Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL A+/Stable/CRISIL A1’ ratings on the bank facilities of Ashish Chemicals (AC; part of the Meghmani LLP group).

 

Revenue is likely to record healthy growth, aided by the recently commissioned capacities in the paracetamol and pigments segments. The company will also benefit from strong demand and realisations for the paracetamol API, amidst shortage in supply from China, import substitution and tie ups with new pharmaceutical companies. Demand for paracetamol has grown sharply during the Covid-19 pandemic. Steady demand is also expected in the pigment segment owing to closure of significant capacities in China due to pollution concerns, overseas customers looking for an alternative to China option and expectation of growth returning to the key end user segments like paints, inks, textiles etc. Operating margin thus should stabilise at 27-30%, supported by healthy capacity utilisation, cost optimisation and steady realisations.

 

Under the capital expenditure (capex) of Rs 200 crore carried out over the last two fiscals, the company doubled its paracetamol manufacturing capacity to 15,000 MTPA, and increased its pigment manufacturing capacity by 1.5 times to 1,800 MTPA. The capex was funded entirely through internal accrual. As a result, gearing is estimated around 0.09 time as on March 31, 2021, while the interest coverage and net cash accrual to total debt ratios are estimated at healthy levels of 145 times and 3.5 times, respectively. Debt protection metrics should sustain, aided by minimal term debt, moderate incremental working capital requirement and absence of any large capex. Cash generated from newly expanded capacities should also strengthen the financial risk profile further.

 

Revenue is estimated to have grown by 28% year-on-year to Rs Rs 634 crore in fiscal 2021 from Rs 496 crore in fiscal 2020, primarily driven by strong demand and realisations for the paracetamol API, amidst a shortage during the pandemic. The pigment segment also witnessed robust growth of 11% y-o-y to record revenue of Rs 354 crore in fiscal 2021 (Rs 318 crore in fiscal 2020). Operating margin is estimated at historically high levels of 38% in fiscal 2021, up from 29% in fiscal 2020, buoyed by increased realisations with moderate raw material prices. A significant portion of raw materials used in the paracetamol and pigment segments are linked to crude oil prices, which were muted for a large part of the previous fiscal.

 

The ratings continue to reflect the extensive experience of the promoters in the chemical industry, the established market position of the Meghmani LLP group in the pigment segment, and improved market position in the paracetamol segment. The ratings also take into consideration operational support expected from other group entities, and the healthy financial risk profile. These strengths are partially offset by large working capital requirement and susceptibility to volatility in raw material prices.

Analytical Approach

For arriving at the ratings, CRISIL Ratings has combined the business and financial risk profiles of AC, Meghmani Pigments (MP) and Meghmani LLP (ML). This is because the entities, collectively referred to as the Meghmani LLP Group, have common promoters and management, and are in the same line of business. Besides, the firms have fungible cash flow and significant financial synergies.

 

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

• Strong market position in the pigment segment and improved market position in the paracetamol segment: The Meghmani group manufactures pigments having diverse applications in industries such as textiles, paints and inks. It is the largest manufacturer of the Violet 23 pigment in India, and caters to speciality applications in violet as well as red pigments. In the pharmaceutical sector, ML is amongst the top paracetamol manufacturers in India. Its market position is likely to strengthen, with doubling of manufacturing capacities, addition of new clients and steady offtake from existing customers, which are amongst the largest and most reputed domestic players. In the ink segment, AC benefits from its longstanding relationships with large printing solution players overseas. Almost entire revenue in the ink additive segment is derived from exports. Exports have formed 35-45% of overall revenue in the past five years.

 

• Extensive experience of the promoters: Strong presence of the promoters in the domestic and international chemical business and operational linkages with the larger group should continue to support the business risk profile. The oldest firm of the group, AC, was set up in 1977. The Meghmani group has more than 15 manufacturing facilities in Gujarat, and is the largest producer of copper phthalocyanine blue and beta blue pigments in the world. In the agrochemical segment, the product range covers the entire value chain: intermediates, technicals, and formulations.

 

• Healthy and improving financial risk profile: Networth and gearing are estimated at Rs 479 crore and 0.09 time, respectively, as on March 31, 2021. Debt protection metrics are healthy, with interest coverage and net cash accrual to total debt ratios estimated over 145 times and 3.5 times, respectively, in fiscal 2021. Healthy margin, steady cash accrual and moderate capex should support the metrics over the medium term.

 

Weaknesses

• Large working capital requirement: Gross current assets were high, estimated at 212 days as on March 31, 2021, driven by large receivables and inventory of 124 and 120 days, respectively. The company needs to stock raw material, as exports form a sizable portion of its revenue. Negotiated payment terms with customers keep receivables high. Working capital requirement is being met mainly via internal accrual, with modest reliance on external debt.

 

• Susceptibility to volatility in raw material prices: Raw materials for the paracetamol and pigment segments include crude and benzene (para nitro chloro benzene) derivatives, prices of which are volatile. While the group can pass on the hike in input prices partly to its clients, profitability remains susceptible to extreme volatility especially during a slowdown. After posting a record high operating margin in fiscal 2021, increase in crude prices and their derivatives may lead to a slight moderation in fiscal 2022.

Liquidity: Strong

The Meghmani LLP Group enjoys strong liquidity with healthy cash accrual of Rs 160 crore in fiscal 2021 and more than Rs 200 crore expected per annum going forward. This should more than suffice to cover the long-term debt obligation of around Rs 2 crore each in fiscals 2022 and 2023, and yearly capex of around Rs 20 crore. Bank limit of Rs 153 crore was utilised only at 63% on an average over the 12 months through May 2021. With estimated gearing at 0.09 time as on March 31, 2021, there is enough headroom to raise additional debt in case of exigencies.

Outlook Stable

CRISIL Ratings expects further improvement in the business risk profile of the Meghmani LLP group over the medium term, aided by gain in market share, scale up in operations and addition of new customers. Healthy demand drivers should support revenue growth while high capacity utilisation, stable realisations and cost optimisation measures should help the profitability sustain. Financial risk profile is expected to remain healthy, with improving cash generation and minimal capex needs.

Rating Sensitivity factors

Upward factors

• Improvement in operating performance, driven by swift ramp up of new capacities, supporting double digit revenue growth and operating margins of over 30%.
• Sustenance of healthy financial risk profile.

 

Downward factors

• Significant moderation in performance – operating margins deteriorating to less than 18-20% on a sustained basis.
• Any large debt-funded capex or acquisitions, leading to increase in gearing to over 1.5 times.
• Sustained large withdrawal, constraining debt metrics and liquidity.

About the Company

AC was set up as a partnership between Mr Ashish Soparkar and Mr Jayantibhai Patel in 1977. It manufactures dispersion blue additives for printing ink.

 

ML (formerly, Meghmani Unichem LLP) was established in 2010 by Mr Maulik Jayantibhai Patel and Mr Kaushal Ashish Soparkar. The firm, which manufactures paracetamol, has doubled its capacity to 15,000 MTPA in fiscal 2021. Commercial production commenced in October 2011. ML also manufactures pigment red 122, and its unit with 600 TPA capacity began operations in November 2014. ML has commissioned facilities for production of Violet-23 in fiscal 2021, with a capacity of 600 MTPA.

 

MP was set up as a partnership firm, Alpanil Industries in 1992, and got its current name in 2009. It manufactures high-performance carbazole dioxazine pigment Violet 23 and high-performance quinacridone pigments, such as Violet 19.

 

The Meghmani group comprises the flagship company, Meghmani Organics Ltd (rated 'CRISIL AA-/Stable/CRISIL A1+'), Meghmani Finechem Ltd (rated 'CRISIL A+/Positive), Meghmani Industries Ltd (rated 'CRISIL A+/Stable/CRISIL A1), Navratan Speciality Chemicals LLP (rated 'CRISIL BBB+/Stable/CRISIL A2'), and the firms of the Meghmani LLP group.

Key Financial Indicators (Consolidated)

Particulars	Unit	2021	2020
Revenue	Rs Crore	634	496
Profit after tax	Rs Crore	157	93
PAT margin	%	24.8	18.7
Adjusted debt/adjusted net worth	Times	0.1	0.09
Interest coverage	Times	145.46	81.76

 

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of Instrument	Date of Allotment	Coupon Rate (%)	Maturity Date	Issue Size (Rs crore)	Complexity levels	Rating Assigned with Outlook
NA	Export packing credit*	NA	NA	NA	13	NA	CRISIL A+/Stable
NA	Letter of credit#	NA	NA	NA	2.0	NA	CRISIL A1

*Interchangeable with cash credit to the extent of Rs 3 crore

#Interchangeable with bank guarantee

Annexure – List of entities consolidated

Names of Entities Consolidated	Extent of Consolidation	Rationale for Consolidation
Meghmani Pigments	Full Consolidation	Common promoters and management and are in the same line of business. Also significant financial synergies between the firms
Meghmani LLP	Full Consolidation	Common promoters and management and are in the same line of business. Also significant financial synergies between the firms