RATING RATIONALE
24Jun2022
Deepak International Ltd
Brickwork Ratings upgrade the ratings for the Bank Loan Facilities of Rs. 53.03 Crs. of Deepak International Ltd
Particulars| Facilities** | Amount (Rs.Crs.) | Tenure | Rating# | ||
|---|---|---|---|---|---|
| Previous | Present | Previous (26 Mar 2021) |
Present | ||
| Fund Based | 18.71 | 7.03 | Long Term |
BWR BBB- /Stable
Reaffirmation |
BWR BBB
/Stable Upgrade |
| (12.00) | (5.00) | ||||
| 27.00 | 29.00 | Short Term |
BWR A3
Reaffirmation |
BWR A3 +
Upgrade |
|
| Non Fund Based | 16.00 | 17.00 | Short Term |
BWR A3
Reaffirmation |
BWR A3 +
Upgrade |
| (27.00) | (20.00) | ||||
| Grand Total | 61.71 | 53.03 | (Rupees Fifty Three Crores and Three lakhs Only) | ||
**Details of Bank Loan facilities,consolidation or instruments are provided in Annexure
RATING ACTION / OUTLOOK
BWR had undertaken the Bank Loan rating of Deepak International Limited (DIL, or ‘the company’) for the loan facilities of Rs.53.03 Cr. and has upgraded the ratings to BWR BBB; Stable/ BWR A3+, covering fund based as well as non-fund based facilities. The upgrade takes into account healthy scale-up of operations in FY21 and FY22 (Prov.) coupled with a steady improvement in the capital structure and debt coverage indicators. The ratings continue to derive strength from the experienced promoters and long track record of operations of the company. These rating strengths are, however, partially offset by modest profit margins which remain susceptible to any adverse fluctuations in the raw material prices and foreign exchange fluctuations, and the hazardous nature of the lead-recycling operations.
Outlook: Stable
BWR believes that DIL's business & financial risk profile is likely to be maintained over the medium term. The 'Stable' outlook indicates a low likelihood of rating change over the medium term. The rating outlook might be revised to 'Positive' if the revenues and profit show sustained and significant improvement. The rating outlook may be revised to 'Negative' if the revenues and profitability margins decline significantly and/ or there is a significant deterioration in the solvency profile of the company.
KEY RATING DRIVERSCredit Strengths:
-
Experienced promoters and long-track record of operations :
The promoters of DIL have been engaged in the manufacturing of lead -acid batteries industry for over three decades, and have a track record of withstanding industry cycles. This has enabled the company to establish long term relationships and receive repetitive orders from various industry majors. The operations are managed by its directors who have industry experience of upto 4 decades. The directors are assisted by a team of experienced professionals for various domains.
-
Healthy scale-up of operations in FY21 and FY22 (Prov.) :
The operating income of the company has grown at a healthy CAGR (compound annual growth rate) of 33.16% in the FY20-FY22 period. This has been on the back of increased orders received from the customers. In FY20, the company expanded its marketing operations in the Southern part of India, which resulted in increased orders from the automobile segment. In FY23, till May 26, 2022, the company has achieved an operating income of ~Rs.52 cr. The company is having orders amounting to ~Rs.23 cr., proposed to be executed by the end of June-2022.
The company had planned a capex with a total project cost of ~Rs.24 Crs. for setting up a new unit to manufacture automotive batteries for 2-wheelers. However, due to the Covid- 19 pandemic, the project got delayed and management decided to change the scope of the project, with the cost of the project revised to Rs.18 cr. The project achieved commercial operations in Dec-2021 (within the revised time estimates). The capex has resulted in increased installed capacities from 78,00,000 kgs/ annum to 1,17,00,000 kgs/ annum, which is expected to support the increased demand going forward.
-
Improvement in the overall solvency position of the company :
On account of low reliance on external debt and accretion of profits to the networth, the overall solvency profile of the company has shown a steady improvement. The overall gearing ratio of the company stood comfortable and improved gradually to 0.29x, as on March 31, 2022 (Prov.) from 0.80x, as on March 31, 2020. The ISCR (Interest Service Coverage ratio) of the company also improved considerably to 4.3x in FY22 (Prov.), from 1.9x in FY20. This has been on the back of increased profitability generated by the company and low reliance on outside debt resulting in lower interest expenses.
-
Hazardous nature of lead-recycling operations :
Lead, which is a highly toxic and polluting material, is the primary raw material for manufacturing batteries. Hence handling lead requires adherence to pollution control norms and the company has to incur additional costs for managing the environmental impacts of the material. Regular checks are done by the authorities and approvals are given based on the assessments done.
-
Competitive nature of the industry, with susceptibility of profitability margins to foreign exchange fluctuations and volatility in raw material price :
DIPL’s profitability margins remain under pressure because of the intense competition in the industry. Though the operating profit margins of the company improved slightly from 3.4% in FY20 to 3.55% in FY21, it declined to 2.73% in FY22 (Prov.) on account of increased raw material costs and manufacturing expenses. Furthermore, any sharp adverse movement in the price of lead, a key raw material in lead-acid batteries, may affect its profitability margins going forward. Apart from that, the company derived 25.93% of its total operating income (in FY22) from the export of batteries and bicycles & bicycle parts (trading). On the other hand, the majority procurement is from the domestic market. This exposes the profitability margins of the company to any adverse fluctuations in the foreign exchange prices. However, the company’s export orders are 100% backed by Letter of Credits and the company also avails forward contract limits from time to time, to hedge itself from any adverse impact of currency fluctuations.
For arriving at its ratings, BWR has applied its rating methodology as detailed in the Rating Criteria detailed below (hyperlinks provided at the end of this rationale).
RATING SENSITIVITIES
Going forward the company’s ability to improve the scale of operations and profitability as envisaged, strengthen its overall credit profile and manage its working capital requirements efficiently would be the key rating sensitivities.
- Positive:
The ratings may be upgraded if the company is able to achieve significant growth in revenue and improvement in profitability margins resulting in improvement in cash accruals and overall improvement in the financial risk profile and the liquidity profile.
- Negative:
The ratings may be downgraded if there is any steep decline in the revenue from operations, profitability margins, and solvency position.
LIQUIDITY INDICATORS - Adequate
The average utilization of its cash credit limits stood at around 45%, respectively over the past nine months period ended May 2022. DIL generated net cash accruals of around Rs.5.30 Crs in FY22, against the repayment obligation of Rs.3.23 Cr. in FY22. The company has a repayment obligation of Rs.2.98 Cr. in FY23, which is expected to be met through the cash accruals. Further, the company has made prepayments of Rs.1.60 Cr., till June 2022, for the term loans availed by it. Free cash and bank balance as on June 15, 2022 stood at Rs.2.50 crore. As on June 15, 2022, the outstanding balance of packing credit stood at Rs.7.00 crore and of cash credit limit stood at Rs.(0.20 crore), providing liquidity cushion to the company. There is no capex planned in the near future.
ABOUT THE ENTITYDIL was incorporated as a limited company in November 1976 by Mr. Deepinder Singh Ranger in Ludhiana. The company is engaged in manufacturing and export of lead-acid batteries at its plant located at Sansarpur, District Kangra, Himachal Pradesh, with an installed capacity of 117 lakh pieces of dry lead acid batteries per annum as on March 31, 2022. It is also engaged in trading of bicycles and its spare parts at Ludhiana. 88% of the turnover is from sale of batteries. The company is ISO 9001:2015 certified. The company requires lead, container, lid, acids, chemicals, etc as its key raw materials. The same are directly procured from suppliers based in Haryana, Himachal pradesh and Delhi.
DIL was a partner in a firm named “Deepak Power Storage Enterprises (DPSC)”. After the dissolution of the DPSC in February 2013, DIL took over the operations of DPSC w.e.f March 01, 2013.
KEY FINANCIAL INDICATORS (Standalone)| Key Parameters | Units |
FY 21-22 (Provisional) |
FY 20-21 (Audited) |
|---|---|---|---|
| Operating Revenue | Rs.Crs. | 311.61 | 229.04 |
| EBITDA | Rs.Crs. | 8.50 | 8.12 |
| PAT | Rs.Crs. | 3.12 | 1.73 |
| Tangible Net Worth | Rs.Crs. | 40.46 | 37.33 |
| Total Debt/Tangible Net Worth | Times | 0.29 | 0.47 |
| Current Ratio | Times | 1.36 | 1.33 |
RATING HISTORY FOR THE PREVIOUS THREE YEARS (including withdrawal and suspended)
| Facilities | Current Rating (2022) | 2021 | 2020 | 2019 | |||||
|---|---|---|---|---|---|---|---|---|---|
| Type | Tenure | Amount (Rs.Crs.) |
Rating | Date | Rating | Date | Rating | Date | Rating |
| Fund Based | LT | 7.03 |
BWR BBB/Stable
(Upgrade) |
26Mar2021 |
BWR BBB- Stable
(Reaffirmation) |
NA |
NA
|
22Jan2019 |
BWR BBB- Stable
(Upgrade) |
| 0.00 |
NA
|
NA |
NA
|
NA |
NA
|
23Dec2019 |
BWR BBB- Stable
(Reaffirmation) |
||
| FB SubLimit | LT | (5.00) |
BWR BBB/Stable
(Upgrade) |
NA |
NA
|
NA |
NA
|
NA |
NA
|
| Fund Based | ST | 29.00 |
BWR A3+
(Upgrade) |
26Mar2021 |
BWR A3
(Reaffirmation) |
NA |
NA
|
NA |
NA
|
| Non Fund Based | ST | 17.00 |
BWR A3+
(Upgrade) |
26Mar2021 |
BWR A3
(Reaffirmation) |
NA |
NA
|
22Jan2019 |
BWR A3
(Upgrade) |
| 0.00 |
NA
|
NA |
NA
|
NA |
NA
|
23Dec2019 |
BWR A3
(Reaffirmation) |
||
| NFB SubLimit | ST | (20.00) |
BWR A3+
(Upgrade) |
NA |
NA
|
NA |
NA
|
NA |
NA
|
| Grand Total | 53.03 | (Rupees Fifty Three Crores and Three lakhs Only) | |||||||
Press Release, as on 05Apr2022
Rating advisory issued on April 05, 2022 on account of non receipt of information
COMPLEXITY LEVELS OF THE INSTRUMENTS - Simple
BWR complexity levels are meant for educating investors. The BWR complexity levels are available at www.brickworkratings.com / download / ComplexityLevels.pdf. Investors queries can be sent to info@brickworkratings.com.
Hyperlink/Reference to applicable Criteria| Analytical Contacts | |
|---|---|
|
Lovely Gupta Ratings Analyst lovely.g@brickworkratings.com |
Sudeep Sanwal Associate Director - Ratings sudeep.s@brickworkratings.com |
| 1-860-425-2742 | media@brickworkratings.com | |
| SL.No. | Name of the Bank/Lender | Type Of Facilities | Long Term(Rs.Crs.) | Short Term(Rs.Crs.) | Total(Rs.Crs.) | |
|---|---|---|---|---|---|---|
| 1 | Punjab National Bank | Term LoanOut-standing | 7.03 | _ | 7.03 | |
| 2 | Punjab National Bank | Bank GuaranteeSanctioned | _ | 12.00 | 12.00 | |
| 3 | Punjab National Bank | Bank GuaranteeProposed | _ | 3.00 | 3.00 | |
| 4 | Punjab National Bank | Letter of CreditSanctioned | _ | 1.00 | 1.00 | |
| 5 | Punjab National Bank | Forward ContractSanctioned | _ | 1.00 | 1.00 | |
| 6 | Punjab National Bank | Covid -19 Emergency Line CreditSanctioned | _ | _ | 0.00 | |
| 7 | Punjab National Bank | PC/PCFCSanctioned | _ | 20.00 | 20.00 | |
| Sub-Limit (Cash Credit Limit) Sanctioned | (5.00) | |||||
| Sub-Limit (FDBP/FUDBP/ PCFC/FCBRD ) Sanctioned | (20.00) | |||||
| 8 | Punjab National Bank | PC/PCFCProposed | _ | 9.00 | 9.00 | |
| Total | 7.03 | 46.00 | 53.03 | |||
| TOTAL (Rupees Fifty Three Crores and Three lakhs Only) | ||||||
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