Crisil downs Essel Propack's STD rating to P1

New Delhi, June 26 (UNI) Rating agency Crisil has downgraded Essel Propack's Rs 37 crore short-term debt programme to 'P1' from 'P1+' due to its continued lending to its promoter group companies.

Promoted by Subhash Chandra and his family, who hold 59 per cent stake, the Essel group company is the world's leading specialty packaging company operating through 23 manufacturing facilities in 12 countries, including seven in India. Essel Propack mainly manufactures collapsible laminated tubes, plastic tubes, and specialty packaging materials. The company had an overall installed capacity of almost six billion tubes as on December 31, 2005, according to Crisil.

Mainly funded out of its short-term debt, such lending by Essel Propack is resulting in ''constrained liquidity and high financial risk,'' Crisil, Indian affiliate of world leading rating agency Standard and Poor's added.

It said Essel Propack has been persistently mobilising high levels of intra-year short-term debt, far in excess of its sanctioned bank limits. This is reflected in a low current ratio (adjusted for peak debt) of 0.9 times in 2006. Further, this adversely impacts the company's debt protection measures, since operating cash flows are insufficient to cover the increased debt repayment obligations. This has also resulted in an increasingly debt-dominated capital structure; and is reflected in an increase in adjusted gearing to 1.6 times during 2006, from 0.7 times during 2003.

Gearing is a measure of financial leverage, demonstrating the degree to which a company's activities are funded by owner's funds versus creditor's funds. The higher a company's degree of leverage, the riskier it is considered.

Given the company's aggressive financial policy, Crisil sees ''little prospect of an improvement in its liquidity and gearing levels over the medium term.'' The rating, however, continues to reflect Essel Propack's strong market position in the global laminated tubes industry, healthy operating margins, strong cash accruals, and a competent, professional management. But these strengths are partially offset by the company's aggressive financial policy and high financial exposure to promoter group companies, the rating agency said.

UNI