Rating Rationale

Detailed Rationale

CRISIL has assigned its ‘CRISIL A3+’ rating to the short term bank facility of 20 Microns Limited (ML, part of the 20ML group). CRISIL has also reaffirmed its existing ‘CRISIL BBB/Stable’ rating on the long term bank facilities.

The ratings continue to reflect the group's established market position, moderate financial profile and sound operating efficiencies. These strengths are partially offset by its capital intensive operations, susceptibility to adverse changes in government regulations, and concentration in end-user industries.

Analytical Approach

For arriving at its ratings, CRISIL has combined the business and financial risk profiles of ML and its subsidiaries, 20 Microns Nano Minerals Ltd (NANO), 20 Microns FZE (20MFZE), 20 Microns SDN BHD (20MSDN), 20 MCC Private Limited (20 MCC) and 20 Microns Vietnam Company Limited. This is because all these companies, collectively referred to as the 20ML group, have a common management team, and operational and financial linkages. ML has 97.21% stake in NANO and 100% stake in all the other entities. Moreover, 20ML has extended a corporate guarantee to the bank facilities of NANO.

Please refer Annexure - List of entities consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths

Established market position:

The group has an established presence in micronized minerals segment catering to customers like Berger Paint, Akzo Nobel, Asian paints among others. With relationship developed over years, the group is among the dominant supplier, in its product segments, to these players. The group is among the leading producers of ultrafine industrial minerals and specialty chemicals, which find application as functional fillers, additives and extenders. It generates around a sixth of its turnover through export.

Moderate financial profile:

The group has a strong net worth of Rs. 182 cr as on March 31, 2020. The indebtedness (total outside liabilities to tangible networth ratio) has moderated to 1.40 times as on March 31, 2020 from highs of 2.87 times as on March 31, 2016 through steady accretions and debt repayments. Over the last couple of years, the group has primarily relied on internal accruals to fund the incremental opex and capex requirements, restraining the reliance on debt. The group had a gearing of 0.66 times as on March 31, 2020. The group had interest coverage and net cash accruals to total debt ratios of 3.15 times and 0.29 times respectively in 2019-20. The group is expected to maintain its financial profile supported by moderate profitability, lowering debt levels and absence of any large capex.

However, the group’s financial flexibility is restrained by the modest market capitalization, past restructuring of debt and pledge of promoters’ 53.74% (off 44.83% stake).

Sound Operating efficiency:

The group enjoys a healthy return on capital employed around 17-18% and maintains a moderate operating margin around 13-14%. The group benefits from its geographically widespread locations (9 plants spread in India) controlling logistics and saving time. Further, group also enjoys economies of scale supported by continued revenue growth.

Weakness

Working capital intensive operations:

Gross current assets were at 143 days as on March 31, 2020. This is driven by around 2 months of debtors and inventory of around 2.5 months. The buildup of inventory prior to monsoon pushes up working capital requirements during the period. The working capital requirements are partially offset by average creditors of over 3 months bridging the requirements significantly. Continued support from creditor shall remain critical in meeting the working capital requirements.

High fixed asset replacement requirements:

The mineral micronization industry operates at low asset turnover ratio of 1-1.5 times indicating high fixed assets requirement. Moreover, the inherent nature of work, involving micronization of minerals, results in high wear and tear in plant. Consequently, the group needs to incur significant annual maintenance capex to sustain its production capacity, consuming a hefty share of its accruals.

Susceptibility to adverse changes in government regulations, and concentration in revenue profile:

The industry is highly susceptible to government regulations, and any unfavourable changes in policies (viz. ban on mining, stringent environment norms, changes in royalties among other) may adversely impact the performance. Further, the company is exposed to high concentration in its revenue profile with paint and plastic industry contributing around 80% of its revenues in FY20. This exposes the group to economic cycles with demand taking a beating in slowing economy.

Also, the group faces high customer concentration risk with the top five customers contributing almost half of its turnover.

Liquidity: Adequate

Liquidity profile is marked by adequate accruals to cover repayment obligations, steady working capital cycle and moderate bank limit utilization.

The company is expected to generate annual cash accruals of around Rs. 40 cr. Against this, the company has 1 year maturing fixed deposit of Rs. 10 cr. Company has outstanding term loan of Rs. 5.1 cr which shall be repaid by fiscal 2022. However, the group needs to incur a significant annual maintenance capex to support its operations meaning a requirement of committed annual deployment of accruals. Bank limit utilization is moderate at 77% of the sanctioned Rs. 61 cr limit through 12 months to November 2020. The working capital cycle is steady with GCA of around 135-140 days.

Access to finer interest rates, diverse bank lines along with amount of recompense payable to banks and the timelines for same shall be a key monitorable.

Outlook: Stable

CRISIL believe the group will continue to benefit from the extensive experience of its promoter, and established relationships with clients.

Rating Sensitivity Factor

Upward factor

Improved debt to EBIDTA ratio below 1 times on sustained basis, supported by steady working capital cycle and absence of any large capex
Significant and sustainable improvement in accruals backed by improved scale

Downward factor

Significant stretch in working capital cycle or sharp decline in the accruals
Payout of recompense significantly higher than the expected Rs. 7 cr or large debt-funded capital expenditure weakens liquidity profile
Significant delay/failure to exit CDR and continued pledge of shares

About the Group

ML was incorporated in 1987. ML is promoted and managed by Mr. Chandresh Parikh and his sons- Mr. Rajesh Parikh and Mr. Atil Parikh. The company is listed on BSE Ltd and National Stock Exchange Ltd. ML is engaged in manufacturing micronized minerals such as calcium carbonate, calcined clay and other specialty minerals.

Nano was incorporated in 1993. Nano is engaged in processing and selling of specialty chemicals such as calcite, wax, SCD.

The group has clocked a revenue of Rs. 193 cr in H1FY21 and reported PAT of Rs. 9.6 cr.

Key financial indicators:

As on / for the period ended March 31	Unit	2020	2019
Operating income	Rs crore	529	480
Reported profit after tax	Rs crore	24	25
PAT margins	%	4.6	5.2
Adjusted Debt/Adjusted Networth	Times	0.66	0.75
Interest coverage	Times	3.15	3.22