Detailed Rationale

CRISIL Ratings has upgraded its rating on the long-term bank facility of Birla Carbon India Private Limited (BCIPL) to ‘CRISIL AA/Stable’ from ‘CRISIL AA-/Positive’. Also, CRISIL Ratings has reaffirmed its ‘CRISIL A1+’ rating on the short-term bank facilities and commercial paper programme of the company.

 

The upgrade reflects the improvement in the business risk profile of the company driven by healthy cash accrual, sustainable operating margin and strong market position in the domestic carbon black (CB) industry. Healthy operating performance also translated into improvement in the financial risk profile, as reflected in near debt-free balance sheet and strong liquidity, as expected.

 

In fiscal 2023, the company saw realisations jumped ~31% while volumes moderated ~7.6%, resulting in growth in revenue by ~22%. Profitability remained steady with earnings before interest, tax, depreciation and amortisation (Ebitda) per tonne at ~Rs 16,500. Cash accrual was healthy at ~Rs 500 crore. Furthermore, loans and advances to group entities fell to ~Rs 1,112 crore as on March 31, 2023, from Rs 1,419 crore a year earlier. Healthy accrual coupled with reduction in loans and advances helped the company deleverage its balance sheet – debt fell to Rs 30 crore as on March 31, 2023, from Rs 407 crore a year earlier.

 

The ratings continue to factor in the strong parentage and synergies derived from being part of the Aditya Birla group. Being a part of one of the leaders in the global carbon black industry enables BCIPL to leverage the group’s technical know-how and scale benefits. Loans and advances extended to Aditya Birla group holding entities are interest-bearing and repayable on demand. Going forward, the loans and advances are expected to remain at a similar level or reduce over the medium term. However, sustained increase in the loans and advances or inability to recall them in a timely manner may adversely affect overall liquidity and hence remains a key rating sensitivity factor.

 

These strengths are partially offset by client concentration in revenue, with the top five customers contributing ~70% of sales, exposure to risks related to the cyclical nature of the automobile industry and susceptibility of realisations to fluctuations in crude oil prices and foreign exchange (forex) rates.

Analytical Approach

CRISIL Ratings has considered the standalone business and financial risk profiles of BCIPL.

Key Rating Drivers & Detailed Description

Strengths:

• Strong market position in the domestic carbon black industry

The company is the second-largest player, after PCBL Ltd (‘CRISIL A1+’), with a domestic market share of 30-33%. It has production capacity of 377,000 tonne per annum (TPA), accounting for ~23% of total domestic capacity. Manufacturing facilities are located close to tyre manufacturers to minimise logistics cost. Exports account for ~7% of sales.

 

Capacity utilisation was ~90% in fiscal 2023, against ~96% in fiscal 2022, as volumes fell owing to high prices and moderate demand. The outlook for end-user segments, majorly domestic tyre industry, is healthy for the medium term, which should drive volume growth and utilisation. Also, the company is focussed on increasing the share of speciality carbon black in overall mix, which should aid operating margin.

 

• Reputed clientele

BCIPL mainly caters to large tyre manufacturers and has established relationships with them. The company drew ~85% of its revenue from the tyre segment in fiscal 2023. It has diversified its client base over the last few fiscals, with the top five players including MRF Ltd, Apollo Tyres Ltd (‘CRISIL AA+/Stable/CRISIL A1+’), JK Tyre and Industries Ltd, and Good Year/SAT/Continental Tyres accounting for about ~70% of revenue, as against ~75% earlier. Large scale of operations, strong global brand, and focus on quality and timeliness of services help the company to maintain healthy relationships with key customers.

 

• Benefits of strong parentage

The company is a wholly owned subsidiary of SKI Carbon Black (Mauritius) Ltd (SKI Carbon Black), which is the holding company for all carbon black business entities of the Aditya Birla group, and operates under the common brand, Birla Carbon. SKI Carbon Black is also one of the world’s largest producers of carbon black, with installed capacity of around 2 MTPA. A geographically diversified business risk profile enables benefits of marketing under a common brand and central procurement of feedstock. An in-house research and development centre focuses on yield enhancement through technology initiatives, thereby lowering cost of production and driving process improvements.

 

• Strong financial risk profile

Operating margin in terms of Ebitda per tonne was stable at Rs 16,500 despite significant rise in crude prices in fiscal 2023. The Ebitda per tonne is expected to sustain at Rs 15,000-16,000 per tonne over the medium term, aided by the company’s focus on specialty grades and ability to pass-through cost albeit with a lag of a quarter. Gearing was comfortable and improved to 0.30 time as on March 31, 2023, from 0.5 time as on March 31, 2022, owing to reduction in debt as cash accrual and receipt from redemption of loans and advances were largely used to lower debt.

CRISIL Ratings understands that the company may look to expand organically based on future demand expectations. Given the expectation of healthy cash accrual, balance sheet strength is expected to sustain. However, any higher-than-expected capital expenditure (capex) resulting in increasing debt will remain a key monitorable.

 

• Moderate working capital cycle

The company typically maintains raw material and finished goods inventory of 80-90 days on average. Raw materials are sourced through 90-180 day letters of credit, with transit time of ~45 days. On the other hand, credit of around 90 days is provided to customers.

 

Weaknesses:

• Susceptibility to cyclicality in the automobile industry

Demand for domestic carbon black depends on growth of the tyre industry as ~65% of overall carbon black produced in India is consumed by tyre manufacturers. BCIPL generated around 85% of its revenue from the tyre industry in fiscal 2023. Hence, revenue may be impacted owing to slowdown in demand from automobile original equipment manufacturers (OEMs) or disruptions such as the Covid-19 pandemic, leading to shutdown of tyre dealerships or automobile service stations. That said, 70% of the tyre demand comes from the aftermarket, which is more resilient than OEM demand.

 

• Exposure to volatility in crude oil prices and forex rates; albeit supported by ability to pass through increased input costs

Carbon black feedstock (CBFS), derived from crude oil, is a major raw material for carbon black production. Increase in crude oil prices may drive up CBFS prices, and thus, increase the operating cost of players such as BCIPL. However, the company passes on such price hikes to customers, although with lag, mitigating any risk to profitability. Furthermore, exposure to volatility in forex rates is largely mitigated by entering forward contracts. Stable revenue from the sale of surplus power generated also supports the operating margin.

 

• Support towards group companies

Loans and advances to group companies reduced to Rs 1,112 crore as on March 31, 2023, from Rs 1,419 crore as on March 31, 2022. CRISIL Ratings understands these outstanding amounts are not expected to increase beyond current levels over the medium term. These loans and advances bear interest and are repayable on demand; the interest is received on time. Increase in loans and advances or inability to recall them in a timely manner, affecting overall liquidity, will be key rating sensitivity factors.

 

• Exposure to risks related to removal of anti-dumping duty on carbon black

The government of India imposed an anti-dumping duty on carbon black originating in, or exported from, China and Russia on November 18, 2015; this levy was valid till December 2020. On January 5, 2021, the government decided not to impose such duty. Although there was no impact of this on demand, CRISIL Ratings will continue to monitor any effect on the business of BCIPL.

Liquidity: Strong

Cash accrual, expected at more than Rs 450 crore per annum, will comfortably cover minimal debt obligation over the next couple of fiscals. Regular cash flow, along with adequate working capital limit and other short-term loan facilities, supports liquidity. Cash and equivalent (excluding ICDs) stood at Rs 325 crore as on March 31, 2023, while unutilised fund-based limit was Rs ~2,837 crore with drawing power of ~Rs 720 crore. Healthy cash accrual and existing cash reserve will sufficiently cover any incremental working capital requirement and capex (mainly towards efficiency measures and regular maintenance). The company also benefits from the strong parentage of the Aditya Birla group.

Outlook: Stable

CRISIL Ratings believes BCIPL's credit risk profile will continue to be supported by its strong market position ensuring a steady order inflow, strong operating efficiency and healthy financial risk profile.

Rating Sensitivity factors

Upward factors

• Significant improvement in operating scale resulting in strong market share gains, coupled with sustenance of operating profitability, with Ebitda per tonne at significantly higher than current levels of ~Rs 16,000
• Strong operating free cash generation supporting further improvement in capital structure and return profile

 

Downward factors

• Significant rise in leverage resulting from higher-than-expected debt-funded capex or further increase in advances to group entities from current levels of Rs 1,112 crore
• Deterioration in operating profile, with material fall in profitability and higher working capital requirement, resulting in negative free cash flow on sustained basis

About the Company

BCIPL [previously, SKI Carbon Black (India) Pvt Ltd], an Aditya Birla group company, is a wholly owned subsidiary of SKI Carbon Black. The company manufactures carbon black, which is used in the tyre industry. It also has a cogeneration power plant of ~100 MW.

 

BCIPL started the carbon black business in India in 1988 through Hi-Tech Carbon, Renukoot (Uttar Pradesh). The second plant was set up in Gummidipoondi, Tamil Nadu, followed by a third in Patalganga, Maharashtra. In 2013, Hi-Tech Carbon demerged from Aditya Birla Nuvo Ltd and SKI Carbon Black India Pvt Ltd was incorporated, which was renamed BCIPL in 2018. Its production capacity is 377,000 TPA.

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 level	Rating assigned with outlook
NA	Commercial Paper	NA	NA	7-365 days	600	Simple	CRISIL A1+
NA	Letter of Credit*	NA	NA	NA	100	NA	CRISIL A1+
NA	Non-Fund Based Limit	NA	NA	NA	100	NA	CRISIL A1+
NA	Working Capital Facility	NA	NA	NA	300	NA	CRISIL AA/Stable

*Sub-limit of SBLC of Rs 100 crore, working capital demand loan of Rs 100 crore and sales invoice discounting of Rs 100 crore