Detailed Rationale

CRISIL Ratings has revised its outlook on the long-term bank facilities of Kabra Extrusiontechnik Limited (KEL) to ‘Negative’ from ‘Stable’ while reaffirming the rating at ‘CRISIL A+’. Rating on the short-term bank facilities reaffirmed at ‘CRISIL A1’.

 

The revision in outlook factors in the contraction in operating performance of KEL’s battery division during the nine months ended December 2023 owing to decline in volumes from key customers. This was on account of the change in the industry-wide Faster Adoption and Manufacturing of Hybrid and Electric Vehicles (FAME-II) subsidy norms, implementation of new electric vehicle battery standards, and other FAME-II subsidy related issues pertaining to key customers, including lower product model approvals, production cut-back due to working capital stress on account of withholding of subsidy dues, and return of past subsidies claimed. The weak performance in the battery business and expected slower-than-earlier anticipated volume offtake shall weigh on the company’s overall operating margin and return metrics. Over the medium term, operating margin is expected to contract to 8-10% as against 11.5% during fiscal 2023. That said, higher-than-anticipated ramp-up in volumes and improvement in the operating performance of the battery division translating to overall recovery in margin and return metrics shall remain key monitorable.

 

Revenue stood at Rs. 446 crore with operating profit of Rs. 32 crore, translating to operating margins of around 7% for the first nine months of the current fiscal as against revenue of Rs. 492 crore with operating profit of Rs. 51 crore during the same period in the last fiscal year. With the reduction of FAME subsidy, margin pressure was witnessed across the entire supply chain. Furthermore, higher operating expenses owing to the increase in employee costs followed by higher research and development (R&D) expenses under the battery business impacted the operating margins by around 350 basis points (bps).

 

Lower-than-expected performance over the medium term comes after KEL’s strong operating performance in the previous fiscal period. Revenues during fiscal 2023 increased by around 65% on-year to Rs. 670 crore on the back of multifold growth in the battery business, while the extrusion business division grew by around 7%. Operating margins contracted by approximately 200 (bps) to 11.5% on account of shift in product mix with substantial increase in the proportion of the battery business which carries lower gross margins compared to the extrusion business. However, operating profitability increased by 40% on-year to Rs. 77 crore.

 

The financial risk profile continues to remain strong, backed by robust capital structure and healthy debt protection metrics. Adjusted gearing (gross debt / adjusted networth) stands at 0.24 time as on March 31, 2023, and is expected to remain between 0.1-0.25 time over the medium term. Key debt protection metrics are expected to remain healthy, with interest coverage and net cash accruals to adjusted debt (NCA / AD) at above 5 times and 45% respectively over the medium term. Liquidity continues to remain comfortable with free cash and liquid investment of Rs.72 crore as on March 31, 2023 (Rs. 108 crore as on September 30, 2023)

 

The ratings continue to reflect KEL’s established market position in the extrusion machinery business, and strong financial risk profile. These strengths are partially offset by exposure to intense competition in the extrusion machinery segment, cyclicality in the plastic products industry, battery business division susceptible to changes in government policies, and customer concentration risk in the revenue profile of the battery business.

Analytical Approach

For arriving at the rating, CRISIL Ratings has evaluated the business and financial risk profiles of KEL on a standalone basis.

Key Rating Drivers & Detailed Description

Strengths:

• Established market position in the extrusion machinery business: KEL has an established track record of more than four decades in manufacturing and commissioning of plastic extrusion machinery. The company is among the largest manufacturers of plastic extrusion machinery in India, wherein it has a market share of 30-40% in the organized space. KEL also caters to the overseas market, with strong presence in African, West Asian, and South-East Asian markets. Improvement in the private capex cycle over the medium term should continue to support the business.

 

• Strong financial risk profile: The company’s reliance on long-term external sources of funds is minimal and largely relies on short-term borrowings to fund large working capital requirements. That said, a stable net working capital cycle coupled with steady growth in business over the medium term, should keep working capital borrowing at stable levels. KEL’s capital structure continues to remain comfortable with adjusted gearing of about 0.24 time as on March 31, 2023, and expected to remain between 0.10-0.25 time on account of limited dependance on external funds to meet working capital and capital expenditure requirements (capex). Capex investments over the medium term shall largely be restricted for maintenance capex, with an expected outflow of Rs. 25-45 crore per annum. Key debt protection metrics as indicated by interest coverage stands at 8.55 times as on March 31, 2023, and the same is expected to remain above 5.0 times over the medium term, thereby providing sufficient buffer to cash flows.

 

Weaknesses:

• Exposure to intense competition in the extrusion machinery segment: The domestic extrusion machinery segment is highly fragmented, characterized by the presence of various small and micro players which limits pricing power. Therefore, KEL is exposed to competition from domestic players and imported extrusion machinery. Also, the segment is technology-intensive and is susceptible to the risk of technological obsolescence. However, the same is mitigated partly through KEL’s technological tie-ups and strategic collaborations with international players such as Battenfeld-Cincinnati (Germany), Penta Srl (Italy), Unicor GmbH (Germany) and Mecanor Oy (Finland).

 

• Cyclicality in the plastic products industry: The demand for extrusion machinery is mainly linked to the capex programmes of plastic products manufacturers, rendering KEL vulnerable to investment plans of its customers, especially during an economic slowdown when many companies may defer or postpone their capex plans.

 

• Battery business division susceptible to changes in government policies: The electric vehicle industry is highly regulated with the government regulating safety and battery norms and subsidy levels, amongst others. The reduction in the FAME II subsidy from June 01, 2023, onwards has resulted in a steep rise in the prices of electric vehicles. As a result, month-on-month sales volumes declined sharply in June 2023. However, sales volumes have witnessed gradual recovery thereafter. On account of the industry-wide impact, KEL’s battery business witnessed sharp contraction in operating margin, thereby weighing on the company’s overall operating efficiency.

 

• Customer concentration risk in the revenue profile of the battery business: During fiscal 2023 the top-5 customers account for over 90% of revenues. However, going forward, the increase in customer base through further OEM partnerships within 3-wheeler EV industry segment and high voltage EV segment, shall result in gradual decline in customer concentration.

Liquidity: Strong

Expected cash accruals of Rs. 30-40 crore per annum over the medium-term along and unencumbered existing cash surplus of around Rs. 108 crore as on September 30, 2023, is more than sufficient to cover debt re-payment obligations, capex of Rs. 25-45 crore per annum, and working capital requirement, with limited dependance on external funding. Furthermore, the utilization of fund-based limits was 65% on an average over the 12 months through to December 2023.

Outlook: Negative

The ‘Negative’ outlook reflects contraction in the operating performance of KEL’s battery division and slower-than-expected offtake in volumes, which shall weigh on the company’s overall operating margins and return metrics over the medium term.

Rating Sensitivity factors

Upward factors:

• Substantial improvement in scale of operations and better-than-expected improvement in the operating performance of the battery business, leading to sustained operating margins above 12%.
• Sustenance of maintenance of strong financial risk profile.

 

Downward factors:

• Weakening of business performance or sharp decline in operating margins below 7-8% on sustained basis.
• Any large, debt-funded capex or any major liability arising out of warranty claims or sizeable stretch in the working capital cycle, leading to material impact on the debt protection metrics, for instance, adjusted gearing increasing on sustained basis.

About the Company

Incorporated in 1982, KEL is a part of the Kolsite group of companies. It manufactures plastic extrusion machinery and mono and multilayer blown film plants, used in industries such as pipes and packaging. Its manufacturing facilities are in Daman. During fiscal 2020, KEL also entered the EV battery packs segment, with a new manufacturing facility in Pune. The company has technological tie-ups with Battenfeld Extrusiontechnik GmbH, Germany, which is valid till 2026 and Unicor Gmbh. KEL also has a R&D division that is approved by the Department of Scientific and Industrial Research (Government of India), which enables the launch of new models and upgrade of existing models.

 

For the nine months ended December 31, 2023, operating income was Rs 446 crore and Profit after tax (PAT) was Rs. 15 crore, against Rs. 492 crore and Rs. 26 crore, respectively, during corresponding period of previous fiscal.

Any other information: Not Applicable

Annexure - Details of Instrument(s)

ISIN	Name of the instrument	Date of Allotment	Coupon Rate (%)	Maturity Date	Issue size (Rs.Crore)	Complexity Level	Rating assigned with outlook
NA	Bank Guarantee	NA	NA	NA	3	NA	CRISIL A1
NA	Cash Credit^	NA	NA	NA	9	NA	CRISIL A+/Negative
NA	Fund-Based Facilities*	NA	NA	NA	45	NA	CRISIL A+/Negative
NA	Letter of Credit	NA	NA	NA	1	NA	CRISIL A1
NA	Letter of Credit#	NA	NA	NA	50	NA	CRISIL A1
NA	Non-Fund Based Limit@	NA	NA	NA	40	NA	CRISIL A1
NA	Proposed Long Term Bank Loan Facility	NA	NA	NA	6	NA	CRISIL A+/Negative

*Interchangeable with WCDL up to Rs. 35 crores; Interchangeable with Cash Credit up to Rs. 15 crores; Interchangeable with EPC / PCFC I up to Rs. 35 crores; Interchangeable with FBN / FBD / FBP / PSFC up to Rs. 35 crores; Interchangeable with EPC / PCFC II up to Rs. 10 crores

#Interchangeable with sales bill discounting up to Rs. 20 crores; Interchangeable with purchase bill discounting up to Rs. 20 crores; Interchangeable with SBLC up to Rs. 20 crores; Interchangeable with Bank Guarantee up to Rs. 20 crores; Interchangeable with preshipment finance up to Rs. 20 crores; Interchangeable with post-shipment finance up to Rs. 20 crores; Interchangeable with sales invoice financing up to Rs. 10 crores; Interchangeable with Working Capital Demand Loan and Cash Credit up to Rs. 25 crores

^Interchangeable up to Rs 7.5 crore with export packing credit, packing credit in foreign currency, export bill discounting/rediscounting.

@Interchangeable with Working Capital Demand Loan up to Rs. 40 Crores, Overdraft up to Rs. 2 Crores and Export Bill Discounting up to Rs. 20 Crores