Detailed Rationale

CRISIL Ratings has upgraded its rating on the long term bank facilities of Agarwal Industrial Corporation Limited (AICL) to 'CRISIL A/Stable' from 'CRISIL A-/Stable'.

 

The upgrade reflects sustained improvement in AICL’s credit profile. AICL reported sustenance of revenue above Rs. 2125 crores in fiscal 2024. It reported revenue of around Rs 1033 crore till September 2024 and is expected to achieve revenues of more than Rs.2250-2300 crores for fiscal 2025, driven by increase in volumes, healthy orders in in the Bitumen segment along with healthy growth in shipping business with continued addition of vessels. Operating margins improved to 8.18% in fiscal 2024 from 7.02% in fiscal 2023 and is expected to sustain above 9% for fiscal 2025. Consequently, liquidity improved with cash accruals of Rs. 136 crores in fiscal 2024 and expected accruals of more than Rs. 150 crores in medium term, adequate to meet repayment obligations of Rs. 59-73 crores.   Financial risk profile continues to be comfortable marked by comfortable capital structure and adequate debt protection metrics. Sustenance of revenue growth and profitability, leading to better liquidity will be a key monitorable.

 

The rating continues to reflect extensive experience of AICL’s promoters and established market position in the bitumen products business, diversified revenue profile with established clientele, prudent risk management strategies and strong financial risk profile. These strengths are partially offset by exposure to cyclicality in end user industry, susceptibility of operating margin to volatility in raw material prices and forex rates and exposure to supplier concentration risk.

Analytical Approach

For arriving at its ratings, CRISIL Ratings has consolidated the business and financial risk profiles of AICL, and its subsidiaries, which are strategically important to, and have a significant degree of operational integration with AICL. These companies are - Bituminex Cochin Private Limited, Agarwal Translink Private Limited, AICL Overseas FZ LLC and AICL Finance Private Ltd. CRISIL Ratings considers these entities as being strategic to AICL in view of their strong integration with AICL’s operations.

 

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 in the bitumen industry: AICL group benefits from the extensive business experience of the promoters of over four decades, their understanding of the dynamics of the local and global bitumen market, and established relationships with suppliers and customers. The group’s strategically located manufacturing facilities and storage units has helped in reduction of transportation cost. A combination of steady demand and strong realizations has led to a significant increase in scale with a CAGR of 33% for the past three years ending fiscal 2024. CRISIL Ratings believes that the AICL group would maintain its established presence aided by extensive experience of promoters in the industry. Increasing demand and customer base has helped increase revenues steadily to Rs. 2125 crores in fiscal 2024 from Rs.904 crores in fiscal 2021. The group has reported revenues of Rs. 1033 crores for first half of fiscal 2025 (growth of around 20% from H1 FY2024) and is expected to sustain its scale over the medium term.

 

• Diversified revenue profile with established clientele: Apart from being a manufacturer and trader of bituminous products, AICL group provides integrated solution to its customers in terms of transportation. AICL group is also engaged in transportation of LPG cylinders, power generation through windmill and ship chartering business. The parent company - AICL’s freight expenses are expected to be moderated to the extent of 60-70% in the form of freight revenue from this ship chartering business. In FY2024 AICL transported 60% of bitumen through its own vessels.  The profitability from ship chartering business offsets for the moderate margins in the Bitumen trading segment. In addition, the group benefits from the established customer and supplier network in domestic and international markets which supports repeat business across segments.

 

• Strong financial risk profile: With continuous accretion to reserves AICL group has built a net worth of Rs. 506 crores as on March 31, 2024 as compared to Rs 398 as on March 31, 2023. The gearing and total outside liabilities to adjusted net worth (TOLANW) is 0.68 time and 1.20 time, respectively, as on March 31, 2024. Despite proposed debt funded capex for procuring vessels the capital structure is expected to be comfortable in the medium term with expected Gearing and total outside liabilities to adjusted networth (TOLANW) in range of 0.4-0.5 time and 0.7-1 time, respectively in medium term. AICL group’s debt protection metrics is healthy with interest coverage of 8.33 times and net cash accruals to total debt (NCATD) of 0.39 time respectively, for fiscal 2024. The debt protection metrics are expected to remain at healthy over the medium term backed by healthy profitability.

 

• Prudent risk management strategies: AICL group has prudent risk management strategies marked by moderate credit extended to customers and low inventory holding. The average inventory maintained over the past 3 years ended fiscal 2024 is low at around 16-24 days. Majority of the purchases are order backed while certain inventories are maintained in order to cater to urgent demand from its customers. Counterparty risk is mitigated to some extent by a large and diversified clientele and established long relationship of 3-4 decades with major clients. It is also able to pass on its foreign exchange exposure to customers.

 

Weaknesses:

• Susceptibility of the operating margin to volatility in raw material prices: The price of the main raw material, bitumen has been extremely volatile in the past as it is a derivative product of crude oil. Thus, any sudden sharp increase or decrease in the price of bitumen, can impact the operating margins. Also, in the shipping business, any fluctuation in the prices of fuel is covered in the freight rates charged to the customer. Thus, although, company is able to pass on this increase to customers, inability to do so fully or lag in passing on, has led to some volatility in operating margins that have ranged from 6.3% to 8.2% in the past five fiscals, through fiscal 2024.

 

• Exposure to cyclicality in end user industry: The entity caters to the infrastructure, industrial gases, and power industries. The end-user industries are cyclical and are strongly correlated to economic cycles. In the past, because of economic recession, the construction sector faced a slowdown, impacting credit profiles of players. This also leads to a stretch in debtors from small clients, reflected in sizeable debtors more than 6 months of Rs.66.28 crores as on March 31, 2024.

 

• Exposure to supplier concentration risk: Supplier concentration to constrain the business risk profile of the company. High supplier concentration limits price negotiation capability. The company majorly procures its bitumen from suppliers like AGEE EXIM DMCC and PETRO ADDICHEM FZC. Continuation of the strong relationship with these companies will remain a key rating sensitivity factor despite longstanding ties between these entities.

Liquidity: Strong

AICL group has strong liquidity driven by expected cash accruals of 154-182 crores annually against repayment obligations of around Rs.59-73 crores over the medium term. Cash and cash equivalents were high at Rs 57.65 crores coupled with liquid mutual funds of Rs.33.17 crores as on September 30, 2024. Fund based limits has an average utilization of 43% on an average over the 12 months ended October 2024. CRISIL Ratings expects internal accruals, cash & cash equivalents and unutilized bank lines to be sufficient to meet its repayment obligations and incremental working capital requirements over the medium term.

Outlook: Stable

CRISIL Ratings believes AICL group will benefit from the extensive experience of the promoters, diversified businesses and low debt levels.

Rating sensitivity factors

Upward factors:

• Significant improvement in scale of operations or sustained improvement in operating margins above 10%, leading to higher cash accruals
• Improvement in debt protection metrics, with debt to Ebitda ratio of less than1.5 times
• Improvement in working capital management and sustenance of financial risk profile along with continuation of strong relationships with suppliers

 

Downward factors:

• Decline in net cash accruals below Rs.75 crore on account of decline in revenue or operating margin.
• Significantly higher-than-expected debt-funded capex leading to gearing above 0.75 times
• Substantial increase in its working capital requirements or large debt funded capex, weakening its liquidity and financial profile.

About the Company

AICL, formerly known as Bombay Baroda Roadways India Limited, was incorporated in 1995. AICPL is primarily engaged in manufacturing of bitumen and bitumen products. It also transports Liquified Petroleum Gas (LPG) and bituminous product. AICPL also forayed into ship operating and chartering business through its subsidiary in UAE.

 

The company is headquartered in Mumbai (Maharashtra) and is promoted by Mr. Jaiprakash Agarwal, Mr. Lalit Agarwal, Mr. Ramchandra Agarwal and Mr. Mahendra Agarwal. The manufacturing units are located at Belgaum, Hyderabad, Taloja and Baroda. The company is listed on Bombay and National Stock Exchanges.

Any other information: Not Applicable