Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AA-/Positive/CRISIL A1+’ ratings on the bank facilities and commercial paper programme of Kirloskar Brothers Ltd (KBL). CRISIL Ratings has also withdrawn its rating on Rs.100 crore proposed term loan facility at the company's request and Rs.150 crore working-capital demand loan and Rs. 27.38 crore term loan on receipt of ‘no objection certificates’ (NOC) from the bankers. This is in line with CRISIL Ratings’ withdrawal policy.

 

Despite the pandemic impacted first quarter, operating income for the KBL group (KBL consolidated including joint venture, Kirloskar Ebara Pumps Ltd, KEPL, rated ‘CRISIL A-/Positive/ CRISIL A2+’) grew by 13% on-year to Rs 3,285 crore in fiscal 2022, driven by healthy project order execution, steady demand for agricultural and residential pumps coupled with price increases following significant rise in raw material cost. The partial pass on of increase in raw material cost and booking of Mark-to-market (MTM) foreign currency (FX) losses at the international subsidiaries resulted in moderation in earnings before interest, tax, depreciation and amortisation (Ebitda) margin to 7.4% in fiscal 2022 from 9.8% with support from cost efficiency measures and healthy profitability at standalone and international businesses.

 

The operating performance in the first quarter of this fiscal was better than the pandemic impacted last year, with KBL consolidated revenue growing by 25% to Rs 784 crore and Ebitda growing by 60% to Rs 41 crore at 5.2% margins. EBITDA margin was impacted during the first quarter this fiscal owing to booking of MTM FX losses at the international subsidiaries in the absence of hedge accounting and higher input costs. CRISIL Ratings estimates healthy operating performance in the subsequent quarters this fiscal, with sizeable order book and healthy demand growth resulting in annual revenue growth of 8-10% over the medium term. The EBITDA margin is expected to improve and sustain at 8-9% over the medium term, driven by steady improvement in the performance of international subsidiaries and cost-rationalisation initiatives. Sustained improvement in operating profitability remains a key monitorable.

 

The financial risk profile continued to improve in fiscal 2022, with the group continuing to remain net debt free. Healthy cash accrual and moderate capex led to building-up on its liquid surplus to Rs 505 crore as of March 31, 2022 growing from Rs 359 crore last year while total debt for the group inched up to Rs 375 crore as on March 31, 2022, from Rs 300 crore a year earlier.

 

The ‘positive’ outlook reflects the expectation of continued improvement in the operating performance of the KBL group, while sustaining its adequate financial risk profile, over the medium term. This is supported by the group’s established market position in the pumps business, sizeable order book (around Rs 2,611 crore as on June 30, 2022) which provides good revenue visibility, and wide geographic reach through a strong distribution network. With improvement in the operating performance, debt metrics are expected to improve, and annual cash accrual is expected about Rs 200 crore against moderate annual capital expenditure (capex) of Rs 70-80 crore over the medium term.

 

The ratings continue to reflect the leadership position of KBL in the domestic pump market, its diversified revenue and improving financial risk profile. These strengths are partially offset by continuing, though declining, losses in the project segment, 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, as all the companies, collectively referred to as the KBL group, are under a common management, and have high operational and financial linkages.

 

For joint venture (JV), Kirloskar Ebara Pumps Ltd (KEPL, 'CRISIL A-/Positive/CRISIL A2+'), CRISIL Ratings follows a full consolidation wherein it combines business and financial risk profile of KEPL, given the common management and high operational and financial linkages.

 

CRISIL Ratings has adjusted retention receivables outstanding for more than a year in the project segment, against networth and trade receivables, because they are slow moving and a substantial amount has been outstanding for over 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:

Leadership 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 agriculture, 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 any particular segment. The group has 11 plants, of which 5 are abroad helping it cater to a global customer base in 100+ countries.

 

Geographically also, the company has been increasing its presence in overseas markets, resulting in share of international revenues increasing to ~20-25% of total group revenues. The company’s key markets include Europe, US, Africa and South-East Asia. Besides, some of the growth in international markets has also come through acquisitions, which have also enabled KBL to widen its product offerings and enhance its technological capabilities.

 

Adequate and improving financial risk profile: The KBL group’s financial risk profile has improved over time, supported by better operating performance and healthy cash accrual. Net debt to EBITDA ratio improved to (-)0.53 times as on March 31, 2022 from (-) 0.20 times last year while the interest coverage ratio rose to 8.03 times in fiscal 2022 from 6.92 times in the previous fiscal. With continued improvement in the operating performance in fiscal 2023, the debt metrics should improve further. Cash accrual of about Rs 200 crore should be adequate to meet moderate capex plan of Rs 70-80 crore annually and debt obligation of Rs 38 crore in fiscal 2023.

 

Weakness:

Continuing, though declining, losses in the project segment and international business: The project segment continues to incur losses, though the declining share of its revenue (to 11% of KBL group’s revenue in fiscal 2022 from 35% in fiscal 2012) and cost control measures provide some respite. The focus on realisation of retention receivables has resulted in aggregate retention receivables declining by about 8% on-year to Rs 194 crore as on March 31, 2022. The international subsidiaries continued to exhibit positive EBITDA in fiscal 2022, despite impacted by high raw material prices with sustained focus on steady higher-margin services business, cost control and process improvement measures. While the performance in the first quarter this fiscal has moderated, improvement in operating performance in the international business and the project segment will remain key monitorable.

 

Large working capital requirement: The working capital cycle of the group remains elongated because of large receivables (Rs 801 crore as on March 31, 2022, including Rs 187 crore retention receivables), particularly in the projects business, and moderate inventory-holding period. Gross current assets were 216 days as on March 31, 2022 and are expected at a similar level over the medium term. Progress in execution of projects and collection of retention money stuck in these projects will continue to be monitored.

 

Susceptibility 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. Moderate ability to pass-on price increases in raw materials results in fluctuations in EBITDA margins given the large share (about 55-60%) of material cost in its cost structure. Apart from long-term efficiency measures, low prices of key raw materials including pig iron and copper in fiscal 2021 drove EBITDA margin peaking to 9.8% with a subsequent decline in fiscal to 7.4%. The company continues to be susceptible to intense competition and price fluctuations in raw material prices.

Liquidity: Strong

Cash and equivalent of the group stood at Rs 505 crore as on March 31, 2022, including bank deposits and mutual fund investments. Cash accrual is expected to be sufficient to meet moderate capex of about Rs 70-80 crore annually and long-term debt obligation of Rs 36-38 crore each in fiscals 2023 and 2024. Utilisation of the fund-based limit averaged 29% in the six months through August 2022 and is expected to moderate in the medium term.

Outlook: Positive

The business risk profile will benefit from the group’s established market position in the domestic pumps business and sustained improvement in the performance of international subsidiaries. Continued improvement in operating performance resulting in better cash accrual and prudent capital spend should improve the financial risk profile and debt -metrics of the KBL group.

Rating Sensitivity Factors

Upward factors:

• Sustained revenue growth and operating margin above 9%
• 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 4% on a sustained basis
• Material debt-funded capex or acquisitions weakening the debt protection metrics, with gearing above 1 time and interest coverage below 3.25 times 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 on June 30, 2022, KBL had a standalone order book of Rs 1,777 crore.

Any other information: Not applicable