Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AA/Stable/CRISIL A1+’ ratings on the bank facilities of Kirloskar Brothers Limited (KBL). Also, CRISIL Ratings has withdrawn its ‘CRISIL A1+’ rating on the Rs 100 crore commercial paper programme, which has remained undrawn for the last couple of years, following a request from the company. This is in line with CRISIL Ratings withdrawal policy.

 

The KBL group (including the joint venture [JV], Kirloskar Ebara Pumps Ltd [KEPL; ‘CRISIL A/Stable/CRISIL A1’]) has an established market position in the pumps business and has shifted its business towards product categories away from the projects business, has sizeable consolidated order book (KBL consolidated order book of ~Rs 3,053 crore as on June 30, 2024) which provides good revenue visibility, and wide geographic reach through a strong distribution network. It undertook strategic initiatives including efficiencies to reduce direct and indirect costs and improve pass-through of increase in raw material prices which has led to improvement in profitability in international and domestic subsidiaries, which will likely sustain over the medium term. 

 

Operating performance of the KBL group continued to improve on-year in fiscal 2024, with operating income growing by 8% to Rs 4,305 crore and earnings before interest, tax, depreciation and amortisation (Ebitda) increasing to Rs 539 crore at 12.5% margin, from 10.8% last fiscal. Healthy operating performance was sustained in the seasonally moderate first quarter of fiscal 2025, with KBL’s consolidated (excluding KEPL) revenue growing by 15% to Rs 1,031 crore and Ebitda margin of 10.8%, compared with 12.2% during the corresponding period of fiscal 2024. KBL will sustain its healthy operating performance supported by double-digit revenue growth and Ebitda margin at 10-11% over the medium term driven by steady profitability in international and domestic subsidiaries

 

The financial risk profile also improved in fiscal 2024, with the group continuing to remain net debt-free. Healthy cash accrual and moderate capital expenditure (capex) led to build-up of liquid surplus to Rs 571 crore as of March 31, 2024 (Rs 504 crore a year earlier) while total debt for the group reduced to Rs 213 crore as on March 31, 2024, from Rs 253 crore a year earlier. With steady operating performance, debt metrics are expected to improve with annual cash accrual of Rs 375-400 crore against yearly capex of Rs 140-160 crore over the medium term and negligible repayment.

 

The ratings continue to reflect the leading position of KBL in the domestic pump market, its diversified revenue and improving operating efficiency. The rating also factors in the company’s moderate financial risk profile. These strengths are partially offset by large working capital requirement and exposure to intense competition.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of KBL and its subsidiaries, collectively referred to as the KBL group, as the companies are under common management and have high operational and financial linkages. For the JV KEPL, CRISIL Ratings follows full consolidation, wherein it combines business and financial risk profiles of KEPL given the high operational and financial linkages and common management.

 

CRISIL Ratings has adjusted retention receivables outstanding for more than a year in the projects segment against networth and trade receivables. This is because they are slow moving and a substantial amount of Rs 156 crore as on March 31, 2024, has been outstanding for more than two years.

 

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:

Leading position in the domestic pump market and diversified revenue: 

The KBL group is one of the largest centrifugal pump manufacturers in India, with a leading market share. Revenue is diversified across segments as the group caters to multiple sectors, including retail, agriculture, water and irrigation, oil and gas, defence, industrial, and building and construction, including the smallest to some of the largest and complex pumping solutions in the world. The diversified end-user base mitigates the adverse impact of slowdown in a segment. The group has 11 plants, of which 5 are overseas, helping cater to customers in over 100 countries. These plants are strategically located across trading blocks and well-suited to cater to expanding geographic presence with reduced turnaround time in a cost-efficient way.

 

Geographically, the company has been increasing its presence in overseas markets, resulting in the share of international revenue increasing to ~26% of the group’s revenue. Key markets include Europe, the US, Africa and Southeast India. Besides, some of the growth in international markets has also come through acquisitions, which enabled KBL to widen its product offerings and enhance technological capabilities. At its international subsidiaries, the company has undertaken various steps to maintain and improve profitability, including manpower and marketing cost reductions and focus on high-margin and off-market/spares orders; it also undertook steps to diversify away from cyclical sectors by focusing on recurring revenue streams by growing revenue share from the framework contracts and subscription platform.

 

It undertook strategic initiatives, including efficiencies, to reduce direct and indirect costs, improve pass-through of increase in raw material prices which led to improvement in profitability at international and domestic subsidiaries; this trend is expected to continue over the medium term. The company has undertaken value engineering at product level to reduce product weight, improve power efficiency, and introduced on-line monitoring of pump performance and advanced manufacturing technologies, such as three-dimensional printing, artificial intelligence, virtual reality and Internet of Things, which help maintain product competitiveness. Moreover, its downsized and efficient manpower management, centralised procurement, dynamic pricing mechanism, focus on increasing share of higher-margin products and spares should help sustain profitability over the medium term.

 

Strengthened financial risk profile:

At the group level, the financial risk profile has improved, supported by better operating performance and healthy cash accrual. It continued to be net debt free, with gross debt of Rs 213 crore as of March 2024 (Rs 253 crore as of March 2023) and cash surplus of Rs 571 crore (Rs 504 crore). The gross debt to Ebitda ratio improved to 0.39 time as on March 31, 2024 from 0.59 times a year ago, while the interest coverage ratio rose to 20.53 times in fiscal 2024 from 12.45 times in fiscal 2023. With continued improvement in operating performance in fiscal 2025, the debt protection metrics should improve further. Cash accrual of Rs 375-400 crore will adequately cover moderate capex of Rs 140-160 crore per fiscal and nominal debt obligation over the next few years.

 

Weaknesses:

Large working capital requirement:

The working capital cycle remains high because of large receivables (about 55-60 days or Rs 694 crore as on March 31, 2024, excluding Rs 156 crore retention receivables), despite having a large small pumps (cash and carry business), and moderate inventory. Gross current assets days (excluding cash) were at 169 days as on March 31, 2024, and are expected at similar levels over the medium term. Progress in execution of projects and collection of retention money stuck in these projects will continue to be monitorable.

 

Susceptible to intense competition: The domestic pumps industry is highly fragmented and has several unorganised players. Organised players, including KBL, face tremendous pressure in maintaining market share and profitability, as cost-sensitive consumers attach more importance to affordability than brand equity primarily in the small pumps business. Moderate ability to pass-on price increases in raw materials primarily in the small pumps segment results in fluctuations in Ebitda margins given the large share (~55-60%) of material cost in cost structure. Company continues to be susceptible to intense competition and price fluctuations in raw material prices primarily in the small pumps segment.

Liquidity: Strong

At the group levels, cash and equivalent stood at Rs 571 crore as on March 31, 2024, including bank deposits and mutual fund investments. Cash accrual is expected to be sufficient to meet capex of Rs 140-160 crore per fiscal and term debt obligation of Rs 4-5 crore. Utilisation of the fund-based limit was nominal in the four months through June 2024 and is expected to remain at similar level over the medium term.

 

ESG Profile

CRISIL Ratings believes that KBL’s Environment, Social, and Governance (ESG) profile supports its already strong credit risk profile.

 

The Pumps industry has a high impact on the environment given the manufacturing process, raw materials sourcing, supply chain, and end-usage. Also, due to the nature of operations, the sector affects the local community and has various occupational health hazards associated with it. The company however scores better than its peers in the industry in both environment and social factors given its commitment to improve across these factors resulting in bringing a positive change. 

 

Key ESG highlights:

• KBL has stated that it aims to reduce scope 1 & 2 emissions by 40% by fiscal 2026 from its fiscal 2024 baseline. Also, the company is in the process of developing a net zero roadmap by fiscal 2026.
• Further, the company plans to enhance the share of electricity consumed from renewable sources (solar and wind) to 70% by fiscal 2026 from ~20% in fiscal 2024.
• KBL’s reported nil lost time injury frequency rate (LTIFR) for employees, while gender diversity was moderate at 7.3%.
• Its governance structure is characterized by 55% of its board comprising of independent directors, presence of two female board directors, dedicated investor grievance redressal system and extensive financial disclosures

 

There is growing importance of ESG among investors and lenders. KBL’s commitment to ESG principles will play a key role in enhancing stakeholder confidence, given its high share of international operations and access to both domestic and foreign capital markets.

Outlook: Stable

The credit risk profile will benefit from the group’s established market position in the pumps business and improving operating profitability. The company is also expected to sustain its healthy financial risk profile, with prudent capital spend.

Rating Sensitivity Factors

Upward factors:

• Better than anticipated revenue growth with sustained operating margin at 11-12%, leading to higher cash generation
• Maintenance of healthy financial risk profile with continued improvement in debt protection metrics supported by prudent capital spending
• Substantial recovery of retention receivables leading to a significant increase in cash flow and an improved working capital cycle

 

Downward factors:

• Weaker-than-anticipated operating performance with operating margin below 7-8% on a sustained basis
• Material debt-funded capex or acquisitions weakening the debt protection metrics on a sustained basis
• Increasing retention receivables from the projects business impacting cash flow and stretching the working capital cycle

About the Group

The KBL group, including KEPL, is India’s largest manufacturer and exporter of pumps. It caters to the oil and gas, defence and marine, water resource management, irrigation, power distribution, and construction sectors. As of March 31, 2024, its ~66% held by the promoters including Mr Sanjay Kirloskar, Ms Pratima Sanjay Kirloskar, Kirloskar Industries Ltd, among others.

 

During fiscal 2024, KBL Group’s revenue stood at Rs 4,395 crore and included non-domestic revenue share at ~26% with about 1% share coming from projects segments and had profit after tax (PAT) of Rs 372 crore. During the first quarter of fiscal 2025, KBL consolidated (excluding KEPL) reported PAT of Rs 71 crore on operating income of Rs 1,031 crore compared to Rs 66 crore on operating income of Rs 900 crore during the same period last year. As on June 30, 2024 KBL had a consolidated order book of Rs 3,053 crore.

Any other information: Not Applicable