Detailed Rationale

CRISIL Ratings has assigned its 'Provisional CRISIL A+(CE)/Positive/CRISIL A1+(CE)' ratings to the bank facilities of KLJ Polymers Pvt Ltd (KPPL). The ratings are based on the strength of the unconditional and irrevocable corporate guarantee by the company’s parent, KLJ Polymers & Chemicals Ltd (KPCL; rated ‘CRISIL A+/Positive/CRISIL A1+’).

Analytical Approach

The ratings are based on CRISIL Ratings’ criteria for rating instruments backed by guarantees. The (CE) suffix in the rating reflects the payment structure that is designed to ensure full and time-bound payment to lenders owing to corporate guarantee by KLJ Polymers & Chemicals Ltd.

 

To arrive at its unsupported ratings, CRISIL Ratings has applied its homogeneous group criteria, wherein the team has combined the business and financial risk profiles of KLJ Plasticizers Ltd, KLJ Polymer & Chemicals Ltd, KLJ Resources Ltd, KLJ Organics Ltd, KLJ Organic (Thailand) Ltd, KLJ Petroplast Ltd and KLJ Polymers Pvt Ltd, collectively referred to as the KLJ Group-Chemical.

 

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:

* Unconditional and irrevocable corporate guarantee by KPCL

KPPL's ratings are based upon unconditional, continuing and irrevocable guarantee from KPCL, and an unconditional undertaking by the latter for securing principal and interest obligation on the company's entire debt. KPCL has a strong credit profile, driven by its established market position and strong business and financial risk profiles and the group’s healthy cash surplus of over Rs 250 crore as on December 31, 2020.

 
The payment structure is designed to ensure full and timely payment to the lender. The guarantor, KPCL, will pay any amount due and payable by KPPL, in relation to these instruments no later than three calendar days from the stipulated due date, irrespective of the lender bank invoking the guarantee. Also, the central treasury team of KPCL will closely monitor the debt repayment and provide timely support. The guarantee and the undertaking together cover the principal, interest and other monies payable under the guaranteed bank loan.

 

* Comfortable business risk profile, supported by proximity to ports and end-user markets and the group’s existing relationships with suppliers

KLJ group has a healthy presence in the polymer compounds segment, which will be further enhanced post commencement of operations in KPPL.  Crude oil derivatives, which is the key raw material for KPPL, are mainly imported. The production facility of KPPL at Silvassa is located favourably close to the port, thus providing logistical advantages. The company’s second facility at Agra, which is dedicated towards manufacturing of compounds for footwear, is located in proximity of the footwear hub of Kanpur. Since the parent KPCL is in the similar line of business as KPPL, KPPL will also be able to take benefit of the long-standing relationships of suppliers and customers leading to healthy operating efficiency.

 

* Strong experience of KLJ Group-Chemical and healthy financial flexibility of the group

In addition to its dominant market position, the group’s strong business profile is supported by proximity of its production facilities to ports and long-term relationships with their suppliers for ease of raw material procurement. The group also has strong in-house research and development division that focuses on improving the throughput and proportion of value-added specialty products. Increasing demand and pricing power has resulted in higher realisations in the first half of fiscal 2021 and is expected to benefit profitability in the near term.

 

The networth is sizeable and the adjusted gearing is comfortable. As on March 31, 2021, the networth is estimated at Rs 2,100 crore.  Capital expenditure (capex) of Rs 465 crore and Rs 290 crore in fiscals 2022 and 2023, respectively, is likely to be funded through a mix of long-term debt of Rs 475 crore and internal cash accrual. The KLJ group is expected to generate cash accrual of above Rs 200 crore annually over the medium term, against low term debt repayment. As a result, the debt metrics are expected to remain comfortable with adjusted total outside liabilities to tangible networth (TOLTNW) ratio estimated at 0.65 time as on March 31, 2021, which is likely to remain below 1 time over the medium term, on account of steady cash accrual and phased drawdown of debt. Liquidity is strong, as reflected in healthy cash accrual, small-term debt obligation, low utilisation of the fund-based limit, and high current ratio.

 

 Weaknesses

* Project implementation and stabilisation risks

Commercial operations of both the facilities are expected to commence from July 2021. This planned capex of Rs 74 crore involves manufacturing of engineering polymer compounds and elastomer compounds to cater to industries such as automobile, appliances, electronics and footwear. Timely commencement of commercial operations, within budgeted costs, will remain key monitorables. The plant is also susceptible to initial stabilisation issues with capacity utilisations remaining a key monitorable.

 

* Weak financial risk profile as operations are yet to commence

KPPL has started building its plant and procuring machinery, however operations are only expected to commence from July 2021 onwards. This has resulted in weak financial risk profile and debt protection metrics on a standalone basis with adjusted gearing and TOLTNW ratio expected to be above 2 times and 2.5 times respectively in fiscal 2022. Overall financial performance is expected to improve gradually with commencement and increase in scale of operations.

Liquidity: Strong

Liquidity remains strong, derived from credit enhancement available in the form of an unconditional and irrevocable corporate guarantee by KPPL's parent, KPCL. KPCL is likely to provide financial support in the event of an exigency in a timely manner. KPPL is expected to complete capex of around Rs 74 crore by fiscal 2022, which is being funded through term loan of Rs 30 crore and rest from KPCL in the form of equity infusion. With commercialisation of its plants, KPPL is also expected to take working capital limits to fund their operations.

 

The KLJ group has sufficient liquidity with unencumbered cash and bank balance above Rs 305 crore as on December 31, 2020. Unutilised bank lines were around Rs 255 crore (with bank limit utilisation averaging 33% over the nine months through December 2020).

Outlook Positive

CRISIL Ratings believes the rating outlook on KPPL’s bank loan facilities is based on the parent’s rating outlook. The outlook may be revised to ‘Stable’ in case of a similar revision in the rating outlook on KPCL.

Rating Sensitivity factors

Upward factors

• Improvement in the overall credit risk profile of the guarantor by one notch or more
• Substantial ramp-up in scale and profitability after commercialisation of plants

 

Downward factors

• Deterioration in the guarantor's overall credit profile by one notch or more
• Non-adherence to the terms of the transaction structure or payment mechanism
• Time or cost overruns in completion of the project

 

The 'provisional' rating on the proposed instruments, will be converted into a 'final' rating on: 

• Receipt of executed guarantee document
• Sanction letter of bank facilities

 
Additional documents, if any, executed for the transaction will also have to be provided. A rating rationale or report indicating conversion of the 'provisional' rating into a 'final' rating will be published on the CRISIL website on receipt of these documents.

Adequacy of credit enhancement structure

The rating is based upon the strength of an unconditional, continuing and irrevocable guarantee extended by KPCL, along with an unconditional undertaking, to ensure full and timely payment of all amounts due to the lender.

According to the payment mechanism, the guarantor (KPCL) will pay, not later than three calendar days from the due date, any amount due and payable by KPPL in relation to these instruments in case of any default or shortfall in payment. The guarantee and the undertaking together cover the entire principal, interest and other monies payable under the guaranteed loan.

Unsupported ratings CRISIL A-

CRISIL Ratings has introduced the 'CE' suffix for instruments having explicit credit enhancement feature in compliance with the Securities and Exchange Board of India’s (SEBI's) circular dated June 13, 2019.

Key drivers for unsupported ratings

For arriving at the unsupported ratings, CRISIL Ratings has applied the homogeneous group criteria and has combined the business and financial risk profiles of KLJ Plasticizers Ltd, KLJ Polymer & Chemicals Ltd, KLJ Resources Ltd, KLJ Organics Ltd, KLJ Organic  (Thailand) Ltd, KLJ Petroplast Ltd and KLJ Polymers Pvt Ltd, collectively referred to as the KLJ Group-Chemical. The ratings factor in the contribution of revenues to the group, growth trend and financial risk profile of KPPL with respect to the KLJ Group.

 

The ratings factor in revenue visibility on account of commencement of operations from FY22 onwards and overall expansion of polymer capacity for the group. The ratings also take into consideration strong need-based support from the KLJ group. These are partially offset by the susceptibility of the project to time overruns mainly for statutory approvals and weak standalone financial risk profile.

About the Company

KLJ Polymers Private Ltd (KPPL) was incorporated on January 21, 2020, with manufacturing facilities in Silvassa and Agra. It was established for manufacturing of Engineering Polymers Compounds & Elastomer Compounds (TPR/TPE/EVA). The company is a wholly owned subsidiary of KPCL, which is a part of the KLJ group.

About the guarantor

KLJ Polymers and Chemicals Limited was set up in Daman  during 1989-90 to manufacture Di-Octyl Phthalate (DOP). Later on during 2010-11 the same plant was closed with the aim to centralize manufacturing of Plasticizers under one roof. Till 2003, the Company was solely in the business of manufacturing of Plasticizers. However, during 2003, the promoters diversified and established a plant at Silvassa for manufacturing of PVC, TPR, EVA PP, Anti-Fab & XLPE Compounds. The manufacturing capacity of these compounds has increased over the years to over 1,00,000 TPA coupled with diversification into new products

 

For the nine months through December 2020, gross turnover for the KLJ group was Rs 3,848 crore and profit before tax Rs 522 crore, against Rs 4,488 crore and Rs 165 crore, respectively, during the corresponding period in the previous fiscal.

List of covenants

• Accepted date of commencement of operations is July 2021
• Any cost over-run/shortfall in debt servicing to be borne by KPCL

Any other information: Not applicable

Annexure - Details of Instrument(s)

 

Annexure – List of entities consolidated

Names of entities consolidated	Extent of Consolidation	Rationale for consolidation
KLJ Plasticizers Ltd	Full	Common management & bankers, same business and strong operational and financial linkages
KLJ Polymers & Chemicals Ltd	Full
KLJ Organic Ltd	Full
KLJ Resources Ltd	Full
KLJ Organic (Thailand) Ltd	Full
KLJ Petroplast Ltd	Full
KLJ Polymers Pvt Ltd	Full