Rationale

 The upgrade in the long-term rating reflects ICRA's expectations that the credit profile of Kirloskar Ferrous Industries Limited(KFIL) would continue to improve in the near-to-medium term on the back of increase in pig iron prices and the company's cost optimisation measures. China's policy to discourage steel exports and keep its Calendar Year (CY) 2021 steel production levels capped at CY2020 levels would support international steel prices and benefit Indian steelmakers, including KFIL, going forward. Despite the pandemic-induced demand slowdown in Q1 FY2021, the company reported a healthy revenue growth of 10%, supported by a 14% increase in pig iron prices. It registered a strong operating margin of 22.6% in FY2021 against 11.7% in FY2020, aided by improved steel spreads and cost savings emanating from the coke oven plant (26% reduction in average coke cost) and waste-heat recovery based power plant (annual savings of around Rs. 80 crore in power cost and coke cost). This also resulted in a sharp improvement in debt protection metrics, with the total debt-to-operating profit improving to 0.6 times as on March 31, 2021 from 1.4 times as on March 31, 2020 and the interest coverage ratio improving to 18.3 times in FY2021 from 12.5 times in FY2020. The company has capital expenditure (capex) plans of Rs. 1,100 crore between FY2022 and FY2024 towards various capacity addition and cost optimisation initiatives. These, along with the utilisation of iron ore from captive mines, would result in a further improvement in KFIL's cost structure and sustain the profitability in the medium-to-long term. ICRA also notes that despite the large capex programme, KFIL's capital structure would remain comfortable as the major part of the proposed capex would be funded by internal accruals. The ratings derive comfort from the established position of KFIL in the foundry-grade pig iron and ferrous castings business. The company is a part of the reputed Pune-based Kirloskar Group, which has a proven management track record. 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 pig iron 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 had 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 their business. ICRA notes the company's exposure to foreign currency movement, considering its sizeable imports of coking coal. However, the company adopts conservative hedging policies to minimise the impact of forex risk. The Stable outlook on the [ICRA]AA rating reflects ICRA's expectations that credit profile of KFIL will remain adequately supported by the healthy domestic demand and favourable pig iron/castings realisations in the near-to-medium term.