Rating Rationale

Strengths:
* Healthy scale and integrated nature of operations: The group is among the leading manufacturer of dye intermediates and dyestuff in India. Operations are highly integrated, and capacities are balanced to enhance in-house consumption and ensure minimal effluent costs. Around 40-45% of basic chemicals and dye intermediates production is for captive consumption. The healthy scale and integrated operations enable better absorption of volatility in profitability.

* Diversified product basket and customer profile: Almost half the business is derived from sales of dye intermediates, around a third from dyestuff, and the balance from basic chemicals, reflecting a diversified product portfolio. Furthermore, BCL enjoys geographic diversification, with about a third of the revenue coming from exports. Moreover, the industry base is wide, including textiles, leather, paper, and water chemicals, among others'reliance on the textile industry is, however, high. Customer base is large, with the top 10 customers contributing around 40% to the topline.

* Extensive experience of the promoters: Benefits from the promoters' experience of more than three decades, an established market position, and healthy relations with customers should continue to support business risk profile.

* Robust financial risk profile and healthy liquidity: Networth was strong and gearing comfortable at Rs 697 crore and 0.26 time, respectively, as on March 31, 2018. Moreover, in fiscal 2018, networth received a boost of Rs 225 crore through a qualified institutional placement. Debt protection measures are comfortable, with interest coverage and net cash accrual to total debt ratios of 38 times and 0.67 time, respectively, in fiscal 2018. Financial profile is also supported by healthy profitability (17.5 % in fiscal 2018) and low leverage.

Liquidity is ample, backed by adequate cash accrual, cushion in bank limit, absence of any debt obligations, and sizeable unencumbered cash and bank balances. Annual cash accrual of Rs 150-170 crore should adequately cover incremental capital expenditure (capex) and working capital requirements. The group does not have any major expenditure programme in the immediate future; if any sizeable capex materialises, it would be spread over the medium term, in line with the stated posture of the management of maintaining gearing below 0.5 times on an ongoing basis. Utilisation of bank limit averaged 67% in the 12 months through July 2018, providing healthy cushion to the sanctioned limit of Rs 175 crore. The group also enjoys funding support from the promoters in the form of unsecured loans.

Weaknesses:
* Working capital-intensive operations: Operations are working capital intensive, with gross current assets of over five months as on March 31, 2018. Debtors and inventory were 110 and 44 days, respectively.

* Risk associated with volatility in the prices of dyestuff and intermediates and foreign exchange (forex) rates: The prices of key products, such as H-acid and vinyl sulphone (VS), have witnessed significant fluctuation in the past. The ability to manage the volatility and sustain profitability remains critical. Also, the company uses forwards to cover its forex risk.

* Susceptibility to fluctuation in raw material and end product prices: The key inputs-sulphur, aniline, caustic, ethyl oxide, PNC, naphthalene, and coal'are volatile and makes operating margin susceptible to fluctuation in prices. Furthermore, high revenue (around two-third of the total) from the textile industry exposes the company to the risk associated with industry concentration.

* Exposure to stringent regulatory norms: BCL operates in an industry that poses high risks to environment and health. Consequently, the industry is regulated by stringent norms by regulatory bodies. The company continues to comply with such norms; however, any changes in the policies may adversely constrain the business.

About the promoters and group
Ahmedabad-based BCL manufactures dyestuff (installed capacity of which is 29,000 tonne per annum [TPA]), dye intermediates (33,000 TPA), and basic chemicals (190,000 TPA). It has eight plants in Vadodara and Ahmedabad, and is promoted by Mr Suresh Patel and his sons: Mr Bhavin Patel and Mr Ankit Patel. The company is a public listed entity.

BCL was promoted by Mr Suresh J Patel as J K Pharma in 1989. J K Pharma set up a small dye intermediate (Vinyl Sulphone) plant in Vatva (Ahmedabad), with capacity of 200 million tonne per annum (MTPA). The name was changed to Bodal Chemicals Pvt Ltd (BCPL) in 1994. Mr Bhavin Patel joined the company in 2004 and the company forward integrated to manufacture dyestuff. In 2006, BCPL was listed through a reverse merger with Dintex Dyechem Ltd and renamed BCL. In 2007, Mr Ankit Patel joined the company, and in 2010, the company backward integrated to manufacture basic chemicals.

In 2016, the company amalgamated Bodal Agrotech Ltd. In 2017, BCL acquired 70% stake in SPS Processors Pvt Ltd (which manufactures dyes intermediates) and 42% stake in Trion Chemicals Pvt Ltd (which manufactures trichloroisocyanuric acid), which was raised to 59% in 2018.