CRISIL has assigned its ‘AA-/Negative’ rating to Finolex Industries Ltd’s (Finolex’s) non-convertible debenture programme and has reaffirmed its ratings on the other debt programmes and bank facilities at ‘AA-/Negative/P1+’.
The ratings continue to reflect Finolex’s established position in the polyvinyl-chloride (PVC) resins industry, leadership in PVC pipes industry, and high operating efficiency driven by integrated production process. These rating strengths are partially offset by Finolex’s average financial risk profile, and susceptibility of its profitability to cyclicality in the PVC industry.
Finolex is the second-largest player in India’s PVC market, with a market share of around 23 per cent. Its large capacity is expected to help it capitalise on the supply-deficit scenario in the domestic industry. The company’s captive consumption of PVC for its pipes and fittings business provides assured offtake for a part of its output and ensures high operating efficiency.
Finolex is the largest player in the fragmented and competitive PVC pipes and fittings market in India, with an overall share of around 22 per cent. In addition, its established brand equity and large dealer network have enabled it to capture a significant share of the growing retail PVC pipe market. In CRISIL’s opinion, Finolex will capitalise on the increasing demand for PVC pipes, underpinned by bright prospects for the agricultural sector and the government’s thrust on rural infrastructure and irrigation.
Finolex incurred high derivative and foreign exchange (forex) losses over the past couple of years, leading to significant deterioration in its capital structure. It incurred forex and derivative losses of Rs.0.54 billion in 2009-10 (refers to financial year, April 1 to March 31) and Rs.1.87 billion in 2008-09. This has led to high gearing and low interest coverage ratio; its adjusted gearing and interest coverage ratio was 1.72 times and 17.9 per cent respectively as on March 31, 2010. Furthermore, it remains exposed to risks related to forex exposures which are not fully hedged.
Finolex also has certain outstanding derivative contracts on which it is expected to incur additional losses over the next couple of years. CRISIL expects these losses to be less than Rs.1 billion. Significantly more-than-expected derivative losses will further exacerbate pressure on Finolex’s debt protection metrics and thereby weaken its credit risk profile.
Finolex’s profitability is vulnerable to cyclicality in the PVC industry and volatility in forex rates. Because of high volatility in crude oil price, operating margin of Finolex has moved from 14.6 per cent in 2008-09 to 22.3 per cent in 2009-10 and down again to 17.2 per cent in first quarter of 2010-11. Furthermore, as Finolex imports majority of its raw material requirement, it remains susceptible to volatility in forex rates.
In 2008-09, Finolex incurred forex loss of Rs.1.45 billion, in 2009-10 profit of Rs.0.06 billion, and in the first quarter of 2010-11 loss of Rs.0.27 billion. CRISIL believes that Finolex’s profitability will remain volatile over the medium term because of the company’s inherent business risks and its practice of not hedging its entire forex exposure.