Detailed Rationale

CRISIL Ratings’ ratings on the bank facilities of Kabra Extrusiontechnik Limited (KEL) continue to reflect KEL's established market position and strong financial risk profile. These strengths are partially offset by modest scale of operations, exposure to intense competition, and susceptibility to cyclicality in the plastic products industry.

 

On December 30, 2021, CRISIL Ratings had revised its outlook on the long-term bank facilities of KEL to 'Positive' from 'Stable' while reaffirming the rating at 'CRISIL A’; the rating on the short-term bank facilities were reaffirmed at ‘CRISIL A1’.

 

The revision in outlook reflects CRISIL Ratings’ expectation that the business risk profile of the company may improve with ramp-up of the battery division over the near term while the improved operating performance in the extrusion machinery division is sustained.

 

KEL completed its major capex programme pertaining to manufacturing plant for lithium-ion battery packs (Capacity 6000 battery packs per month) during March 2020. However, the ramp-up was delayed due to covid-19 pandemic. The plant ran at around 20% utilization levels during H1 FY22 despite 2nd wave of Covid-19 and is currently scaling up faster to meet the demand. While the battery division incurred operating losses during H1 FY22, it is expected to turn profitable with scaling up of the operations. With debottlenecking and automation, the capacity has been increased to around 10000 battery packs per month. Furthermore, the company is also increasing its capacity to 63000 battery packs per month which is expected to be completed in next 12-18 months. Timely ramp-up of sales along with stabilization of operating margins in the battery division will be a key monitorable. 

 

During fiscal 2021, operating income increased by 26% year-on-year, with higher execution of orders despite Covid-19 pandemic. The EBITDA (earnings before interest, tax, depreciation and amortization) also increased significantly (Rs. 41 crore during fiscal 2021 as compared to Rs. 13 crore during fiscal 2020) during the fiscal due to cost rationalization measures taken by the company and higher fixed cost absorption. Operating performance continues to remain higher during the first half of current fiscal and is expected to sustain over the medium term driven by ongoing and upcoming capex plans in the key end-user industries viz. the plastic pipe manufacturers and the packaging films manufacturers.

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: KEL has an established track record of more than three 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 25-30%. KEL also caters to the overseas market, with strong presence in African, West Asian, and South East Asian markets. Currently, the order book stands at around Rs. 150 crores which provides the revenue visibility for the next 6 months.  Favourable industry scenario, with higher investments envisaged in domestic irrigation, water supply and sanitation segments over the medium term backed by various government initiatives, should continue to support the business.

 

Timely stabilization of, and growth in EV battery segment: KEL completed its major capex pertaining to the manufacturing plant for lithium-ion battery packs for EVs in March 2020. Though the pandemic-led lockdown resulted in disruption of production during fiscal 2021, ramp-up of production has started during first half of fiscal 2022 and has picked up further during the current quarter due to strong demand from the customers. The revenue contribution from the segment is expected to increase going forward. Moreover, the company is increasing its capacity to 63000 battery packs per month which is expected to be completed in next 12-18 months. Timely ramp-up of sales along with stabilization of operating margins in the battery division will be a key monitorable.

 

Strong financial risk profile: The financial risk profile remains strong, backed by low debt and moderate networth. Overall gearing remains comfortable at 0.09 time as on March 31, 2021, led by lower-than-envisaged debt availed for the major capex programme and moderate working capital debt. Company prioritizes internal cash accruals over the debt for the capex purposes. Debt protection metrics were also robust, with adjusted interest coverage ratio of 19.9 times (10.6 times in the previous fiscal). The financial risk profile should remain strong over the medium term, backed by healthy cash accrual and adequate liquidity despite large capex plans.

 

Weaknesses

Exposure to intense competition in the extrusion machinery segment: Domestic extrusion machinery segment is highly fragmented, characterised by 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 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.

Liquidity: Adequate

Liquidity remains adequate with cash and equivalents of around Rs 32 crore as on September 30, 2021. Further, fund-based bank limit utilisation averaged 28% over the 12-months through October 2021, thereby providing additional liquidity in the form of unutilised bank limits. Available liquidity, unutilized bank lines and expected annual cash accrual of over Rs. 25 crore, should suffice to cover the debt obligation and incremental working capital requirements in fiscals 2022 and 2023.

Outlook: Positive

KEL’s business risk profile may improve with ramp-up of the battery division while it will continue to benefit from its established market position in the plastic extrusion machinery segment; the financial risk profile should remain comfortable supported by low gearing and adequate liquidity.

Rating Sensitivity Factors

Upward Factors

• Significant scale up of operations in the EV battery packs division while sustenance of the operating performance of the plastic extrusion segment
• Sustenance of overall operating margin above 11%, leading to higher cash accrual

 

Downward Factors

• Delay in ramp-up and stabilization of operations in the EV battery packs business, leading to lower-than-expected revenue contribution in fiscals 2022 and 2023
• Sustenance of operating margin below 8%.
• Any large, debt-funded capex or any contingent liability leading to deterioration in the financial risk profile

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 into 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 Department of Scientific and Industrial Research (Government of India) approved in-house research and development division, which enables the launch of new models and upgrade of existing models.

 

For the six months ended September 30, 2021, operating income was Rs 138 crore and Profit after tax (PAT) was Rs 10 crore, against Rs 106 crore and Rs 6 crore, respectively, during corresponding period of previous fiscal.

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue (Rs Cr)	Complexity level	Rating outstanding with Outlook
NA	Cash Credit@	NA	NA	NA	9	NA	CRISIL A/Positive
NA	Working Capital Facility#	NA	NA	NA	20	NA	CRISIL A/Positive
NA	Working Capital Facility@@	NA	NA	NA	20	NA	CRISIL A/Positive
NA	Letter of Credit	NA	NA	NA	1	NA	CRISIL A1
NA	Bank Guarantee	NA	NA	NA	3	NA	CRISIL A1
NA	Proposed Long Term Bank Loan Facility	NA	NA	NA	101	NA	CRISIL A/Positive

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

@@Fully interchangeable with working capital demand loan; Interchangeable up to Rs 10 crore with cash credit, letter of credit, buyer's credit; Interchangeable up to Rs 10 crore with export packing credit, foreign bills purchase/discounting/negotiation, post-shipment credit in foreign currency; and Interchangeable up to Rs 5 crore with bank guarantee and standby letter of credit

#Fully interchangeable with working capital demand loan; includes sub limit of cash credit of Rs 10 crore