KESORAM INDUSTRIES LIMITED

Transcription

1 Ratings KESORAM INDUSTRIES LIMITED Instruments/Facilities Amount (Rs. crore) Ratings 1 Remarks Facilities Long-term Bank Facilities 2,918.1 (enhanced from 2,596.8) Short-term Bank Facilities (enhanced from 450.0) Long/Short-term Bank Facilities 1,300.0 (enhanced from 1,000.0) Total facilities 4,818.1 CARE A (Single A) CARE A1 (A One) CARE A / A1 (Single A /A One ) Rating Rationale The ratings continues to draw support from long & established track record of the company, group support, diversified product profile & well-accepted brands, operational efficiency arising from backward integration (limestone and power) for cement division and satisfactory performance of the cement unit. The ratings also factor in the subdued financial performance of the company due to continual losses in the tyre division (though improvement being witnessed) leading to deterioration in the capital structure, risk associated with the ongoing as well as the recently completed projects and challenging operating environment for the domestic cement & tyre industries. Ability to turnaround the tyre division and derive benefits from the added tyre capacities, rationalise the debt profile and improve the capital structure shall remain the key rating sensitivities. Background Kesoram Industries Ltd (KIL), the flagship company of the B.K. Birla group, is a diversified conglomerate engaged in manufacturing of tyres & tubes, cement, viscose filament rayon yarn (VFRY), transparent paper and spun pipes. The primary products are tyre and cement, which accounted for 63% and 33% respectively of gross turnover in FY12 (refers to the period April 1 to March 31). KIL s five cement manufacturing units four at Sedam in Karnataka & one at Basantnagar in Andhra Pradesh, have an aggregate capacity of 7.25 mn tonnes per annum. The company s five tyre units, four at Haridwar, Uttaranchal and one at Balasore, Orissa together have a capacity to produce 1,21,02,000 tyres per annum. Most of the plants have ISO 9001/9002 and ISO accreditations. Credit Risk Assessment Long & established track record of the company and group support KIL, the flagship company of the B.K. Birla group, was set up in the year 1919 and has been successfully operating over the last nine decades. The company has grown significantly over this period and is currently, one of the leading tyre & cement manufacturers in India. The B. K. Birla group is one of India s leading industrial groups with major interests in tea, chemicals & fertilisers, cement, tyres, textiles, vegetable oils, etc, with an aggregate turnover of about Rs.10,000 crore (FY12). Mr B. K. Birla, the promoter & the Chairman of KIL, is an eminent industrialist who has been in the Board of KIL since Being a part of the B.K. Birla group, KIL enjoys financial flexibility and has been able to raise resources in times of need. As per the inheritance plan, Mr Kumar Mangalam Birla (grandson of B. K. Birla) is likely to take over the reins of the company. Mr Kumar Mangalam Birla is an eminent industrialist owning and managing a host of renowned companies across diverse sectors as a part of the Aditya Birla Group having aggregate turnover of over Rs.1,50,000 crore. 1 Complete definition of the ratings assigned are available at and other publications of CARE 1

2 Diversified product profile and well-accepted brands KIL has a diversified product profile, and is engaged in manufacturing automobile tyres and tubes, cement, VFRY, transparent paper and spun pipes at plants spread out at seven locations across the country. The company generally produces three grades of cement, viz, 53/43 grades of OPC and PPC and sells under the brand name Vasavdatta and Birla Shakti, which are wellaccepted brands in the market. KIL produces more than 50 varieties of tyre products, major being for heavy vehicles. Tyres are sold under the brand name, Birla Tyres, which has already gained prominence in the market. Diversified product profile helps the company in mitigating the downturn in a particular industry. Operational efficiency arising from backward integration (limestone and power) for cement division KIL sources limestone from its two leasehold mines (one each at both the locations) against royalty payment. The limestone reserves at both the mines extend beyond economic life of the respective plants. The said mines are located in proximity of the clinker plants, thereby enabling the company to optimise cost pertaining to its mining activities. Availability of high quality of limestone enables higher blending ratio thereby resulting in higher cement production. Cement production, being power intensive, KIL needs uninterrupted supply of power which is ensured by various CPPs installed at all its plant locations (for cement), which meets about the entire annual power requirement of the company. The cheaper cost of power generated in CPPs vis-à-vis power from GRID reduces power cost leading to improvement in operational efficiency of the company. Satisfactory performance of the cement unit The cement division of the company has shown significant growth of 11.4% in gross sale (from Rs1,795.8 crore in FY11 to Rs.2,060.5 crore in FY12) & 60.2% in PBIT (from Rs crore in FY11 to Rs crore in FY12) led by increased cement realization (average cement price was up by about Rs.40/bag in FY12). Financial performance and margins of the cement division of the company improved significantly (from 15.27% in FY11 to 21.32% in FY12). Despite oversupply situation, this has been possible due to low base, superior product mix, established brand name and initiation of strategic marketing policies. Subdued financial performance owing to continued losses in tyre division; however, improving trend Financial performance of the company in FY12 is characterised by operating losses and continual net loss owing to continual subdued performance in the company s tyre division. The financial performance of the company`s tyre division continued to remain grim even in FY12 after remaining dismal in FY11 as a result of low market share in high-margin replacement division, low capacity utilization (owing to substantial enhancement in capacity in the last three years) and high input (rubber) cost. Although sale and realisation for tyre increased by 9.5% and 16% respectively in FY12, low capacity utilisation resulted in underabsorption of fixed cost which, coupled with high interest cost led to negative PBIT of Rs.617 crore for the division and cash loss of Rs.400 crore (on aggregate basis) during FY12. However, on the back of reduction in the prices of raw material (natural rubber constituted 50.4% of the total cost of raw material of the company in FY12) and change in target segment, an improving trend is being witnessed since Q4F12 in the company`s tyre division. Despite net loss, the overall performance of KIL has shown an improvement in H1FY13 from H1FY12. While net sales increased by 4% in H1FY13 on the back of higher dispatches from the cement division; PBILDT in H1FY13 improved significantly over H1FY12 owing to improvement in the tyre division led by of decline in raw material prices (i.e. rubber) and change in focus on target segment (i.e. increased sales in high margin replacement market segment and reduction in OEM market sale. However, lower absorption of fixed overheads arising out of under utilisation of capacities of tyre division as well as high capital charges led to overall loss. Optimum capacity utilisation of the tyre division, stability in input prices and KIL s ability to tap the replacement market (for tyres) remain crucial. The ability of the company to turnaround the tyre division and achieve improvement in the overall financial risk profile of the company are key rating sensitivities. Deterioration in capital structure and weakening of debt protection metrics The huge projects (mostly in the tyre division) implemented by the company were primarily financed out of loans with high reliance on short-term funds. This coupled with the net loss suffered during FY11 & FY12 resulted in significant deterioration in the capital structure and weakening of debt protection metrics. Furthermore, owing to lower-than-expected cash profits made by the company in FY11 and cash losses in FY12 and H1FY13, the company is resorting to long-term borrowings for refinancing of loans falling due for repayment as also to fund its cash losses thereby, further deteriorating the debt protection metrics. 2

3 The management is contemplating rights issue of about Rs.500 crore and the company has already appointed SBICAPS as merchant banker for the purpose. The draft offer letter for rights issue has been filed with SEBI. The management expects the right issue to be completed before the end of March Infusion of funds by the promoter is crucial and the ability of the company to rationalise & optimize its debt profile is a key rating sensitivity. Risk associated with the ongoing as well as recently completed projects Since the end-2009, KIL has undertaken the capex project of setting up radial tyre units -80MT/day passenger car radial tyre unit at Balasore, Orissa and 85MT/day of truck/bus radial tyres unit at Haridwar, Uttaranchal. The same are kept on hold for long owing to lower-than-expected cash profits earned in FY11 & cash losses in FY12. The company, till March 2012, has incurred an amount of about Rs crore (out of the aggregate project cost of Rs.1,148 crore) on these projects. This apart, the company has added substantial capacities in tyre over the last few years. Successful implementation of the ongoing projects coupled with deriving of benefits from the added tyre capacities shall be a key rating sensitivity. Challenging operating environment for the domestic cement & tyre industries Tyre The tyre industry has faced a challenging scenario in FY11 and FY12 with most of the companies witnessing losses owing to significant increase in raw material costs. However, softening of rubber prices since Q4FY12 has aided tyre manufacturing companies to post better margins of late. Furthermore, it is expected that natural rubber prices would remain stable over FY13 owing to surplus production in major rubber-producing countries. However, adverse forex movement & sluggish sales of automobile companies remains a major concern for these companies. Automobile demand is expected to remain flat in the coming months owing to soaring fuel bill and high interest rates. However, considering that tyres are replaced every year (for heavy vehicles), robust auto sales in FY10 and FY11 will lead to replacement demand for those vehicles now. Hence, continuance of stability in input prices coupled with the ability of the company to increase its sale in replacement division would be crucial for it in achieving its projection. Cement Demand growth for cement in FY12 at 6.5% was marginally better than 5% growth registered in FY11, however, the industry economics suffered with oversupply as a result of substantial addition to capacity which stood around 310 million tonnes as on March 31, The profitability margins also suffered with increased input (coal, petro-products and logistics) cost and relatively lower increase in realisation. Going forward, weak economic fundamentals characterised by rising energy costs, higher freight & distribution costs, depreciation of rupee, slow GDP growth and recent crackdown of Competition Commission of India on major cement players for alleged cartelisation (till date, KIL is not amongst the alleged parties) remain causes of concern for the industry. However, recent run-up in prices and anticipated support to demand from infrastructure & real estate sector are likely to aid the growth of the industry. Prospects Hardship faced by the tyre division continued in FY12 and the same eroded the profit earned by the company`s cement division. Going forward, the company s prospects depend on movement of input prices and its ability to pass on the costs to its customers which shall affect its ability to turnaround the tyre division. Financial Performance (Rs. crore) For the year ended/as on Mar.31, (Audited) Total operating income Total income PBILDT (59.2) Depreciation Interest PBT (152.3) (710.3) PAT (before defd. tax) (152.2) (709.0) PAT (after defd. tax) (210.2) (379.7) 3

4 For the year ended/as on Mar.31, (Audited) Gross cash accruals (GCA) (399.8) Financial Position Equity share capital Tangible networth Total debt Key Ratios Profitability (%) PBILDT / Total operating income (0.99) PAT (after defd. tax) / Total income 4.89 (3.78) (6.35) ROCE (5.75) Solvency Long Term Debt equity ratio Overall gearing ratio Interest coverage (times) (0.15) Total term debt / GCA NM Total debt/gca NM Liquidity Current ratio Adjusted current ratio ** Quick ratio Turnover (days) Avg. collection period Average inventory period Average finished goods inventory period Average creditors period Working capital cycle **excluding current portion of term liabilities DISCLAIMER CARE s ratings are opinions on credit quality and are not recommendations to sanction, renew, disburse or recall the concerned bank facilities or to buy, sell or hold any security. CARE has based its ratings on information obtained from sources believed by it to be accurate and reliable. CARE does not, however, guarantee the accuracy, adequacy or completeness of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. Most entities whose bank facilities/instruments are rated by CARE have paid a credit rating fee, based on the amount and type of bank facilities/instruments. 4

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