Detailed Rationale

CRISIL Ratings’ rating on the bank loan facilities of Kkalpana Industries (India) Limited (KIIL) remains on ‘Rating Watch with Negative Implications’.

 

CRISIL Ratings had placed the rating on watch on December 21, 2020 following the announcement by the company that its board of directors had approved restructuring of the business through a scheme of arrangement wherein the compounding business forming around 97% of revenues of KIIL will be demerged into a separate company, Ddev Plastiks Industries Ltd (DPIL), while KIIL will continue to hold the smaller reprocessing business.  Company is undertaking the demerger process to separately pursue growth opportunities and ensure greater focus on both the business segments which otherwise have no common synergies between them. Further as there are restrictions on the transfer of licenses held for reprocessing of plastic waste, the reprocessing business is being retained in KIIL while the compounding business is being transferred to DPIL. A similar license is also held by a Dubai-based wholly owned subsidiary of KIIL.

 

Each shareholder of KIIL would be issued shares of DPIL in 1:1 ratio, in consideration for the demerger; and DPIL will also be listed with its shareholding mirroring that of KIIL.  KIIL is expected to become debt-free as the reprocessing business requires significantly smaller working capital requirement as compared to the compounding business. However, significant reduction in scale of business post the demerger would impact the overall credit risk profile of KIIL and as a result rating of the company may be lowered by more than one notch from the current rating

 

Presently, KIIL has received the final NCLT approval on the scheme of arrangement and the final order copy is expected shortly. Post receiving the final order copy, company has to complete all necessary ROC filings within 30 days from receipt of the order copy to complete the demerger process.

 

CRISIL Ratings will continue to be in discussions with KIIL's management and will remove the ratings from watch and announce its final action on receipt of the final NCLT order.

 

In the nine months ended December 31, 2021, the company’s operating income was Rs. 1640 crores with operating margins of 4.6% as against Rs. 1059 crores and 3.7% in the corresponding period last fiscal. Interest coverage improved to 2.93 times as on December 31, 2021 vis-à-vis 1.95 times as on December 31, 2020 as the company has no long term borrowings outstanding as on date.

 

The ratings continue to reflect KIIL’s healthy business risk profile driven by its established position in the domestic polyvinyl chloride (PVC) and polyethylene (PE) compounds market, wide range of products, strong clientele consisting of all major wire and cable companies in India, and extensive experience of the promoters in the polymer compounds industry. These strengths are partially offset by exposure to intense competition, susceptibility of profitability to sharp volatility in raw material prices and currency fluctuations, as well as a modest interest coverage ratio.

Analytical Approach

CRISIL Ratings has considered loans from the promoters as 75% equity and 25% debt. CRISIL Ratings has also combined the business and financial risk profiles of KIIL and its 99.99% subsidiary, Plastic Processors and Exporter Pvt Ltd till fiscal 2021, as the two companies are in the same business and have common management and operational linkages.

 

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:

Healthy business risk profile on the back of strong market position, extensive experience of the promoters, wide product range, and strong clientele:

KIIL is promoted by Kolkata-based Surana family that has been associated with the polymer compounding industry for over five decades. Over the years, the promoters have diversified product profile, developed a strong understanding of market dynamics, and established healthy relationships with suppliers and customers. Clientele includes large wire and cable companies such as KEI Industries Ltd, Havells India Ltd, Apar Industries Ltd, and KEC International Ltd; apart from some key international manufacturers.

 

KIIL is the largest polymer compounder in India with capacity of 292,500 tonne per annum (tpa), with market leadership in PE compounds catering to the low- and medium-voltage power cable industry, supported by diversified products used for manufacturing building wires, control and instrumentation cables, and for insulation and jacketing of wires in the wire and cable industry, as well as in the packaging segment. The company’s strong market position is underpinned by large scale of operations (turnover of Rs 1,640 crore in the nine months ended December 31, 2022) and a diverse customer base.

 

Disciplined inventory management and strategic location of facilities:

The company has manufacturing facilities on the east and west coasts of India (West Bengal, Daman, and Silvassa). Strategic location of its plants provides logistical advantages for import of raw materials as well as for export of products. Proximity to suppliers and ports also helps keep a tight control over inventory (20-40 days in the past eight fiscals). Volatility in raw material prices (crude oil derivatives) impacts operating profitability. However, the discipline in inventory management has helped KIIL to protect its business from sharp changes in raw material prices and sustain operating profitability at 4-7% over the past 10 fiscals. 

 

Comfortable capital structure:

Net worth was healthy at Rs 390 crore, gearing healthy at 0.39 time, as on December 31, 2021 as compared to Rs. 349 crores and 0.17 times respectively in the corresponding period in the preceding fiscal. Further, all outstanding term loans have been prepaid by the company. With no major capital expenditure (capex) and effective working capital management backed by timely realization of receivables, capital structure is expected to improve over the medium term.

 

Weaknesses:

Exposure to intense competition in the compounds market and dependence on large players in the oil and gas industry for raw material:

The domestic polymer compounding industry faces steep competition from import from global chemical giants such as Borealis AG, Dow Chemical Company, and Solvay SA. These players have an advantage of large capacity and economies of scale. While these entities mainly cater to specialty grade compounds focused more on high- and extra-high-voltage power cables, KIIL’s business performance remains susceptible to competition from import. Also, the company procures around 70% of its raw material from Reliance Industries Ltd, Indian Oil Corporation Ltd, and ONGC Petro-additions Ltd, leading to low bargaining power with suppliers. 

 

Modest, although improving, interest coverage ratio:

In nine months ended December 31, 2021, adjusted interest coverage ratio, although improved, remains modest at 2.84 times (2-2.5 times in the past five fiscals). Over the medium term, with operating profitability of 4-6% and lower debt level, interest coverage ratio should improve and sustain at over 2.5 times.

 

Susceptibility of profitability to sharp volatility in raw material prices and currency rates:

Raw materials, such as LDPE/HDPE and PVC resin, used to manufacture polymer compounds are crude derivatives and a significant portion of the same is imported. Input prices and currency exchange rates have been volatile in the past because of sharp fluctuations in crude oil prices. While the company has demonstrated discipline in working capital management in the past, its profitability is susceptible to any sharp movement in raw material prices and currency rates. 

Liquidity: Adequate

Cash accrual is Rs 36 crore whereas all term loans have been prepaid in fiscal 2021. On a consolidated basis (KIIL+DPIL), cash and cash equivalents is expected to remain above Rs. 50 crores over the next two fiscals. The company has no major capex over the medium term across both reprocessing and compounding segments, and any maintenance capex is expected to be funded mainly through internal accrual.

Rating Sensitivity factors

Upward factors:

• Sharp and sustained improvement in scale at a consolidated level with improved operating profitability (in case the demerger doesn’t go through)
• Improvement in debt metrics such as interest coverage and TOL/TNW i.e. sustained improvement of interest coverage above 3 times

 

Downward factors:

• Significant reduction in scale of business owing to the demerger
• Deterioration in operating performance
• Debt funded capex leading to moderation in capital structure and adverse impact on debt protection metrics; interest coverage falling to below 2 times

About the Company

Incorporated in 1985 and promoted by the late Mr D C Surana and his son, Mr Narrindra Surana in Kolkata, KIIL established a unit in Daman for manufacturing PVC compounds. Sustained expansion has resulted in a diverse product portfolio consisting of PE and PVC compounds, master batches, engineering plastics, and reprocessed compounds. The company has seven manufacturing plants in West Bengal, Daman and Diu, Dadra and Nagar Haveli, and Noida; with an aggregate installed capacity of 292,500 TPA.

 

In the nine months ended December 31, 2021, the company’s operating income was Rs. 1640 crores with operating margins of 4.6% as against Rs. 1059 crores and 3.7% in the corresponding period last fiscal.

Any other information: Not applicable

ISIN	Name of Instrument	Date of Allotment	Coupon Rate (%)	Maturity Date	Issue Size (Rs Cr)	Complexity Level	Rating Assigned with Outlook
NA	Cash Credit	NA	NA	NA	147	NA	CRISIL A-/Watch Negative
NA	Letter of credit & Bank Guarantee	NA	NA	NA	535	NA	CRISIL A2+/Watch Negative