Rating Rationale
July 24, 2019 | Mumbai
Aarti Industries Limited
Ratings Reaffirmed
 
Rating Action
Total Bank Loan Facilities Rated Rs.1900 Crore
Long Term Rating CRISIL AA-/Positive (Reaffirmed)
Short Term Rating CRISIL A1+ (Reaffirmed)
 
Rs.100 Crore Long-Term Borrowing Programme CRISIL AA-/Positive (Reaffirmed)
Rs.80 Crore Non Convertible Debentures CRISIL AA-/Positive (Reaffirmed)
Rs.120 Crore Non Convertible Debentures CRISIL AA-/Positive (Withdrawn)
Rs.400 Crore Commercial Paper CRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has reaffirmed its 'CRISIL AA-/Positive/CRISIL A1+' ratings on the bank facilities and debt instruments of Aarti Industries Limited (Aarti). CRISIL has also withdrawn its rating on non-convertible debentures of Rs 120 crore (See Annexure 'Details of rating withdrawn' for details) consequent to their redemption. CRISIL has received independent confirmation that these instruments are fully redeemed and the withdrawal is in line with CRISIL's withdrawal policy.
 
Earlier on 2nd April 2019, CRISIL revised its outlook on the long term bank facilities and debt instruments of Aarti to 'Positive' from 'Stable' while reaffirming the rating at 'CRISIL AA-'. The rating on the commercial paper and short-term rating was reaffirmed at 'CRISIL A1+'.
 
The outlook revision reflected sharp improvement in the financial risk profile post the equity raising by the company through qualified institutional placement (QIP) of Rs 750 crore as on 23rd March 2019. The fund raising improved the gearing to 0.88 times in fiscal 2019 from 1.26 times in fiscal 2018. The ratio of debt to earnings before interest, depreciation, tax, and amortisation (Debt/EBIDTA) which was 3.0 times during 2018, is expected to fall below 2.0 times by fiscal 2021.
 
Earlier announced capital expenditure (capex) plan of the company to the tune of around Rs 2300 crore over fiscal 2019 to fiscal 2021 in multiple value chains is expected to remain the same post QIP. The capex will mainly be funded out of proceeds of the QIP as well as internal accrual and debt. Over the medium term, the overall debt is expected to remain range bound with gearing below 1 times.  
 
Operating performance improved during fiscal 2019 considering the revenue growth of 33% (excluding demerged home and personal care) year on year (y-o-y) backed by strong volume growth in specialty chemicals segment and higher revenue contribution from pass through of raw material prices. Operating margins improved to 20.5% in the same period as against 18.4% y-o-y mainly due to better operating leverage from increasing capacity utilizations.

Going forward, Aarti's operating performance is expected to remain strong, over medium term supported by improving share of high-margin value-added products and contribution from long term contract manufacturing agreements entered by company in fiscal 2018 and 2019 with global multinational companies (MNCs), which will result in assured business of Rs 14900 crore over the contract period with healthy operating margins. The revenue is expected to grow at around 14% per annum from fiscal 2019 to fiscal 2022, while operating margin is expected to be in the range of 19-21% at stable raw material prices.
 
The ratings continue to reflect the Aarti group's established market position, diversified revenue profile, and sound operating efficiency, supported by a high level of integration. These strengths are partially offset by large working capital requirement and average debt protection metrics. 

Analytical Approach

For arriving at the ratings, CRISIL has combined the business and financial risk profiles of Aarti and its subsidiaries, Aarti Corporate Services Ltd, Alchemie Europe Ltd, Innovative Envirocare Jhagadia Ltd, Aarti USA Inc., Shanti Intermediaries Pvt Ltd (subsidiary of Aarti Corporate Services Ltd), Nascent Chemical Industries Ltd (subsidiary of Aarti Corporate Services Ltd), Ganesh Polychem Ltd, Aarti Polychem Pvt Ltd. This is because all the companies collectively are referred to as the Aarti group and have significant managerial, operational, and financial linkages.

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

Key Rating Drivers & Detailed Description
Strengths
Established market position with diversified revenue, higher revenue visibility and healthy profitability
The Aarti group has maintained its dominant market position in the nitro-chloro-benzene (NCB)-based specialty chemicals segment. The group has NCB capacity of 75,000 tonne per annum. Aarti also has presence in other chemical value chains such as toluene, ethylation, sulphur etc. The company has been gradually ramping up capacity utilization of all product lines. Aarti is the largest producer of benzene derivatives in India, and a major player among global manufacturers, with a 25-40% global market share across various products. No single customer or product contributes more than 8% to revenue. The company supplies to diverse end-user industries such as polymer additives, pigments, dyes, paints, pharmaceuticals, agrochemicals, fertilisers, and fast-moving consumer goods, and is insulated from downturn in any particular industry. Also, over 40% of its net revenue is from exports, providing geographical diversity. The company maintained a strong revenue growth rate (CAGR of 15% in the past four fiscals). The long term contract manufacturing agreements entered with three global multinational companies will result into assured business and thereby higher revenue visibility over next 10+ years. With large capex for improving processes to increase efficiency and greater focus on higher-margin products, the operating margin increased from 15.3% in fiscal 2014 to 20.5% in fiscal 2019 despite volatility in raw material prices. CRISIL believes Aarti will maintain its strong operating performance with healthy growth and profitability over the medium term.
 
Sound operating efficiency because of continuous investment in process improvement initiatives and high level of integration
The Aarti group has high economies of scale as it is one of the largest producers of NCB in the domestic market and has built up large and flexible manufacturing capacity. Operating efficiency is also supported by strong research and development (R&D) capability. Integrated operations to manufacture higher order derivatives of Benzene, ability to change the product mix according to the demand-supply scenario, and continuous process improvement for maximising the share of value-added benzene derivatives enables Aarti to sustain strong operating efficiency. In addition, the company has increased its captive power generation, which will help improve operating efficiency as well as save on power cost.
 
* Improving financial risk profile
Aarti has undertaken debt funded capex of about Rs.2700 crore in the past five fiscals. The company also has a capex plan of Rs 2300 crore over fiscal 2019 to fiscal 2021 in multiple value chains to increase market share as well as for long term contracts with global MNCs. Post QIP the additional capex requirement will mainly be funded out of proceeds of QIP and internal accrual, leading to lower dependence on external debt over medium term. The debt protection metrics as well as gearing levels are expected to improve sharply over medium term. Interest coverage and ratio of net cash accrual to adjusted debt which were 5.3 times and 25% as on 31st March 2019 are expected to improve to 6.4 times and 33% by fiscal 2021. The ratio of total outside liabilities to adjusted networth (TOL/ANW) is expected to remain below 1.2 times over medium term in line with 1.16 times in fiscal 2019. The ratio of debt to earnings before interest, depreciation, tax, and amortisation (Debt/EBIDTA) which stood at 2.5 times in 2019, is expected to fall below 2.0 times by fiscal 2021.
 
Weakness
Large capacity expansion leading to significant increase in working capital requirement
Revenue growth over the past few fiscals due to continuous capacity addition and volatility in crude-linked raw material prices has increased the group's working capital requirement. This has led to higher dependence on bank borrowings. Also, as the raw materials are predominantly crude derivatives, the company's working capital cycle is susceptible to volatility in crude prices. Its gross current asset days (net of cash) stood at 137 days as on March 31, 2019.
 
* Project Risk and risk related to volatility in commodity prices
The company has been carrying out a large capital expansion over medium term increasing capacities in multiple value chains to increase market share as well as for long term contracts with global MNCs.
 
Although the capex is in similar product segments, ensuring the projects are completed in stipulated time and within stipulated costs will be critical. Also while the offtake risk is relatively lower due to presence of long term contracts and long term relationships with clients as well as the improved scenario due to supply side reforms in chemical industry in China, overall ramping up of capacities as envisaged, will remain a key monitoring factor.
 
Additionally, the main raw material, benzene is a crude derivative, prices of which remain susceptible to any sharp volatility in crude prices. While the company has consistently demonstrated its ability to pass on the volatility in raw material prices due to its cost plus business model, which has reflected in consistent operating profitability of 16-20% over last eight fiscals, nevertheless, the company remains exposed to the volatility in commodity prices.
Liquidity

Aarti has adequate liquidity driven by expected cash accruals of more than Rs 580-850 crore per annum in fiscal 2020 to fiscal 2022 and cash and cash equivalents of Rs 805 crore as on March 31, 2019. The bank limit utilization stood at 84% of total working capital limit of Rs 1200 crore on an average over the 12 months ended November 2018. The limits have been enhanced to Rs 1800 crore in December 2018 which enhances the financial flexibility of the company in future. The company has long term repayment obligations around Rs 250-370 crore over 2020 to 2023. CRISIL expects internal accruals, cash & cash equivalents and unutilized bank lines to be sufficient to meet its repayment obligations. The company has a capex plan of Rs 2300 crore over fiscal 2019 to fiscal 2021 which is expected to be mainly out of proceeds of QIP, done in March 2019 and internal accrual, leading to lower dependence on external debt over medium term

Outlook: Positive

CRISIL believes the Aarti group will maintain its strong business risk profile over the medium term, backed by revenue diversity and good growth prospects for its high-margin products. This will help in gradual improvement in utilisation of newly added capacity and in maintaining operation margin.
 
Upside scenario
* Significant and sustained improvement in operating performance
* Improvement in debt metrics backed by increase in cash accruals or equity infusion, for instance gearing improving sustainably below 1 time or Debt/EBITDA below 2 times
 
Downside scenario
* Weakening of operating performance leading to lower-than-expected cash accrual or
* Debt protection metrics weaken, most likely because of substantial working capital requirement or higher-than-expected debt-funded capex or acquisition expenditure for instance gearing increasing to 1.5 times or debt/EBIDTA above 3.5 times on sustained basis.

About the Group

Aarti, the flagship company of the Aarti group, manufactures organic and inorganic chemicals at its major facilities in Vapi, Jhagadia, Dahej and Kutch, in Gujarat. It also manufactures active pharmaceutical ingredients at its units in Tarapur and Dombivali in Maharashtra, and at Vapi. Its home and personal care division manufactures surfactants at its units in Silvassa and Pithampur, Madhya Pradesh. The company announced demerger of its home & personal care division into separate entity in June 2018. The demerger was completed in June 2019. The group has a strong market position in the nitro-chloro-benzene-based specialty chemicals segment. The company also commissioned greenfield Nitro Toluene facility in Jhagadia, Gujarat in fiscal 2018. In fiscal 2017, it commenced calcium chloride and polydiacetylene (PDA) facilities in Jhagadia, Gujarat and a multipurpose ethylation unit at Dahej, Gujarat. The company also has three full-fledged R&D centres, recognised by the Department of Scientific and Industrial Research, Government of India and is in the process to set up an R&D centre focussed at developing high end value added products and chemistries in specialty chemical segment. In fiscal 2019, the company did capex of Rs 794 crore.

The other major group companies are mostly into trading of chemicals or are marketing arms of Aarti's products. In June 2018, the company also announced demerger of manufacturing operations of its subsidiary Nascent Chemical Industries Ltd with itself to consolidate the manufacturing operations of the group under one company.
 
In fiscal 2019, company posted operating income of Rs 4706 crore and profit after tax of Rs 492 crore (net of demerged home and personal care division) as against operating income of Rs 3806 crore and profit after tax of Rs. 333 crore during fiscal 2018.

Key Financial Indicators
Particulars Unit 2019 2018
Revenue Rs. Cr. 4,706 3,806 
Profit After Tax (PAT) Rs. Cr. 492 346
PAT Margins % 10.5 9.1
Adjusted Debt/Adjusted Networth Times 0.88 1.26
Interest Coverage Times 5.30 5.59

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments.
Annexure - Details of Instrument(s)
ISIN Name of instrument Date of
Allotment
Coupon
Rate (%)
Maturity date Issue Size
(Rs. Cr)
Rating Assigned
with Outlook
NA Commercial paper NA NA 7-365 days 400 CRISIL A1+
INE769A07050 Non-convertible debentures 31-Jul-2014 11.75% Jun-2020 40 CRISIL AA-/Positive
INE769A07068 Non-convertible debentures 31-Jul-2014 11.75% Jun-2021 40 CRISIL AA-/Positive
NA Long-Term Borrowing Programme NA NA Mar-2022 100 CRISIL AA-/Positive
NA Cash credit NA NA NA 1080 CRISIL AA-/Positive
NA Letter of credit & bank guarantee NA NA NA 600 CRISIL A1+
NA Proposed cash credit limit NA NA NA 50 CRISIL AA-/Positive
NA Term loan 31_Mar-2017 8.15% Mar-2024 100 CRISIL AA-/Positive
NA Term loan 12-Feb-2014 11% Mar-2021 70 CRISIL AA-/Positive

Annexure - Details of Rating Withdrawn
ISIN Name of instrument Date of
Allotment
Coupon
Rate (%)
Maturity date Issue Size
(Rs. Cr)
INE769A07043 Non-convertible debentures 31-Jul-14 11.75% 15-Jun-19 40
INE769A07035 Non-convertible debentures 31-Jul-14 11.75% 15-Jun-18 40
INE769A07027 Non-convertible debentures 31-Jul-14 11.75% 15-Jun-17 40
 
Annexure - List of entities consolidated
Entities consolidated
Aarti Corporate Services Ltd Full consolidation
Alchemie Europe Ltd Full consolidation
Innovative Envirocare Jhagadia Ltd Full consolidation
Aarti USA Inc, Full consolidation
Shanti Intermediaries Pvt Ltd Full consolidation
Nascent Chemical Industries Ltd Full consolidation
Ganesh Polychem Ltd Full consolidation
Aarti Polychem Pvt Ltd Full consolidation
Annexure - Rating History for last 3 Years
  Current 2019 (History) 2018  2017  2016  Start of 2016
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Commercial Paper  ST  400.00  CRISIL A1+  02-04-19  CRISIL A1+  09-07-18  CRISIL A1+  25-09-17  CRISIL A1+    --  -- 
        06-02-19  CRISIL A1+  05-01-18  CRISIL A1+           
Long-Term Borrowing Programme  LT  100.00
24-07-19 
CRISIL AA-/Positive  02-04-19  CRISIL AA-/Positive  09-07-18  CRISIL AA-/Stable  25-09-17  CRISIL AA-/Stable  29-09-16  CRISIL AA-/Stable  CRISIL A+/Positive 
        06-02-19  CRISIL AA-/Stable  05-01-18  CRISIL AA-/Stable           
Non Convertible Debentures  LT  80.00
24-07-19 
CRISIL AA-/Positive  02-04-19  CRISIL AA-/Positive  09-07-18  CRISIL AA-/Stable  25-09-17  CRISIL AA-/Stable  29-09-16  CRISIL AA-/Stable  CRISIL A+/Positive 
        06-02-19  CRISIL AA-/Stable  05-01-18  CRISIL AA-/Stable           
Fund-based Bank Facilities  LT/ST  1300.00  CRISIL AA-/Positive  02-04-19  CRISIL AA-/Positive  09-07-18  CRISIL AA-/Stable  25-09-17  CRISIL AA-/Stable  29-09-16  CRISIL AA-/Stable  CRISIL A+/Positive 
        06-02-19  CRISIL AA-/Stable  05-01-18  CRISIL AA-/Stable           
Non Fund-based Bank Facilities  LT/ST  600.00  CRISIL A1+  02-04-19  CRISIL A1+  09-07-18  CRISIL A1+  25-09-17  CRISIL A1+  29-09-16  CRISIL A1+  CRISIL A1 
        06-02-19  CRISIL A1+  05-01-18  CRISIL A1+           
All amounts are in Rs.Cr.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Cash Credit 1080 CRISIL AA-/Positive Cash Credit 1080 CRISIL AA-/Positive
Letter of credit & Bank Guarantee 600 CRISIL A1+ Letter of credit & Bank Guarantee 600 CRISIL A1+
Proposed Cash Credit Limit 50 CRISIL AA-/Positive Proposed Cash Credit Limit 50 CRISIL AA-/Positive
Term Loan 170 CRISIL AA-/Positive Term Loan 170 CRISIL AA-/Positive
Total 1900 -- Total 1900 --
Links to related criteria
CRISILs Approach to Financial Ratios
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating criteria for manufaturing and service sector companies
Rating Criteria for Chemical Industry
CRISILs Criteria for Consolidation

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