Experienced management with an established track record of operations and a reputed clientele
PMIPL has an operational track record spanning more than four decades. The company was initially established as a proprietorship concern in 1977 by Dr. Champalal Desarda, who holds a doctorate in metallurgy. Further, the company was reconstituted as a private limited company in 1991 and is currently managed by his son, Mr. Shekhar Desarda (Chairman and MD), who possesses more than two decades of experience in the manufacturing of capital equipment, consumables, and spares for the pulp and paper industry. He is ably supported by a qualified team of senior management in managing the day-to-day operations of PMIPL. The extensive experience of the management has enabled PMIPL to establish a healthy relationship with its reputed clientele, like ITC Limited, JOEFL Paper Mills, West Coast Paper Mills, Astron Paper and Board Mill, JK Paper Limited, Tamil Nadu Newsprint and Papers Limited, and Century Paper & Board Mills Limited, amongst others.

Acuité believes that PMIPL will continue to benefit from its experienced management, an established track record of operations, and a reputed clientele.

Healthy financial risk profile
The financial risk profile of PMIPL is healthy, marked by a healthy net worth, low gearing, and comfortable debt protection metrics. The tangible net worth of the company improved to Rs. 133 crore as of March 31, 2022, as against Rs. 120 crore as of March 31, 2021, due to healthy accretion to reserves. The gearing (debt-equity) stood lower at 0.21 times as of March 31, 2022, as against 0.18 times as of March 31, 2021. The gearing of the company is expected to improve further and remain low over the medium term in the absence of any debt-funded capex plans. The total debt of Rs. 28 crore as of March 31, 2022, consists of long-term bank borrowings of Rs. 15 crore and short-term bank borrowings of Rs. 13 crore.

The interest coverage ratio, though declining, remained healthy at 19.08 times for FY2022 as against 30.68 times for FY2021, whereas the DSCR stood at 4.76 times for FY2022 as against 3.50 times for FY2021. The net cash accruals to total debt ratio improved to 1.11 times for FY2022 as against 0.87 times for FY2021. The total outside liabilities to tangibles stood marginally higher at 0.79 times for FY2022 as against 0.75 times for FY2021. The debt-to-EBITDA ratio stood at 0.63 times for FY2022 as against 0.86 times for FY2021.

Acuité believes that the financial risk profile of PMIPL will remain healthy over the medium term due to its low debt levels, healthy tangible net worth, and comfortable debt protection metrics.

Improved operating performance
PMIPL reported an increase in its revenue of Rs. 291 crore in FY 2023 (estimate) as against Rs. 258 crore in FY 2022 and Rs. 177 crore in FY 2021. The growth in the company’s revenue over the years is primarily driven by the company’s established presence of more than four decades in serving the pulp and paper industry across both the domestic and export markets and manufacturing a wide range of machines for producing Kraft, tissue, and writing paper. It also deals in the manufacturing of a wide range of consumables and spares, such as rotors, gear boxes, shaft sleeves, and others.

Despite the increase in overall operating costs, the operating margin of the company is, however, estimated to improve to 14.00 percent in FY2023E as against 12.17 percent in FY2022 on account of reduced steel prices during the year, which is a major raw material being used by the company. On the other hand, the net profit margin of the company is estimated to remain lower in the range of 8 to 9 percent in FY2023 as against 9.24 percent in FY2022 due to an increase in the depreciation charged during the year.

Acuité believes that PMIPL's ability to maintain its scale of operations and profitability will remain a key rating sensitivity factor.

Moderately intensive working capital operations
The working capital operations of PMIPL are moderately intensive, as marked by its gross current assets (GCA) of 137 days for FY2022, which improved as against 179 days for FY2021. This is due to the inventory and receivables cycles of the company, which, though elongated, recorded an improvement in FY2022 of 52 days and 64 days, respectively, as against 75 days and 68 days, respectively, in FY2021. Further, the creditors cycle of the company also stood at 31 days in FY2022 as against 66 days in FY2021.

The company has a moderate inventory holding period, which is mainly on account of bulk purchases of steel to avail better pricing, and at the same time, end-to-end execution of orders also takes around 6 to 12 months, depending on the nature and complexity of the project. Project execution in the capital goods industry is often affected by delays in approvals and licences for operations, funding processes, and other operational delays. All these factors can further lead to the lengthening of the inventory holding period and, subsequently, the elongation of the working capital cycle.

Acuité believes that the ability of PMIPL to improve and maintain an efficient working capital cycle over the medium term will remain a key rating sensitivity factor.

Margins are susceptible to raw material prices and foreign exchange fluctuation risk.
Steel, being the major raw material utilised by PMIPL, forms a major component of the overall cost structure of the company. With steel prices being volatile in nature, the company faces cost escalation risk in the absence of adequate hedging mechanisms and a price escalation clause in its contracts. Further, exports contribute 35 percent of the revenue for PMIPL; this poses a foreign exchange fluctuation risk to PMIPL in the absence of adequate hedging mechanisms, making the operating income and profitability margins volatile.