India Ratings assigns Modern Insulators 'IND BBB' / Stable

India Ratings and Research (Ind-Ra) has assigned Modern Insulators Limited (MIL) a Long-Term Issuer Rating of 'IND BBB'. The Outlook is Stable.

Improvement in EBITDA Margin in FY21: MIL recorded margins of 7.5%-8.5% over FY17-FY20. The margin had declined on a yoy basis to 7.6% in FY20 (FY19: 8.6%) because of the losses incurred by the terry towel division. During 9MFY21, however, the margin rose significantly to 10.7% due to energy savings from the 3MW solar captive plant that was commissioned in 2HFY20 and reduced wastages, resulting from the automation of some processes. Furthermore, the cost-reduction measures implemented by the terry towel division helped to narrow its losses in 1HFY21, and also enabled it to achieve profits before interest and tax of INR5.8 million in 3QFY21. Ind-Ra expects the margins to have increased on a yoy basis in FY21. MIL's insulator business involves the designing and customisation of the products in line with the customer's requirements, which enables it to report stable margins. Ind-Ra believes MIL will sustain its higher margins over the medium term, backed by energy savings and cost-cutting initiatives.

Comfortable Credit Metrics: MIL's credit metrics had weakened in FY20 due to a decline in the absolute EBITDA to INR333 million in FY20 (FY19:376 million). The gross interest coverage (operating EBITDAR/gross interest expense + rent) was 2.5x in FY20 (FY19:3.4x) and the net leverage (total adjusted net debt/operating EBITDAR) was 2.8x (1.98x). However, during 9MFY21, the interest coverage improved to 3.7x due to an increase in the EBITDA margins. Ind-Ra expects the credit metrics to have improved on a yoy basis in FY21 because of the rise in the margins.

Liquidity Indicator - Adequate: MIL's average utilisation of the fund-based limits was 60% over the 12 months ending March 2021. The company's cash flow from operation had fallen to INR187 million in FY20 (FY19:INR219 million). MIL recorded cash flow from operations of INR270 million in 1HFY21. In FY20, the free cash flow had declined to INR3.7 million (FY19: INR138 million) due to the incurring of capex of INR124 million. The company had cash and bank balance of INR75.7 million as on 30 September 2021. The company does not have any repayment obligations.

Medium Scale of Operations; Low Customer Concentration Risk: MIL's revenue dipped to INR4,397 million in FY20 (FY19: INR4,400 million) owing to lower volume sales of insulators due to a fall in demand from equipment manufacturers. The insulator division's revenue declined to INR3,872 million in FY20 (FY19: INR3,925 million) and the terry towel division's revenue rose to INR495 million (INR475 million). In 9MFY21, the company reported revenue of INR2,710 million (insulators: INR2,351 million; terry towel: INR359 million). In FY21, the revenue is likely to have decreased on a yoy basis because of lower realisations and volume sales in the insulator division, as demand was impacted by COVID-19-led disruptions. As of March 2021, the company had an order book of around INR1,000 million, scheduled to be executed in 1QFY22. Ind-Ra believes the company will sustain its scale of operations over the medium term, backed by the heathy order book. Furthermore, MIL's business profile is supported by its low customer concentration risk, with no single customer having contributed more than 15% to the revenue in FY20.

Limited Impact of amalgamation with Modern Denim Limited (MDL): In December 2019, MIL announced the amalgamation of MDL with itself. The scheme of amalgamation has been approved by the board of directors and has been submitted for approval to the National Company Law Tribunal, post which the company would need to seek approval from other authorities as well.

As per the scheme, MIL will make a cash payment of INR576 million to MDL over and above exchange of shares; of this, MIL had already paid INR476 million as on 30 September 2020 in the form of unsecured loans. MDL does not have any outstanding debt with any bank or financial institution. However, it has unpaid debt non-convertible debentures of INR62 million (principal: INR33 million; unpaid dividend: INR29 million) and unpaid fixed deposits of INR161 million (principal: INR67 million; unpaid interest: INR94 million) since FY98-FY99. The balance payment of INR100 million from MIL would be utilised at the time of amalgamation to repay the principal obligation of the non-convertible debentures and fixed deposits. MIL's absolute EBITDA levels can easily absorb MDL's EBITDA loss of INR12.7 million. The amalgamation will further enhance MIL's cash flow by reducing the tax burden by way of MDL's accumulated losses. Ind-Ra believes there will be limited impact of the amalgamation on MIL's liquidity, credit profile or business profile. However, the final impact of the amalgamation will be a key monitorable.

Working Capital-Intensive Operations: MIL's working capital cycle remained elongated at 145 days in FY20 (FY19: 135 days) on account of its long receivables period and stretched inventory holding period, which is inherent to the business. The working capital cycle deteriorated on a yoy basis to due to an increase in the inventory days to 115 days in FY20 (FY19: 84 days). MIL's customers include large transformer manufacturers, electricity boards and railways, wherein payments are realised between 90-140 days. The company maintains inventory of 90-120 days. MIL's credit period hovers between 30-45 days. Its payable days stood at 41 days in FY20 (FY19: 24 days). The agency expects the working capital cycle to remain elongated as the company has to maintain high inventory levels to ensure smooth execution of orders.

Shares of MODERN INSULATORS LTD. was last trading in BSE at Rs.41.9 as compared to the previous close of Rs. 40.85. The total number of shares traded during the day was 3925 in over 32 trades.

The stock hit an intraday high of Rs. 41.9 and intraday low of 40.75. The net turnover during the day was Rs. 161712.

Source : Equity Bulls

Keywords