Fitch Ratings has today downgraded India's KS Oils Limited's (KS Oils) National Long-term Rating to 'BBB+(ind)' from 'A-(ind)' (A minus(ind)) and revised the Outlook to Stable from Negative. Simultaneously, Fitch has downgraded the rating of KS Oils' INR2750m long term loans to 'BBB+(ind)' from 'A-(ind)' (A minus(ind)) and affirmed the Short-term rating assigned to its INR4400m short term bank facility at 'F2+(ind)'.
The action follows KS Oils' recent announcement of a INR1250m acquisition of an edible oil refinery from Kolkata-based Ambo Agro Products and its revised capex plan envisaging a higher outlay. The company plans to invest INR6850m in FY09 towards the acquisition, capacity expansion, Wind Power (WP) projects and the development of palm plantations. The downgrade reflects increased risks on account of the company's entry into new areas such as wind energy, and the consequent execution risk. In addition, the acquisition and substantial increase in capex over FY09-FY11 will result in greater negative free cash flows (FCF) than anticipated at the time of assigning the ratings. With increased debt required to fund this, negative FCF will likely result in a higher than anticipated leverage for KS Oils. Uncertainties surrounding end-product prices and higher oilseed prices expose KS Oils to lower EBDITA margins in the short-to-medium-term.
The company invested INR1480m in FY08 for WP projects and plans to invest another INR2270m in FY09 and INR150m in FY10. KS Oils faces execution risks during construction of wind energy, however over the long-term, these initiatives could increase the stability of its earnings on the back of well structured power purchase agreements for its wind energy project.
Fitch believes that KS Oil's capacity expansion and entry into palm oil, as well as its geographical diversification should positively impact its revenue and operating margins. The agency notes that traditional oils will have a significant price difference from the imported oils, unlike in 2008; also, 2009 is expected to see a shift of demand towards palm oil from soybean oil amongst imported oils, which is expected to put pressure on KS Oils' branded mustard oil sales. The short-term ratings are constrained by increased working capital requirements due to an increased scale of operations and the consequent liquidity pressures.
The agency notes that a successful completion of the company's capex programme, along with a demonstrated improvement in sales and margins, leading to an improved liquidity position, could be a positive rating trigger. Any significant negative impact from working capital, which would substantially raise leverage levels, or any greater-than-expected decline in the margins, could move the rating downwards. In any case, deterioration in debt/EBITDA beyond 4.0x on a sustained basis will result in a negative rating action.
KS is primarily a mustard oil player with an integrated setup, but also has a presence in refined and hydrogenated oils. In FY08 it recorded revenues of INR20443m (2007: INR10875m), net income of INR1207m (2007: INR573m) and EBITDA of INR2190m (2007: INR927m). The EBITDA margins improved to 10.7% in FY08 from 8.5% in FY07 due to an increase in branded oil sales. The company reported sales of INR22558m (2007: INR13671m) with EBITDA margin of 11.0% (2007: 11.5%) for the nine months results ended December 2008.
Note to editors: Fitch's National ratings provide a relative measure of creditworthiness for rated entities in countries with relatively low international sovereign ratings and where there is demand for such ratings. The best risk within a country is rated 'AAA' and other credits are rated only relative to this risk. National ratings are designed for use mainly by local investors in local markets and are signified by the addition of an identifier for the country concerned, such as 'AAA (ind)' for National ratings in India. Specific letter grades are not therefore internationally comparable.
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