue growth is expected at 10-12%, operating profitability is likely to moderate by 80-100 bps to ~10% from ~11% due to the high input costs, especially Zinc. Nevertheless, cash accruals are expected to be above Rs.40 crores in fiscal 2022, adequate to fund the moderate capital expenditure (capex) and working capital requirements. Over the medium term, the company is expected to register revenue growth of 6-8%, supported by modest sales in batteries, and better contribution from Kineco. Operating profitability is expected to remain range bound at 10-12%, leading to steady cash generation and gradual improvement in debt metrics.

 

Earlier in fiscal 2021, revenues grew by 5% compared with the previous fiscal, driven by better performance of dry cell batteries segment which grew by 38%, and offset the decline in revenues at Kineco. Revenues at Kineco declined due to delay in execution of railway orders.

 

The ratings continue to reflect INL’s established market position and brand in the domestic dry cell batteries industry, as well as its vast distribution network, diverse revenue profile through Kineco (composites for defence, railways and aerospace), and the company's adequate and improving financial risk profile. These strengths are partially offset by slowish growth in the core domestic dry cell batteries business, supplier concentration risks, and susceptibility of operating profitability to volatile input prices and intense competition.

Analytical Approach

For arriving at the rating, CRISIL Ratings has consolidated the business and financial risk profile of INL and its subsidiary, Kineco. CRISIL Ratings has also amortized the goodwill on acquisition of Kineco over a period of five years ending 2021

 

Please refer Annexure – List of entities consolidated, which captures the list of entities considered and their analytical treatment of consolidation

Key Rating Drivers & Detailed Description

Strengths:

Established player, with strong brand name, in dry-cell industry; revenue diversity through Kineco

With a production capacity of 78.5 crore batteries per annum, INL is the second-largest player in the dry-cell industry in India with a market share of above 30% and continues to benefit from its strong ‘Nippo’ brand.

 

INL has diversified its product portfolio with the acquisition of Kineco in fiscal 2016 and introduction of products like LED, torches, Mosquito bats, DORCO Razor blades etc. Kineco manufacturers composites for the defence, railways and aerospace sectors and registered revenues of Rs.145 crore in fiscal 2021 (Rs.178 crores in fiscal 2020), with revenues impacted due to delayed execution of railway orders. The company has an order book of Rs.200 crore, and increasing scale of operations at Kineco is expected to improve INL’s revenue diversity and visibility in the medium to long term.

 

Wide and established distribution network

More than 70%of INL’s batteries are sold through authorized distributors. The company has an established distribution network involving exclusive distributors, 4000 stockists, 30 depots, and more than 17 lakh retail outlets and wholesalers. INL has been associated with many distributors since its inception. The distributors also assume absolute responsibility for the storage and distribution of goods. Company has also leveraged on its extensive marketing network to scale-up existing portfolio of electrical products and launch new products leveraging the strong distribution network. CRISIL Ratings believes INL will continue to capitalize on its wide distribution network and established brand image

 

Adequate and improving financial risk profile

INL’s gearing is healthy, at 0.63 time as on March 31, 2021. Cash generation benefits from improving contribution from Kineco and stable cash flows from the core business. The interest coverage and net cash accrual to total debt (NCATD) ratios are adequate and were at 5.70 times and 0.26 time respectively in fiscal 2021 as compared to 4.61 times and 0.10 time in fiscal 2020. The ratio of total outside liabilities to adjusted net worth (TOL/ANW) also improved to 1.07 times in fiscal 2021, from 1.20 times in fiscal 2020.

 

Earlier, in fiscal 2020, the company provided for Rs.29 crores in its books towards doubtful debts, following bankruptcy of one of its key distributors.

 

The Competition Commission of India (CCI) in its order dated April 19, 2018, imposed a penalty of Rs 42.66 Cr on INL since it has found INL, and two other companies, to have violated provisions of the Competition Act, 2002. While the matter is subjudice, INL’s low gearing should help absorb any negative impact of the decision resulting in payment of penalty. At present, the penalty is considered as a contingent liability.

 

Weaknesses:

Slowish revenue growth in core dry cell battery business

INL’s revenue growth from dry cell battery segment was flat at about Rs.260 crore in fiscal 2018 and fiscal 2019. This was mainly due to competition from cheaper imports. However, with implementation of quality standards by Bureau of Indian Standards, cheaper imports have reduced which has contributed to improved revenues of Rs.291 crores in batteries segment in fiscal 2021. In the past, decreasing share of larger ‘D’ size batteries impacted revenues from this segment. Going forward, revenues from battery segment are expected to register modest growth of 2-5%, given increasing number of electronic products and toys being launched using button cells.

 

Partial susceptibility to raw material price volatility and intense competition

Raw material accounts for over 45% of total cost of sales. The company purchases zinc based on prices on London Metal Exchange and sources its monthly requirements both at spot and monthly average prices. Any steep increase in zinc prices will impact the company’s profitability given the intense competition in the industry and limited pricing flexibility.

 

Supplier concentration risk

Zinc, which constitutes about 30% of INL’s raw material is sourced entirely from Hindustan Zinc Ltd (Hindustan Zinc; rated ‘CRISIL AAA/Stable/CRISL A1+’). This, exposes INL to supplier concentration risk and may affect its price-negotiation capabilities. However, this is partly offset by INL’s established business relationship, going back to more than a decade, with Hindustan Zinc, and long-term contract for supply of zinc.

Liquidity: Adequate

INL has adequate liquidity driven by expected cash accruals of above Rs. 45 crore per annum over the medium term. It also has access to fund-based limits of Rs. 85 crores utilized at about 57% over the 12 months ended December 2021. Term loan repayments are about 14-17 crore per annum in the subsidiary. There are no major capex plans in the medium term. CRISIL Ratings expects internal accruals, cash & cash equivalents, and unutilized bank lines to be sufficient to meet its repayment obligations as well as incremental working capital requirements.

Outlook: Stable

INL's business risk profile will continue to benefit from its established position and brand in the battery segment, increasing contribution from electrical products, and better performance at its subsidiary. Its financial risk profile is adequate and improving, supported by steady cash generation.

Rating Sensitivity factors

Upward Factors

* Higher than anticipated growth in revenues (over 10-12%) over medium term, and operating profitability sustaining at 11-12%, leading to better cash generation

* Further improvement in financial profile, supported by prudent capex and working capital management, leading to better debt metrics; TOL/ANW below 0.8-1 times

 

Downward Factors

* Sluggish revenue growth and decline in operating profitability (below 8%), impacting cash generation

* Stretched working capital cycle, or sizeable debt-funded capex leading to moderation in debt metrics (TOL/ANW in excess of 2 times)

About the Company

Incorporated in 1972 as a joint venture (JV) between the late Mr. P Obul Reddy and Panasonic Corporation (leading Japanese electronics company, which subsequently exited the JV in 2012), Chennai-based INL (formerly, Nippo Batteries Company Ltd) manufactures and sells dry cell batteries and trades in torches, emergency power back-up products, and LEDs.

 

INL is the second-largest player in the dry cell batteries industry in India, with capacity of 78.5 crore battery per annum and a market share of above 30%. INL has an established distribution network comprising exclusive distributors, 4000 exclusive stockists, 30 depots, and 17 lakh retail outlets and wholesalers. In fiscal 2016, INL acquired 44.49% stake in Kineco, which manufactures composite for Railways, aerospace, and defence. Subsequently, in fiscal 2017, INL increase its stake in Kineco to 51%. Kineco also has a 51:49 joint venture, Kineco Kaman Composites Pvt Ltd, with Kaman Aerospace Group, USA, which manufactures advanced composites for medical, aerospace, and several other industries. INL also set up 4.6 megawatt solar power plant in Polepally village, Telangana, and has entered into a power purchase agreement with Deccan Hospitals (unit of Apollo Hospitals Enterprise Ltd, rated ‘CRISIL AA/FAA+/Stable/CRISIL A1+’).

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	Cash Credit*	NA	NA	NA	81.0	NA	CRISIL A/Stable
NA	Proposed Short Term Bank Loan Facility	NA	NA	NA	4.0	NA	CRISIL A1

*Interchangeable with short term debt and Bill discounting facility