Rationale

 The outlook revision reflects ICRA's expectation of Kirloskar Ferrous Industries Limited (KFIL) generating healthy accruals in the near to medium term leading to improvement in debt protection metrics. The company's operating performance during 9M FY2021 remained healthy with an operating margin of 20.6% compared to 11.7% in FY2020, led by higher domestic pig iron prices, lower coking coal prices and cost savings. The margin improvement is partially expected to sustain, given the significant cost savings emanating from the recently commissioned coke oven and 20-MW power plant. The ratings derive comfort from the established position of KFIL in the manufacturing of foundry-grade pig iron and ferrous castings business. The company is part of the reputed Pune-based Kirloskar Group with a proven management track record. It had undertaken cost optimisation capital expenditure (capex) project in FY2020 by installing a coke oven plant (for converting coking coal into coke), which has reduced its exposure to volatile coke prices. The waste gas generated by the oven will be harnessed by a 20-MW power plant, which will generate additional power and fuel savings for the Koppal (Karnataka) plant. The company is also expected to benefit from the allocation of two iron ore mines in Karnataka in the medium term, with respect to cost control and regular iron ore supply. KFIL continues to have a comfortable debt protection metrics with TD/OPBITDA of 1.0x and interest coverage of 9.2x in H1 FY2021, and adequate liquidity position characterised by adequate cash accruals and sizeable unused bank lines. The ratings are partially offset by the vulnerability of the company's operating margins to fluctuating raw material prices, given the commoditised nature of the business. The ratings are constrained by the casting division's exposure to the inherent demand cyclicality in the key end-user segments (both commercial vehicle and tractor segments) that impacted its past operating performance, along with a relatively high customer concentration risk. However, this risk is mitigated to some extent by KFIL's established relationships with large original equipment manufacturers (OEMs) and healthy share of business. ICRA notes KFIL's exposure to foreign currency movement, considering its sizeable imports of raw materials. However, the company adopts conservative hedging policies to minimise the impact of forex risk.