December 24, 2019 Hunsur Plywood Works Pvt Ltd: Long term rating upgraded to [ICRA]BB- (Stable) and short term rating reaffirmed Summary of rating action Previous Rated Amount Current Rated Amount Instrument* Rating Action (Rs. crore) (Rs. crore) Long Term – Fund Based [ICRA]BB-(Stable); upgraded 5.56 5.56 Cash Credit from [ICRA] B+(Stable); Short Term – Non-Fund 9.50 9.50 [ICRA]A4; Reaffirmed Based Letter of Credit Total 15.06 15.06 * Instrument details are provided in Annexure-1. Rationale The ratings upgrade mainly considers Hunsur Plywood Works Pvt Ltd’s (HPWPL) steady improvement in profit margins over the last three fiscals, which resulted in a stable accretion to its net worth. The ratings continue to factor in the extensive experience of the promoters and established presence of the company in the timber industry. The ratings also take comfort from the company’s established relationship with its key customer, which lends stability to revenues. The ratings, however, remain constrained by the company’s modest scale of operations and a moderate financial profile, characterised by a modest capital structure and debt coverage indicators. Nevertheless, a major portion of the debt constitutes only unsecured loans from promoters. The ratings are also constrained by high working capital intensity because of high inventory holdings and the margin exposure to fluctuations in foreign currency fluctuation. The ratings further consider intense competition in the industry and the fragmented nature of the business, which limits the company’s pricing flexibility to an extent. The Stable outlook on the [ICRA]BB- ratings reflects ICRA’s opinion that HPWPL will continue to benefit from the extensive experience of its promoters. Key rating drivers Credit strengths Improved profit margins – HPWPL’s operating margin improved to 8.6% in FY2019 from 6.7% in FY2018 owing to better product mix, improved manufacturing facility as well as a reduction in the raw material prices. The net margins improved to 1.8% in FY2019 from 1.6% in FY2018. Extensive experience of promoters in the timber business – Mr. Moiz S Vagh and his family members, the promoters of HPWPL, have over four decades of experience in the timber and plywood industry. The promoters also have controlling stakes in Group entities such as Pyramid Timber Associated Private Limited, The Decorative Laminates India Private 1 Limited and Ferro Foundries Private Limited, which are mainly involved in similar line of business. The company derives most of its revenue (~91% in FY2019) from the sale of plywood and decorative plywood. Long-term association with key customers – Owing to its long presence in the timber business, the promoters have established strong association with dealers and timber marts in Bengaluru, Hyderabad, Mysore and other parts of South India, which supports business volumes. Credit weaknesses Modest scale of operations – HPWPL’s scale of operations continues to remain modest at Rs. 39.4 crore in FY2019, registering a ~2% growth over FY2018. The stagnant growth was because of subdued demand in the real-estate sector in south India, the major sector catered to by HPWPL. The moderate scale of operations restricts its operational and financial flexibility to a major extent. Moderate capital structure and coverage indicators – High inventory holding requirements lead to reliance on external borrowings for funding, resulting in high debt levels and moderate capital structure with a gearing of 2.3 times as on March 31, 2019, and moderate coverage indicators. Nevertheless, a major portion of the debt comprises unsecured loan from promoters. Profitability exposed to forex risk – The company imports ~30-50% of its raw materials from Singapore, Burma, Malaysia, Italy, North Africa and the US, which expose margins to foreign exchange rates fluctuations in the absence of any formal hedging mechanism. Intense competition in a highly fragmented industry limits bargaining power – Intense competition and the fragmented nature of the industry limit its overall bargaining power and the pricing flexibility. Demand for plywood is directly related to the growth of construction and real-estate sectors, which expose the company to sectoral concentration risk to an extent. However, HPWPL’s established relationship with its major customers offers comfort to some extent. Liquidity position: Adequate There was a deficit of Rs. 2.7 crore in the cash flow from operations in FY2019 due to an increase in the working capital requirement. However, the liquidity position is adequate given the low repayment of term loan and working capital utilisation of ~75% between September 2018 and October 2019. Rating sensitivities Positive triggers – ICRA may upgrade HPWPL’s ratings if the firm demonstrates a sustained improvement in its scale by maintaining profitability and improving its working capital intensity. Specific credit metrics that could lead to an upgrade of HPWPL’s rating would be to achieve an interest cover of above 2.5 on a sustained basis. Negative triggers – Negative pressure on HPWPL’s ratings may arise if there is a decline in scale and profitability or further elongation in the working capital cycle. Specific credit metrics that may lead to a downgrade of HPWPL’s rating would be weakening of interest coverage below 1.5 times. 2 Analytical approach Analytical Approach Comments Applicable Rating Methodologies Corporate Credit Rating Methodology Parent/Group Support Not Applicable Consolidation / Standalone The ratings are based on standalone financial profile of the company About the company Established in 1962, HPWPL is promoted by Mr. Moiz S Vagh and family. It manufactures hardwood and decorative plywood, block boards, flush doors and decorative veneers. The company’s manufacturing facility is at Hunsur in Mysore district of Karnataka and is spread over 26 acres of land, with an installed capacity to manufacture 1.0 million square feet of plywood per annum. The company’s products are marketed under the brand, Hunsply. In FY2019, the company reported a net profit of Rs. 0.7 crore on an OI of Rs. 39.4 crore compared to a net profit of Rs. 0.6 crore on an OI of Rs. 38.7 crore in the previous year. Key Financial Indicators FY2018 (Audited) FY2019 (Audited) Operating Income (Rs. crore) 38.7 39.4 PAT (Rs. crore) 0.6 0.7 OPBDIT/ OI (%) 6.7% 8.6% RoCE (%) 14.8% 16.3% Total Debt/ TNW (times) 2.0 2.3 Total Debt/ OPBDIT (times) 4.6 4.4 Interest coverage (times) 1.5 1.7 DSCR 1.6 1.7 Source: HPWPL Status of non-cooperation with previous CRA: Not Applicable Any other information: None 3 Rating history for last three years Current Rating (FY2020) Rating History for the Past 3 Years Instrument Amount Amount Rating FY2019 FY2018 FY2017 Type Rated Outstanding 24-Dec-2019 16-Oct-18 08-Nov-17 02-Nov-16 [ICRA]BB- [ICRA]B+ [ICRA]B+ [ICRA]B+ 1 Cash Credit Long Term 5.56 - (Stable) (Stable) (Stable) (Stable) 2 Import LC Short Term 9.50 - [ICRA]A4 [ICRA]A4 [ICRA]A4 [ICRA]A4 Source: HPWPL Complexity level of the rated instrument ICRA has classified various instruments based on their complexity as "Simple", "Complex" and "Highly Complex". The classification of instruments according to their complexity levels is available on the website www.icra.in 4 Annexure-1: Instrument Details Date of Issuance / Coupon Maturity Amount Rated Current Rating and ISIN No Instrument Name Sanction Rate Date (Rs. crore) Outlook NA Fund Based Facility - - - 5.56 [ICRA]BB- (Stable) Non-Fund Based NA - - - 9.50 [ICRA]A4 Facility Source: HPWPL 5 ANALYST CONTACTS Ravichandran K R Srinivasan +91 44 4596 4301 +91 44 45964315 [email protected] [email protected] Aishwaryaa A Viren B Chhabria +91 80 49225568 +91 80 49225504 [email protected] [email protected] RELATIONSHIP CONTACT Jayanta Chatterjee +91 80 4332 6401 [email protected] MEDIA AND PUBLIC RELATIONS CONTACT Ms. Naznin Prodhani Tel: +91 124 4545 860 [email protected] Helpline for business queries: +91-9354738909 (open Monday to Friday, from 9:30 am to 6 pm) [email protected] About ICRA Limited: ICRA Limited was set up in 1991 by leading financial/investment institutions, commercial banks and financial services companies as an independent and professional investment Information and Credit Rating Agency. Today, ICRA and its subsidiaries together form the ICRA Group of Companies (Group ICRA). ICRA is a Public Limited Company, with its shares listed on the Bombay Stock Exchange and the National Stock Exchange. The international Credit Rating Agency Moody’s Investors Service is ICRA’s largest shareholder. For more information, visit www.icra.in 6 ICRA Limited Corporate Office Building No. 8, 2nd Floor, Tower A; DLF Cyber City, Phase II; Gurgaon 122 002 Tel: +91 124 4545300 Email: [email protected] Website: www.icra.in Registered Office 1105, Kailash Building, 11th Floor; 26 Kasturba Gandhi Marg; New Delhi 110001 Tel: +91 11 23357940-50 Branches Mumbai + (91 22) 24331046/53/62/74/86/87 Chennai + (91 44) 2434 0043/9659/8080, 2433 0724/ 3293/3294, Kolkata + (91 33) 2287 8839 /2287 6617/ 2283 1411/ 2280 0008, Bangalore + (91 80) 2559 7401/4049 Ahmedabad + (91 79) 2658 4924/5049/2008 Hyderabad + (91 40) 2373 5061/7251 Pune + (91 20) 2556 0194/ 6606 9999 © Copyright, 2019 ICRA Limited. 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