Rs250 million Commercial Paper programme

F1+(ind) (Upgraded)

Fitch Ratings has upgraded the rating of Kirloskar Oil Engines Ltd's (KOEL) commercial paper programme to 'F1+(ind)' from 'F1(ind)'.

KOEL derives its rating from its strong brand and leadership position in many products; it is the market leader in small and medium engines and has a strong marketing and distribution network across India. KOEL makes the widest range of engines in the country and is upgrading its product standards to target exports in a bigger way.

Though exports accounted for only about 6 per cent of its sales in FY04, these are likely to increase significantly over the next few years. KOEL is likely to maintain its strong operating performance owing to a positive outlook for the power generation and construction industry, from which KOEL derives substantial orders for its engines.

KOEL has in the past supported group companies, especially Kirloskar Ferrous Industries Ltd (KFIL), both with investments and guarantees for borrowings. Following its improved operating performance, the debt on KFIL's books has reduced significantly and KOEL has comfortable debt cover parameters, even taking into account contingent liabilities.

In the year ended March 31, 2004, KOEL reported a 20 per cent increase in its topline to Rs10,413 million, led by higher sales volume in most product categories. Operating margins expanded from 10 per cent in FY03 to 13 per cent in FY04. Higher operating profits and lower interest outflow led to KOEL's net profit (PAT) increasing 71 per cent to Rs705 million in FY04.

KOEL had a total debt of Rs1,355 milion in FY04, including contingent liabilities of Rs1,057 million. The debt KOEL's books has decreased significantly from Rs1,154 million in FY01 to Rs297 million in FY04. It had no long-term debt in FY04 and almost the entire borrowing was in the form of working capital borrowings. These low debt levels confer comfortable debt cover parameters, with a debt-equity ratio of 0.33, net cash accrual to total debt of 55 per cent and a debt-EBITDA ratio of 1x in FY04.

Note: 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.