Rationale

 The revision in the outlook on the long-term rating of Kirloskar Ferrous Industries Limited (KFIL) reflects the expected increase in leverage levels and moderation in debt protection metrics of the company following the proposed debt-funded acquisition of Indian Seamless Metal Tubes Limited1 (ISMT) and KFIL's exposure to associated business integration risks. While arriving at the ratings, ICRA has considered the consolidated financial risk profile of KFIL and ISMT. KFIL has entered into a Share Subscription Agreement dated November 25, 2021 to acquire 51.25% stake in ISMT through preferential allotment of equity shares2 for an aggregate consideration of Rs. 476.6 crore. Additionally, KFIL would be extending unsecured loan of Rs. 194 crore in ISMT. The total consideration of Rs. 670 crore for the acquisition would be funded largely by issue of debt securities. This is expected to increase KFIL's consolidated debt to about Rs. 1,150 crore as on March 31, 2022 vis-à-vis Rs. 291.8 crore as on March 31, 2021. KFIL's ability to successfully integrate ISMT's operations with itself and achieve the desired operating parameters would be crucial for the profitable ramp-up of ISMT's operations, and hence would remain a key monitorable. ICRA also notes that KFIL has commenced an open offer for acquiring up to 25.05% of the emerging voting capital of ISMT. In case the same materialises, it would involve additional cash outflow of up to Rs. 240 crore. The proposed acquisition coincides with a large ongoing major capital expenditure (capex) programme of around Rs. 700 crore, proposed to be funded largely via internal accruals over FY2022 and FY2023. Both are likely to keep KFIL's free cash flows under check. Nonetheless, the ratings favourably factor in 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.