Rating Rationale
April 30, 2024 | Mumbai
Chembond Chemicals Limited
Ratings reaffirmed at 'CRISIL BBB+/Stable/CRISIL A2'
 
Rating Action
Total Bank Loan Facilities RatedRs.12 Crore
Long Term RatingCRISIL BBB+/Stable (Reaffirmed)
Short Term RatingCRISIL A2 (Reaffirmed)
Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings.
1 crore = 10 million
Refer to Annexure for Details of Instruments & Bank Facilities

Detailed Rationale

CRISIL Ratings has reaffirmed its ratings on the bank loan facilities of Chembond Chemicals Limited (CCL; part of Chembond group) at ‘CRISIL BBB+/Stable/CRISIL A2’.

 

The ratings continue to reflect the extensive experience of the promoters in the chemicals industry which has led to established market position of the group across various segments and sub-segments along with healthy financial risk profile of the group. These strengths are partially offset by the intense competition in the specialty chemicals industry and its working capital-intensive nature of operations.

Analytical Approach

For arriving at its ratings, CRISIL Ratings continues to combine the business and financial risk profiles of Chembond with those of its subsidiaries (see annexure). This is because all these entities, together referred to as the Chembond group, are owned and managed by the same promoters and have significant operational and financial linkages.

 

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:

  • Well established market position backed by diversified product portfolio: Group is into specialty chemical industry for last five decade. Group has well established its market position in the water treatment chemicals segment and other specialty chemical segments like the industrial coatings, construction chemicals and animal health segment. The group has a diversified customer base and deals with customers from various industries like automobile, petrochemicals, steel, fertilizers, construction and animal nutrition amongst others. The group is now benefitting from increased demand from the automobile segment and steady revenue growth from its major contributors the water treatment chemicals segment. Sustained growth in revenue and improvement in operating margins will continue to remain a key rating sensitivity factor.

 

  • Comfortable financial risk profile: The CCLs financial risk profile was marked by a heathy networth of Rs.269 Crores  as on Sept 2023 (Rs 248 crore as on March 31, 2023) adjusted for intangibles and moderate leverage levels with gearing at 0.03 times and total outside liabilities to tangible networth (TOL/TNW) ratio at 0.30 times as on March 31, 2023. Debt protection metrics remain comfortable with interest coverage and net cash accrual to adjusted debt ratios at 34 times and 3.07 time, respectively, in fiscal 2023. Interest coverage ratio is expected to be above 40 times in fiscal 2024. In the absence of any major debt-funded capital expenditure (capex), the overall financial risk profile should be comfortable over the medium term.

 

Weaknesses:

  • Intense competition leading to pressure on margins: The surface and water-treatment chemical sector industry is fragmented because of low entry barriers, such as limited capital and technology requirements, small gestation period, and easy availability of raw materials. Operating margins have been range bounded between 5-8% over past four years ending fiscal 2023. However, 9MFY24 operating margins were at 11.06%. With the expected improvement in sales performance, the margin is expected to improve and will remain monitorable.

 

  • Working capital intensive nature of operations: The company’s operations are working capital intensive, as indicated by gross current assets (GCAs) of around 135 days as on March 31, 2023, because of debtors of 96 days. However, the working capital cycle is supported by extended credit offered by suppliers. The inventory requirements are high due to batch manufacturing process followed by CCL for all its products to achieve maximum efficiency. Also, the company keeps raw material of around 30 days to support continuous production cycle. GCA days are expected to remain in the same range over the medium term.

Liquidity: Adequate

Bank limit utilisation is low at around 7 percent for the past twelve months ended Feb 2024. Cash accruals are expected to be over Rs 30 crore against nil term debt obligations. In addition, it will act as a cushion to the liquidity of the company. Current ratio is healthy at 2.75 times on March 31, 2023. No major capex plans over medium term.

Outlook: Stable

CRISIL Ratings believes the Chembond group will benefit over the medium term from its established market position and healthy relationship with key customers.

Rating Sensitivity factors

Upward Factors:

  • Sustained healthy growth in revenue and improved operating margin sustaining above 11% resulting in higher accruals.
  • Sustenance of improved working capital cycle and financial risk profile.

 

Downward Factors:

  • Lower than expected growth in revenue or operating margins remaining below 7% resulting in lower-than-expected net cash accruals, impacting liquidity position especially net cash accruals to repayment obligation ratio.
  • Increase in working capital requirements, larger-than-expected, debt-funded capital expenditure (capex) or acquisition or dividend payout, weakening the financial risk profile.

About the Group

Set up in 1975 by Dr Vinod Shah, Mr Ashwin Nagarwadia and Mr Parviz Dastur, Chembond manufactures speciality chemicals and provides a range of products for diverse industrial applications. It offers metal-treatment chemicals, water-treatment chemicals, and industrial enzymes through its subsidiaries and joint ventures (JVs). The company also manufactures chemicals for the construction and infrastructure sectors, and high-performance coatings for structural protection from corrosion, for floors and walls in clean rooms, and for shop floors and building exteriors. The company diversified into equipment-based solutions for water treatment. Additionally, it trades in building construction chemicals. Manufacturing and blending plants are in Tarapur (Maharashtra), Baddi (Himachal Pradesh), Chennai (Tamil Nadu), and Dudhwada (Vadodara, Gujarat). Warehouses and branch offices are in Ahmedabad (Gujarat), New Delhi, Faridabad (Haryana), and Kolkata (West Bengal).

 

In 2001, the Chembond group formed a JV with Ashland Inc, USA, and simultaneously acquired Drewtreat Chemicals Ltd for water-treatment chemicals. Pursuant to the sale of water-technologies business globally by Ashland Inc to Solenis Netherlands BV (Solenis). Solenis took over the minority stake in the Indian JV, Chembond Ashland Water Technology Ltd; the JV was renamed Chembond Solenis Water Technologies Ltd effective August 21, 2014. On April 27, 2017, Chembond entered into an agreement to acquire the equity shares of Chembond Solenis Water Technologies Ltd from Solenis Netherlands BV, after which the said entity became a wholly owned subsidiary of Chembond.

 

In November 2017, Chembond acquired 100% stake in Phiroze Sethna Pvt Ltd (Phiroze Sethna), which manufactures sealants and adhesives for the automotive industry. Phiroze Sethna also has a wholly owned subsidiary, Gramos Chemicals India Pvt Ltd, which manufactures products used in paint shops in the automotive industry.

Key Financial Indicators

As on / for the period ended March 31

Unit

9MFY 24

2023

2022

Operating income

Rs crore

340.16

441.03

350.57

Reported profit after tax

Rs crore

37.63

24.76

13.53

PAT margins

%

11.06

5.61

3.86

Adjusted Debt/Adjusted Net worth

Times

NA

0.03

0.01

Interest coverage

Times

NA

34.63

27.47

Any other information: Not Applicable

Note on complexity levels of the rated instrument:
CRISIL Ratings` complexity levels are assigned to various types of financial instruments and are included (where applicable) in the 'Annexure - Details of Instrument' in this Rating Rationale.

CRISIL Ratings will disclose complexity level for all securities - including those that are yet to be placed - based on available information. The complexity level for instruments may be updated, where required, in the rating rationale published subsequent to the issuance of the instrument when details on such features are available.

For more details on the CRISIL Ratings` complexity levels please visit www.crisilratings.com. Users may also call the Customer Service Helpdesk with queries on specific instruments.

Annexure - Details of Instrument(s)

ISIN Name of the
instrument		 Date of
Allotment		 Coupon
Rate (%)		 Maturity
Date		 Issue size
(Rs. Crore)		 Complexity
Level		 Rating assigned
with outlook
NA Bank Guarantee NA NA NA 3 NA CRISIL A2
NA Cash Credit NA NA NA 9 NA CRISIL BBB+/Stable

Annexure – List of entities consolidated

Names of Entities Consolidated

Extent of Consolidation

Rationale for Consolidation

Chembond Chemicals Limited

Fully consolidated

Parent company. Common promoters and significant operational and financial linkages

Chembond Clean Water Technologies Ltd

Fully consolidated

Step down subsidiary of Chembond. Common promoters and significant operational and financial linkages

Chembond Water Technologies Ltd

Fully consolidated

Wholly owned subsidiary of Chembond. Common promoters and significant operational and financial linkages

Chembond Biosciences Ltd

Fully consolidated

Wholly owned subsidiary of Chembond. Common promoters and significant operational and financial linkages

Chembond Material Technologies Private Ltd

Fully consolidated

Wholly owned subsidiary of Chembond. Common promoters and significant operational and financial linkages

Chembond-Calvatis Industrial Hygiene Systems Ltd

Fully consolidated

Chembond owns majority stake in the company and asserts control. Common promoters and significant operational and financial linkages

Chembond Polymers and Materials Ltd

Fully consolidated

Wholly owned subsidiary of Chembond. Common promoters and significant operational and financial linkages

Chembond Water Technologies (Malaysia) Sdn. Bhd.

Fully consolidated

Wholly owned subsidiary of Chembond Water Technologies Ltd and step down subsidiary of Chembond. Common promoters and significant operational and financial linkages

Phiroze Sethna Pvt Ltd

Fully consolidated

Wholly owned subsidiary of Chembond. Common promoters and significant operational and financial linkages

Gramos Chemicals India Pvt Ltd

Fully consolidated

Wholly owned subsidiary of  Phiroze Sethna Pvt Ltd. and step down subsidiary of Chembond. Common promoters and significant operational and financial linkages

Chembond Distribution Ltd

Fully consolidated

Wholly owned subsidiary of Chembond. Common promoters and significant operational and financial linkages
Annexure - Rating History for last 3 Years
  Current 2024 (History) 2023  2022  2021  Start of 2021
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund Based Facilities LT 9.0 CRISIL BBB+/Stable   -- 31-01-23 CRISIL BBB+/Stable   -- 02-11-21 CRISIL BBB+/Stable CRISIL BBB+/Stable
      --   --   --   -- 30-09-21 CRISIL BBB+/Stable --
Non-Fund Based Facilities ST 3.0 CRISIL A2   -- 31-01-23 CRISIL A2   -- 02-11-21 CRISIL A2 CRISIL A2
      --   --   --   -- 30-09-21 CRISIL A2 --
All amounts are in Rs.Cr.
Annexure - Details of Bank Lenders & Facilities
Facility Amount (Rs.Crore) Name of Lender Rating
Bank Guarantee 3 HDFC Bank Limited CRISIL A2
Cash Credit 9 HDFC Bank Limited CRISIL BBB+/Stable
Criteria Details
Links to related criteria
CRISILs Approach to Financial Ratios
Rating criteria for manufaturing and service sector companies
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating Criteria for Chemical Industry
CRISILs Criteria for Consolidation
Understanding CRISILs Ratings and Rating Scales

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