Fitch Ratings has upgraded India-basedKiri Dyes and Chemicals (KDCL) National Long-term rating to BBB+(ind) from BBB(ind). The outlook is positive.

The agency has also upgraded KDCLs bank facilities as follows:

Rs 666.4 million (enhanced from Rs 625 million) long-term outstanding loans and Ra 1,700 million (enhanced from Rs 1,180 million) fund-based limits: upgraded to BBB+(ind) from BBB(ind); and Rs 365 million non-fund based limits: upgraded to F2+(ind) from F3(ind).

The upgrade reflects a successful institutional placement of Rs 2,390 million shares in November 2010, whose proceeds were used to repay KDCLs short-term loans and to partly fund its capex programme. The rating action also factors in the successful turnaround of subsidiaries, Dystar Colours Deutschland GmBH and Dystar Colours Distribution GmBH (Dystar), earlier than expected in the current financial year.

As part of the turnaround strategy, Dystar has successfully outsourced 64 of its reactive dye products to KDCL with the remaining 29 products likely to follow in the next three to six months. As a result, consolidated EBITDA margins improved to 6.8% for the nine months to the financial year ending March 2011.

The Positive Outlook reflects Fitchs expectations that the outsourcing strategy and completion of capex will lead to a sustained improvement in KDCLs consolidated credit profile and, eventually, a rating upgrade. KDCL is incurring capex to expand the production of dye intermediaries (i.e. H.acid and vinyl sulphone). New production of vinyl sulphone and H.acid is likely to start in March and June 2011 respectively.

Higher working capital requirements at the Dystar subsidiaries resulted in higher leverage (net debt to EBITDA) of 3.98x for 9MFY11.

Positive rating triggers include improvements in EBITDA margins leading to total net debt to EBITDA below 3.5x on a sustained basis. Conversely, deterioration in margins or any additional debt-led capex may result in the Outlook being revised to Stable.

Lonsen group (China) has invested EUR 22 m at Kiri Holdings Singapore holding company of Dystar group -- through convertible bonds which can be converted into equity anytime within the next five years. In such an event, Dystar will become a subsidiary of Lonsen group. Although this is likely to keep the strategic linkages between KDCL and Dystar intact, it would result in a significant reduction in overall debt levels and prompt an appropriate rating action by Fitch.‎ -