Rating agency Crisil has assigned AA+ rating for Century Enka Ltd.'s Non-Convertible Debenture Programme and a P1+ for its Short Term Debt programme. The rating reflects on the company's strong financial risk profile, driven by the management's conservative financial policy.
The agency said that the company's low debt levels have resulted in a robust capital structure, with an average gearing of less than 0.5x since 2000-01. Also, its interest coverage has increased significantly to an estimated twenty five times in 2004-05 from five times in 2000-01. The rating also reflects Century Enka's diversified business operations across the nylon tyre cord fabric (NTCF), nylon filament yarn (NFY) and partially oriented yarn (POY) segments, which impart some stability to its revenue stream.
Jointly promoted by the B. K. Birla group and fibre major, Acordis (earlier part of Dutch conglomerate Akzo Nobel), Century Enka manufactures synthetic textile yarns (nylon and polyester) and industrial yarn (NTCF). Synthetic textile yarns accounted for about 78 per cent of its operating income in 2003-04 with industrial yarns contributing the rest.
According to the agency, Century Enka enjoys a strong business position as the second-largest player in the domestic NTCF market with an estimated share of 15 per cent. The company plans to expand its NTCF capacities from 14,000 tonnes per annum (tpa) currently to 21,500 tpa over the next two years at a capital cost of Rs1.7 billion. The agency says that this will enhance the company's business position, especially since its large production capacities, depreciated plants, and low interest burden have enabled it to effectively combat competition from smaller domestic players in the past.
The rating, is however, tempered by Century Enka's small POY operations with an estimated market share of barely six per cent. The company's marginal presence and small production capacities (62,000 tpa estimated by May 2005) in this area limit its pricing flexibility. The rating is also constrained by the continued threat from low-priced NTCF imports from China. This threat has been aggravated by the reduction in import duties from 20 per cent to 15 per cent in the Union budget 2005-06. Any further reduction in duties is likely to adversely impact the company's NTCF margins. The rating is also moderated by the inherent cyclical nature of the business.
The agency also points out that key raw materials such as purified terephthalic acid (PTA), mono ethylene glycol (MEG), and caprolactam, which account for 65 per cent of the cost of production, remain susceptible to price movements in the petrochemical cycle and have exerted considerable pressure on Century Enka's margins, particularly in its POY operations.
As for its outlook, Crisil expects the company to maintain its strong financial profile despite its capex plans because of its healthy cash accruals and business diversity.
For the year ended March 31, 2004, the company has reported a net profit after tax of Rs570.0 million on an operating income of Rs8.2 billion. For the nine months ended December 31, 2004, Century Enka has recorded a net profit of Rs264.6 million (Rs372.9 million in the previous corresponding period) on an operating income of Rs710.9 million (Rs594.5 million).