Detailed Rationale

CRISIL Ratings has revised its outlook on the long-term bank facilities of Kores India Limited (Kores) to ‘Stable’ from 'Negative' while reaffirming the rating at ‘CRISIL BBB’ and has reaffirmed its ‘CRISIL A3+’ rating on the short-term bank facilities. Also, CRISIL Ratings has revised its outlook on the Rs 25 crore fixed deposits to ‘Stable’ from 'Negative' while reaffirming the rating at ‘FA-/Stable’. Moreover, it has withdrawn its rating on the Rs 15.1 crore proposed fund-based limit at the company’s request and in line with the CRISIL Ratings withdrawal policy.

 

The outlook revision reflects normalisation of business activities after the Covid-19 pandemic related disruptions. The business risk profile is supported by presence in diverse sectors such as conventional, foundry, engineering, and pharmaceutical and chemical (PCD), which cater to diverse end-user industries such as automobiles (auto), stationery for schools, colleges and offices, oil and gas, and pharma. Revival in demand across these segments has benefitted the company in terms of higher revenue and better margin.

 

Revenue is estimated to have grown 32% year-on-year to Rs 754 crore in fiscal 2022 driven by healthy growth across key divisions. The foundry division, which majorly caters to the auto segment (~60% revenue comes from this segment) grew by 54% to Rs 303 crore in fiscal 2022, as against subdued performance in fiscals 2020 and 2021 owing to slowdown in the auto sector and pandemic related disruptions. The conventional stationery division grew by 13% to Rs 200 crore in fiscal 2022 despite the impact of the second wave of Covid-19 in the first quarter of this fiscal. However, with opening of schools, colleges and offices, the revenue of this division is expected to further improve over the medium term. The PCD division booked revenue of Rs 126 crore in fiscal 2022, registering 39% growth, and is planning to undertake the European Directorate for the Quality of Medicines & HealthCare (EDQM) audit in fiscal 2023. If cleared, this will help increase export to Europe leading to higher revenue and profitability. Revenue for the engineering division, which mainly caters to the mining sector, remained range bound at Rs 37 crore; however it continued to remain highly profitable with operating margin at ~30%. Kores is planning to enter the contract drilling segment, which should increase the revenue of the engineering division.

 

The operating margin rose to an estimated 7.6% in fiscal 2022 from 6.3% in fiscal 2021, driven by improvement in revenue leading to higher operating leverage. With revival in demand, the company is able to pass on increase in raw material cost to customers, further supporting the profitability going forward. The operating margin is expected to be maintained around 6-7% over the medium term. 

 

The financial risk profile improved with higher accrual driven by increase in revenue and profitability. Networth rose to an estimated Rs 136 crore as on March 31, 2022, from Rs 114 crore a year earlier, while debt reduced to Rs 177 crore from Rs 202 crore. With steady increase in cash accrual and nil major debt-funded capital expenditure (capex) plans, debt is expected to decrease, strengthening the capital structure. This, along with growing scale and improving profitability, should lead to further improvement in the financial risk profile over the medium term.

 

The ratings continue to reflect the diverse revenue profile of the company and the extensive experience of the promoters in various businesses. These strengths are partially offset by susceptibility to economic downturns, regulatory challenges in the pharma industry, intense competition and volatility in raw material prices; and average financial risk profile.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of Kores and its subsidiaries, collectively referred to herein as Kores, as the entities are in a similar line of business and have operational and financial synergies. Promoter loans have been treated as debt as it might be paid back in case of excess cash flows.

 

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:

• Diverse revenue profile

The company broadly operates in four segments: conventional, foundry, engineering and PCD. This mitigates the impact of slowdown or cyclicality in any segment on the performance. When the performance of PCD was impacted in fiscal 2018 because of plant closure by Maharashtra Pollution Control Board (MPCB), the foundry division saw healthy growth and the conventional division grew steadily. Similarly, when the foundry division was impacted in fiscal 2019 due to slowdown in the auto sector, new launches in the conventional and engineering businesses partially offset the impact. Majority of the segments were impacted owing to the pandemic, with the impact being the highest on the conventional segment, which manufactures items for offices, schools and colleges. However, performance began picking up from the second half of fiscal 2022 with normalising of demand and opening of schools, colleges and offices.

 

• Extensive experience of the promoters

The promoters have extensive experience in various businesses and established relationships with customers and suppliers. Under the leadership of the Thirani family members, the company diversified into various segments such as office automation, foundry, textiles, engineering, real estate, pharma, art materials and writing instruments. The management has, over the years, taken timely decisions to exit from unviable businesses.

 

Weaknesses:

• Susceptibility to economic cycles and regulatory changes

Growth has been highly volatile in the past due to challenges across business segments. The foundry and engineering divisions are dependent on the auto and mining industries, respectively, and slowdown in these sectors could impact growth. Besides economic cyclicality, Kores is vulnerable to changes in regulatory policies. The performance of the pharma division declined due to non-compliance with the EDQM audit, affecting sales in Europe. The foundry division was impacted by slowdown in the auto sector, which resulted in lower capacity utilisation. However, with easing of supply chain constraints, the auto sector is likely to witness further growth over the medium term benefitting the foundry segment. Kores is undertaking the EDQM audit in fiscal 2023, which if cleared, will lead to increase in export and in revenue and profitability. In the engineering division, it is looking to enter the contract drilling market which if executed would lead to higher revenue. 

 

• Intense competition in key segments and exposure to volatile raw material prices

Kores faces competition from established players as well as unorganised sector in its key business segments, which keeps the operating margin modest at 4-7%. In the pharma division, cheaper imports of intermediates from China have added to pricing pressure. In the stationery segment, intense competition from the unorganised sector and established players in the organised sector restricts its pricing power. This is only partially offset by strong relationships with established customers. Furthermore, volatility in raw material prices may constrain profitability as limited bargaining power limits ability to pass on price increases to customers.

 

• Average financial risk profile

Total debt reduced to an estimated Rs 177 crore as on March 31, 2022, from Rs 202 crore a year earlier, while networth improved to an estimated Rs 136 crore from Rs 114 crore. This coupled with prudent working capital management has led to decline in estimated gearing to 1.31 times as on March 31, 2022, from 1.78 times a year earlier.

 

The financial risk profile will be sustained over the medium term through continued reduction in debt and steady accretion to reserve.

Liquidity: Adequate

Liquidity will remain adequate over the medium term. Debt obligation of Rs 18 crore and capex of Rs 5-10 crore is expected to be funded through projected cash accrual of Rs 30 crore per fiscal. Bank lines of Rs 74 crore were utilised ~70% on average over the 12 months through March 2022, and cash surplus stood at more than Rs 10 crore as on March 31, 2022. The company also proactively manages its liquidity and the promoters are expected to infuse funds into the company in case there is any shortfall.

Outlook: Stable

CRISIL Ratings believes the credit risk profile of Kores will remain stable driven by revival in demand in key end-user industries such as automobiles, opening of schools, colleges and offices, and higher offtake from PCD. The financial risk profile expected to improve with higher cash accrual strengthening the capital structure and debt protection metrics.

Rating Sensitivity factors

Upward factors

• Sustained improvement in revenue with operating margin sustained at over 6%.
• Further deleveraging resulting in strengthening of capital structure and debt protection metrics.

 

Downward factors

• Material reduction in revenues with operating margin falling below 5% impacting cash generation.
• Debt-funded capex or acquisition leading to substantial increase in gearing and worsening of debt protection metrics.

About the Company

Kores was established in 1936 as a subsidiary of the Austrian company, Kores Holding Zug AG. It initially manufactured office stationery. In 1956, it was acquired by the late Mr K L Thirani and the company has since diversified into distribution of office and banking automation products, real estate, pharma, and foundry and fabrication of drilling-related equipment. Mr Anand Kumar Thirani is the managing director. In fiscal 2021, 35% of the total revenue came from the conventional segment, 39% from the foundry division, 18% from pharma, and 8% from engineering businesses.

Key Financial Indicators (consolidated)

As on / for the period ended March 31		2021	2020
Operating income	Rs crore	571	601
Reported profit after tax (PAT)	Rs crore	3	-10
PAT margin	%	0.5	-1.61
Adjusted debt / adjusted networth	Times	1.78	1.97
Interest coverage	Times	1.74	1.25

 

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs crore)	Complexity level	Rating assigned with outlook
NA	Term Loan	Sep-19	9.00%	Aug-25	3	NA	CRISIL BBB/Stable
NA	Term Loan	Sep-19	8.00%	Apr-22	1.86	NA	CRISIL BBB/Stable
NA	Term Loan	Sep-19	8.00%	Apr-22	1.33	NA	CRISIL BBB/Stable
NA	Term Loan	Sep-19	8.00%	Apr-22	2.67	NA	CRISIL BBB/Stable
NA	Term Loan	Sep-19	11.80%	Aug-21	3.33	NA	CRISIL BBB/Stable
NA	Term Loan	Sep-19	10.00%	Oct-22	4.68	NA	CRISIL BBB/Stable
NA	Loan Against Property	Sep-19	8.25%	May-26	17.85	NA	CRISIL BBB/Stable
NA	Cash Credit & Working Capital Demand Loan*	NA	NA	NA	74.00	NA	CRISIL BBB/Stable
NA	Proposed Fund-Based Bank Limits	NA	NA	NA	15.1	NA	Withdrawn
NA	Letter of Credit	NA	NA	NA	35.00	NA	CRISIL A3+
NA	Bank Guarantee	NA	NA	NA	40.00	NA	CRISIL A3+
NA	Fixed Deposits	NA	NA	NA	25.00	NA	FA-/Stable

*includes overdraft facility

Annexure – List of entities consolidated

Names of entities consolidated	Extent of consolidation	Rationale for consolidation
JK Gypsum Pvt Ltd	Full	Wholly owned subsidiary
Cast Tech Casting Pvt Ltd	Full	Associate company