Rating Rationale
April 05, 2021 | Mumbai
Kirloskar Oil Engines Limited
Ratings reaffirmed at 'CRISIL AA / Stable / CRISIL A1+ '; rated amount enhanced for Bank Debt
 
Rating Action
Total Bank Loan Facilities RatedRs.791 Crore (Enhanced from Rs.563 Crore)
Long Term RatingCRISIL AA/Stable (Reaffirmed)
Short Term RatingCRISIL A1+ (Reaffirmed)
 
Rs.100 Crore Commercial PaperCRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to Annexure for Details of Instruments & Bank Facilities

Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AA/Stable/CRISIL A1+’ ratings on the bank facilities and commercial paper programme of Kirloskar Oil Engines Limited (KOEL).

 

Owing to the Covd-19 pandemic, operating performance was impacted during the first quarter of fiscal 2021. However, with healthy recovery thereafter and implementation of cost control measures, the operating margin in the first nine months of this fiscal improved to 9.1% compared with 7.8% in fiscal 2020, despite revenue decline of 15.1% to Rs 2,139 crore. This was supported by the healthy performance of the subsidiary, La-Gajjar Machineris Pvt Ltd (LGMPL; ‘CRISIL A+/Stable/CRISIL A1’). Operating profitability is expected to remain healthy at 9% in fiscal 2021, while revenue is expected to be lower by 10% year-on-year. Revenues are expected to pick-up from fiscal 2022.

 

The ratings continue to reflect the equity infusion of Rs 651 crore up to February 2021 in ARKA Fincap Ltd (ARKA), which is KOEL’s wholly owned subsidiary in the non-banking financial company (NBFC) segment. The investment was funded through existing cash and liquid investments, which stood at Rs 589 crore as on February 28, 2021. The financial risk profile is likely to remain strong even after capital infusion of up to Rs 350 crore in ARKA by fiscal 2023, backed by strong debt protection metrics and nominal term debt obligation. Developments in the NBFC subsidiary and any higher-than-expected investment from KOEL will be key monitorables.

 

The ratings also factor in a strong financial risk profile, established market position in the small- and medium-sized diesel engine segment across key end-user industries, and widening product portfolio with the electric pump business of LGMPL. These strengths are partially offset by susceptibility to cyclicality in end-user segments, volatility in raw material prices, and intense competition in the diesel engine market.

Analytical Approach

For arriving at the ratings, CRISIL Ratings has combined the business and financial risk profiles of KOEL and its subsidiaries, KOEL Americas Corp (wholly owned subsidiary) and LGMPL (76% subsidiary). That’s because all these companies, collectively referred to herein as KOEL, have common management and close operational linkages. For the financial subsidiary ARKA, CRISIL Ratings has factored in the capital allocation method. Cash outflow towards equity investment of Rs 651 crore in ARKA by February 2021 has been considered.

 

Also, CRISIL Ratings has amortised goodwill (post completion of purchase price allocation) from the acquisition over five years; both profit after tax (PAT) and networth have been adjusted to that extent.

 

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:

  • Strong financial risk profile

The financial risk profile is supported by a healthy networth of over Rs 1,750 crore expected as on March 31, 2021. The gearing and debt protection metrics are expected to remain healthy, with the gearing estimated at 0.05 time as on March 31, 2021, and the interest coverage ratio at 36.0 times in fiscal 2021. The financial risk profile is likely to remain strong over the medium term, after factoring capex plans of about Rs 190 crore (including LGMPL) and additional investment of Rs 350 crore in ARKA, given steady cash accrual. Any higher than expected capex or large acquisition having material impact on KOEL’s liquidity position or capital structure will remain the key monitorables.

 

  • Established market position in the small- and medium-range diesel engine segments

The company has a strong presence in diverse sectors, such as power generation, agriculture, and industrial. The market position is well established, particularly in the agriculture and industrial sectors; a bulk of the revenue is derived from sales of diesel-powered farm pump sets (agriculture) and engines for construction equipment (industrial). Acquisition of a controlling stake in LGMPL has provided KOEL a significant footprint in the electric pump market. While the operating performance has been marginally impacted due to subdued demand in industrial and power generation segments, LGMPL’s business has provided stability.

 

Weaknesses:

  • Susceptibility to cyclicality in end-user industries

Given the nature of products, the company’s prospects will remain linked to capex undertaken by end-user industries. Susceptibility to cyclicality in demand should persist, reducing revenue contribution from the impacted segment, as witnessed in the case of industrial and power generation segments in the past few fiscals.

 

  • Exposure to volatility in raw material prices and to intense competition

Raw material cost accounts for 66-67% of operating income. Profitability, therefore, is susceptible to volatility in the prices of raw materials, particularly in the intensely competitive small- and medium-range diesel engine segments. The company faces competition from unorganised players in the small-range diesel engine segment, and from entities such as Cummins India Ltd, Ashok Leyland Ltd, and Mahindra & Mahindra Ltd in the medium-range diesel engine segment.

Liquidity: Strong

Liquidity is likely to remain strong supported by healthy cash accrual over the next two fiscals. Term debt obligation is expected to be minimal at Rs 5.7 crore and Rs 3.9 crore in fiscals 2022 and 2023, respectively, and capex of Rs 190 crore in fiscal 2022 and Rs 120 crore in fiscal 2023 will be comfortably covered through internal cash accrual. KOEL has liquid surplus of Rs. 589 crores as on February 28, 2021. The fund-based bank limit of Rs 103 crore has been sparingly utilised. The company has not availed any moratorium announced under the Reserve Bank of India guidelines.  Liquidity should remain adequate, after factoring capex plans as well as investment of about Rs 200 crore in fiscal 2022 in ARKA. Any larger than expected capex or acquisition could adversely impact KOEL’s liquidity position and will remain the key monitorable.

Outlook: Stable

KOEL should continue to benefit from its established market position and large product portfolio catering to diverse sectors. The financial risk profile should remain strong, supported by robust capital structure and debt protection metrics.

Rating Sensitivity factors

Upward factors

  • Substantial and sustained increase in revenue and profitability, driven by product launches or higher sales to major end-user segments, resulting in annual net cash accrual over Rs 400 crore
  • Efficient working capital management and maintenance of the healthy financial risk profile
  • Sustained strong liquidity profile

 

Downward factors

  • Weaker business performance due to downturns in end-user industries, constraining revenue and profitability, resulting in annual net cash accrual below Rs 150 crore
  • Large debt-funded capex or acquisition, adversely impacting liquidity position below Rs. 200 crores
  • Stretch in working capital cycle or debt funded acquisition resulting in gearing above 0.25 times

About the Company

KOEL, one of the flagship companies of the Kirloskar group, manufactures and services diesel engines (primarily between 2.5-740 horsepower) and diesel generator sets (mainly between 2-1,010 kilovolt ampere). The company also makes diesel-, petrol-, and kerosene-based pump sets. It has manufacturing units in Pune, Kagal, and Nashik, all in Maharashtra. The company caters to the agriculture, power generation, and industrial sectors. On August 1, 2017, it acquired 76% stake in LGMPL and is likely to acquire the remaining stake over the next five years, in line with the share purchase agreement. KOEL has set up an NBFC business through ARKA, with equity infusion of Rs 526.5 crore as on March 31, 2020. 

 

For the nine months through December 2020, on a consolidated basis, net profit was Rs 119 crore on operating income of Rs 2,209 crore, against Rs 134 crore and Rs 3,379 crore, respectively, in the corresponding period of the previous fiscal.

Key Financial Indicators*

Particulars

Unit

2020 #

2019

Revenue

Rs crore

3,331

3,630

PAT

Rs crore

152

184

PAT margin

%

4.6

5.1

Adjusted debt/adjusted networth

Times

0.06

0.05

Interest coverage

Times

28.4

30.2

*CRISIL-adjusted consolidated numbers #Provisional

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL Ratings' complexity levels are assigned to various types of financial instruments. The CRISIL Ratings' complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL Ratings' complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments.

Annexure - Details of Instrument(s)

ISIN

Name of instrument

Date of allotment

Coupon rate (%)

Maturity date

Issue size (Rs crore)

Complexity

Rating assigned with outlook

NA

Cash Credit

NA

NA

NA

313

NA

CRISIL AA/Stable

NA

Letter of credit & Bank Guarantee

NA

NA

NA

478

NA

CRISIL A1+

NA

Commercial Paper

NA

NA

7 to 365 days

100

Simple

CRISIL A1+

 

Annexure – List of entities consolidated

Names of Entities Consolidated

Extent of Consolidation

Rationale for Consolidation

KOEL Americas Corp

Full

Common management and close operational linkages

LGMPL

Full

Common management and close operational linkages

 

Annexure - Rating History for last 3 Years
  Current 2021 (History) 2020  2019  2018  Start of 2018
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund Based Facilities LT 313.0 CRISIL AA/Stable   -- 29-10-20 CRISIL AA/Stable 13-12-19 CRISIL AA/Stable 03-09-18 CRISIL AA/Stable CRISIL AA/Stable
      --   -- 06-07-20 CRISIL AA/Stable 09-04-19 CRISIL AA/Stable   -- --
Non-Fund Based Facilities ST 478.0 CRISIL A1+   -- 29-10-20 CRISIL A1+ 13-12-19 CRISIL A1+ 03-09-18 CRISIL A1+ CRISIL A1+
      --   -- 06-07-20 CRISIL A1+ 09-04-19 CRISIL A1+   -- --
Commercial Paper ST 100.0 CRISIL A1+   -- 29-10-20 CRISIL A1+   --   -- --
      --   -- 06-07-20 CRISIL A1+   --   -- --
All amounts are in Rs.Cr.
Annexure - Details of Bank Lenders & Facilities
Facility Amount (Rs.Crore) Name of Lender Rating
Cash Credit 25 Axis Bank Limited CRISIL AA/Stable
Cash Credit 3 Bank of Maharashtra CRISIL AA/Stable
Cash Credit 125 HDFC Bank Limited CRISIL AA/Stable
Cash Credit 15 ICICI Bank Limited CRISIL AA/Stable
Cash Credit 50 Kotak Mahindra Bank Limited CRISIL AA/Stable
Cash Credit 75 State Bank of India CRISIL AA/Stable
Cash Credit 20 The Hongkong and Shanghai Banking Corporation Limited CRISIL AA/Stable
Letter of credit & Bank Guarantee 28 Axis Bank Limited CRISIL A1+
Letter of credit & Bank Guarantee 45 Bank of Maharashtra CRISIL A1+
Letter of credit & Bank Guarantee 110 HDFC Bank Limited CRISIL A1+
Letter of credit & Bank Guarantee 110 ICICI Bank Limited CRISIL A1+
Letter of credit & Bank Guarantee 125 State Bank of India CRISIL A1+
Letter of credit & Bank Guarantee 30 State Bank of India CRISIL A1+
Letter of credit & Bank Guarantee 30 The Hongkong and Shanghai Banking Corporation Limited CRISIL A1+

This Annexure has been updated on 20-Sep-2021 in line with the lender-wise facility details as on 06-Sep-2021 received from the rated entity.

Criteria Details
Links to related criteria
CRISILs Approach to Financial Ratios
Rating criteria for manufaturing and service sector companies
CRISILs Bank Loan Ratings - process, scale and default recognition
CRISILs Criteria for Consolidation
CRISILs Bank Loan Ratings

Media Relations
Analytical Contacts
Customer Service Helpdesk
Saman Khan
Media Relations
CRISIL Limited
D: +91 22 3342 3895
B: +91 22 3342 3000
saman.khan@crisil.com

Naireen Ahmed
Media Relations
CRISIL Limited
D: +91 22 3342 1818
B: +91 22 3342 3000
 naireen.ahmed@crisil.com
Anuj Sethi
Senior Director
CRISIL Ratings Limited
B:+91 44 6656 3100
anuj.sethi@crisil.com

Sameer Charania
Director
CRISIL Ratings Limited
D:+91 22 4097 8025
sameer.charania@crisil.com

Ashish Kumar
Manager
CRISIL Ratings Limited
D:+91 22 4040 5815
Ashish.Kumar1@crisil.com		Timings: 10.00 am to 7.00 pm
Toll free Number:1800 267 1301

For a copy of Rationales / Rating Reports:
CRISILratingdesk@crisil.com
 
For Analytical queries:
ratingsinvestordesk@crisil.com

 

Note for Media:
This rating rationale is transmitted to you for the sole purpose of dissemination through your newspaper / magazine / agency. The rating rationale may be used by you in full or in part without changing the meaning or context thereof but with due credit to CRISIL Ratings. However, CRISIL Ratings alone has the sole right of distribution (whether directly or indirectly) of its rationales for consideration or otherwise through any media including websites, portals etc.


About CRISIL Ratings Limited (A subsidiary of CRISIL Limited)

CRISIL Ratings pioneered the concept of credit rating in India in 1987. With a tradition of independence, analytical rigour and innovation, we set the standards in the credit rating business. We rate the entire range of debt instruments, such as, bank loans, certificates of deposit, commercial paper, non-convertible / convertible / partially convertible bonds and debentures, perpetual bonds, bank hybrid capital instruments, asset-backed and mortgage-backed securities, partial guarantees and other structured debt instruments. We have rated over 33,000 large and mid-scale corporates and financial institutions. We have also instituted several innovations in India in the rating business, including rating municipal bonds, partially guaranteed instruments and infrastructure investment trusts (InvITs).
 
CRISIL Ratings Limited ("CRISIL Ratings") is a wholly-owned subsidiary of CRISIL Limited ("CRISIL"). CRISIL Ratings Limited is registered in India as a credit rating agency with the Securities and Exchange Board of India ("SEBI").
 
For more information, visit www.crisilratings.com 



About CRISIL Limited

CRISIL is a global analytical company providing ratings, research, and risk and policy advisory services. We are India's leading ratings agency. We are also the foremost provider of high-end research to the world's largest banks and leading corporations.

CRISIL is majority owned by S&P Global Inc., a leading provider of transparent and independent ratings, benchmarks, analytics and data to the capital and commodity markets worldwide

For more information, visit www.crisil.com

Connect with us: TWITTER | LINKEDIN | YOUTUBE | FACEBOOK

CRISIL PRIVACY NOTICE
 
CRISIL respects your privacy. We may use your contact information, such as your name, address, and email id to fulfil your request and service your account and to provide you with additional information from CRISIL.For further information on CRISIL’s privacy policy please visit www.crisil.com.

DISCLAIMER

This disclaimer forms part of and applies to each credit rating report and/or credit rating rationale (each a "Report") that is provided by CRISIL Ratings Limited  (hereinafter referred to as "CRISIL Ratings") . For the avoidance of doubt, the term "Report" includes the information, ratings and other content forming part of the Report. The Report is intended for the jurisdiction of India only. This Report does not constitute an offer of services. Without limiting the generality of the foregoing, nothing in the Report is to be construed as CRISIL Ratings providing or intending to provide any services in jurisdictions where CRISIL Ratings does not have the necessary licenses and/or registration to carry out its business activities referred to above. Access or use of this Report does not create a client relationship between CRISIL Ratings and the user.

We are not aware that any user intends to rely on the Report or of the manner in which a user intends to use the Report. In preparing our Report we have not taken into consideration the objectives or particular needs of any particular user. It is made abundantly clear that the Report is not intended to and does not constitute an investment advice. The Report is not an offer to sell or an offer to purchase or subscribe for any investment in any securities, instruments, facilities or solicitation of any kind or otherwise enter into any deal or transaction with the entity to which the Report pertains. The Report should not be the sole or primary basis for any investment decision within the meaning of any law or regulation (including the laws and regulations applicable in the US).

Ratings from CRISIL Ratings are statements of opinion as of the date they are expressed and not statements of fact or recommendations to purchase, hold, or sell any securities / instruments or to make any investment decisions. Any opinions expressed here are in good faith, are subject to change without notice, and are only current as of the stated date of their issue. CRISIL Ratings assumes no obligation to update its opinions following publication in any form or format although CRISIL Ratings may disseminate its opinions and analysis. Rating by CRISIL Ratings contained in the Report is not a substitute for the skill, judgment and experience of the user, its management, employees, advisors and/or clients when making investment or other business decisions. The recipients of the Report should rely on their own judgment and take their own professional advice before acting on the Report in any way. CRISIL Ratings or its associates may have other commercial transactions with the company/entity.

Neither CRISIL Ratings nor its affiliates, third party providers, as well as their directors, officers, shareholders, employees or agents (collectively, "CRISIL Ratings Parties") guarantee the accuracy, completeness or adequacy of the Report, and no CRISIL Ratings Party shall have any liability for any errors, omissions, or interruptions therein, regardless of the cause, or for the results obtained from the use of any part of the Report. EACH CRISIL RATINGS' PARTY DISCLAIMS ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY, SUITABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE. In no event shall any CRISIL Ratings Party be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs) in connection with any use of any part of the Report even if advised of the possibility of such damages.

CRISIL Ratings may receive compensation for its ratings and certain credit-related analyses, normally from issuers or underwriters of the instruments, facilities, securities or from obligors. CRISIL Rating's public ratings and analysis as are required to be disclosed under the regulations of the Securities and Exchange Board of India (and other applicable regulations, if any) are made available on its web sites, www.crisil.com (free of charge). Reports with more detail and additional information may be available for subscription at a fee - more details about ratings by CRISIL Ratings are available here: www.crisilratings.com.

CRISIL Ratings and its affiliates do not act as a fiduciary. While CRISIL Ratings has obtained information from sources it believes to be reliable, CRISIL Ratings does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives and / or relies in its Reports. CRISIL Ratings has established policies and procedures to maintain the confidentiality of certain non-public information received in connection with each analytical process. CRISIL Ratings has in place a ratings code of conduct and policies for analytical firewalls and for managing conflict of interest. For details please refer to: http://www.crisil.com/ratings/highlightedpolicy.html

Rating criteria by CRISIL Ratings are generally available without charge to the public on the CRISIL Ratings public web site, www.crisil.com. For latest rating information on any instrument of any company rated by CRISIL Ratings you may contact CRISIL RATING DESK at CRISILratingdesk@crisil.com, or at (0091) 1800 267 1301.

This Report should not be reproduced or redistributed to any other person or in any form without a prior written consent of CRISIL Ratings.

All rights reserved @ CRISIL Ratings Limited. CRISIL Ratings Limited is a wholly owned subsidiary of CRISIL Limited.

CRISIL Ratings uses the prefix ‘PP-MLD’ for the ratings of principal-protected market-linked debentures (PPMLD) with effect from November 1, 2011 to comply with the SEBI circular, "Guidelines for Issue and Listing of Structured Products/Market Linked Debentures". The revision in rating symbols for PPMLDs should not be construed as a change in the rating of the subject instrument. For details on CRISIL Ratiings' use of 'PP-MLD' please refer to the notes to Rating scale for Debt Instruments and Structured Finance Instruments at the following link: www.crisil.com/ratings/credit-rating-scale.html