TEXT-Fitch affirms English Indian Clays at 'Fitch A(ind)'; outlook stable

(The following statement was released by the rating agency)

June 20 - Fitch Ratings has affirmed India-based English Indian Clays Limited's (EICL) National Long-Term rating at 'Fitch A(ind)'. The Outlook is Stable. A list of additional rating actions is provided at the end of this commentary.

The ratings continue to reflect EICL's strong position in the domestic clay market coupled with easy access to quality raw material. This has resulted in strong EBITDA margins in the range of 25%-29% for this segment over FY09-FY12. Revenue from the segment contributes around 50% to total sales and over 75% to EBITDA. The ratings also draw comfort from the company's diversified clientele across industries.

The ratings are however, constrained by EICL's moderate market position and low and volatile EBITDA margins in its starch business due to raw material (maize and tapioca - agricultural commodities) fluctuations. Fitch also notes that most of the products from this segment are commoditised in nature.

In FY12, total revenue grew 6% yoy to INR3,760m while operating EBITDA margin dipping to 14.7% from 19%. The latter was due to higher operating expenses for both the business segments coupled with EICL's inability to pass on cost increases fully to its end customers mainly in paper and paints industries (around 60% of total revenue). The low capacity utilization of the company's new starch plant at Shimoga also contributed to the decline in profitability. This resulted in deterioration of financial leverage to 3.1x in FY12 (FY11: 2.2x). Fitch notes that the company curtailed its capex plan for FY12 which helped it in keeping debt at comfortable levels (INR1,784m including INR300m of redeemable preference shares).

Positive rating guidelines include significant revenue growth along with stable profitability resulting in an improvement in financial leverage on a sustained basis. Negative rating guidelines include a decline in profitability and/or large debt-led capex or acquisition leading to financial leverage above 3.5x on a sustained basis. The ratings can also be negatively impacted due to the entry of a significant competitor in the clay business which could affect stable cash flow from this business.

EICL, controlled by Karan Thapar, has business interests in clay and starch. The company has its manufacturing facilities in the southern and northern parts of the country. The clay division has its manufacturing facilities in Kerala and the starch division has its manufacturing facilities in Shimoga (Karnataka) and Yamunanagar (Haryana). The starch facility at Puducherry was closed and integrated with Shimoga in H212. The company plans to incur capex of INR1,400m spread over a period of three years to be funded by a mix of debt and internal accruals.

Rating actions on EICL's bank facilities:

INR983.8m long-term loans (reduced from INR1161.3m): affirmed at 'Fitch A(ind)'

INR750m fund based limits (enhanced from INR650m): 'Fitch A(ind)'/'Fitch A1(ind)'

INR150m non-fund-based limits: 'Fitch A(ind)'/'Fitch A1(ind)'