CRISIL has revised its rating outlook on Aarti Industries Ltd’s (Aarti’s) long-term bank facilities and non-convertible debentures to ‘Positive’ from ‘Stable’, while reaffirming the rating at ‘A’. The outlook revision reflects CRISIL’s expectation of an improvement in Aarti’s capital structure and debt protection measures over the medium term, on the back of continued healthy cash accruals. CRISIL has also assigned its ‘P1’ rating to the short-term debt programme of Aarti. The rating on the company’s short-term bank facilities has been reaffirmed at ‘P1’.

The ratings reflect Aarti’s established market position in chlorobenzene-based products and di-methyl sulphate, and its diversified revenue profile. These rating strengths are partially offset by the company’s moderate financial risk profile and working capital-intensive operations.

Aarti is a dominant player in nitro chlorobenzene-based basic and specialty chemicals. The company has the largest chlorination capacity, of 70,000 tonnes per annum, in India. It caters to diverse end-user industries, such as pharmaceuticals, agrochemicals, dyes, pigments, paints, and polymers. Furthermore, it has strong operating efficiency.

However, Aarti has a moderate financial risk profile marked by a high gearing of 1.47 times as on March 31, 2009, and a low interest coverage ratio at 2.7 times for 2008-09 (refers to financial year, April 1 to March 31). Aarti’s high gearing was primarily because of the significant debt contracted by the company to fund its increased working capital and capital expenditure (capex) requirements. CRISIL expects an improvement in Aarti’s gearing over the medium term, given the company’s continued healthy net cash accruals. Aarti’s increasing scale of operations, combined with the volatility in raw material costs, exerted pressure on its working capital requirements and liquidity during 2008-09. The company has initiated many measures, such as reduction in receivables days, to reduce its large working capital requirements.

Outlook: Positive
CRISIL expects Aarti’s capital structure and debt protection measures to improve over the medium term on the back of continued healthy cash accruals. The ratings may be upgraded if the company’s financial risk profile improves significantly. Conversely, the outlook may be revised to ‘Stable’ in case of decline in Aarti’s operating margin, or if the company undertakes a large, debt-funded capex programme.

About the Company
Aarti manufactures organic and inorganic chemicals at its facilities at Vapi, Sarigam, and Jhagadia, in Gujarat. It also manufactures active pharmaceutical ingredients (APIs) at its Tarapur and Dombivli units in Maharashtra. Aarti’s API facility at Tarapur has the US Food and Drug Administration approval. The company has a strong presence in benzene-based specialty chemicals. It also has a full-fledged research and development centre, recognised by the Department of Scientific and Industrial Research, the Government of India.

For 2008-09, Aarti posted a profit after tax (PAT) of Rs.833 million on net sales of Rs.14.2 billion (standalone); it had reported a standalone PAT and net sales of Rs.367 million and Rs.8.8 billion, respectively, for the previous year.