Unhedged buyer's credit may hit Finolex

Using unhedged buyer’s credit beyond working capital needs may hit the financial profile of Finolex Industries Limited (FIL). It exposes the company to significant foreign exchange risks, rating agency CRISIL has warned. Today, the agency downgraded the rating its debentures and bank facilities from ‘AA-’ to ‘A+’.

CRISIL believes FIL’s profitability and capital structure would remain susceptible to likely foreign exchange derivative losses through the medium term. The rating may be downgraded if foreign exchange and derivative losses are more than expected. Deterioration in liquidity and more debt may also lead to a downgrade.

FIL’s financial risk profile remains vulnerable to crystallisation of its derivative contracts under litigation as on September 30. The outstanding claims against derivative contracts stood at about Rs 100 crore. FIL had settled derivative liability of Rs 40 crore in the first half of 2012-13. Liabilities under its balance derivative contracts would remain a key rating sensitivity factor, CRISIL said.

The downgrades factor in aggressive financial risk management practice of availing largely unhedged buyer’s credit beyond its working capital needs. It also takes into account deterioration in FIL’s modest debt protection metrics. The company’s interest coverage ratio for 2011-12 deteriorated to 2.6 times, against 3.11 times for 2010-11.

FIL’s gearing increased to 1.86 times as on September 30 from 1.44 times as on March 31, 2011.Its buyer’s credit (in foreign currency) use increased to about Rs 850 crore as on September 30 from about Rs 500 crore as on March 31, 2011. The buyer’s credit utilisation is significantly higher than FIL’s net assets of about Rs 460 crore as on September 30, the remaining borrowings are deployed in liquid mutual funds.