Detailed Rationale

Crisil Ratings has placed its ratings on the bank facilities of Chembond Chemicals Limited (CCL, Part of Chembond Group) on ‘Rating Watch with Negative Implications’.

 

The watch negative reflects the expected weakening of the business risk profile of the group basis the understanding received by Crisil Ratings due to the upcoming split of the water treatment chemical segment from the existing group operations which currently includes metal-treatment chemicals, water-treatment chemicals, and industrial enzymes.

 

This will lead to reduction in scale of operations, however, the extent of impact on the group’s operations and business risk profile remains a key monitorable and is pending clarifications on the demerged operations from the management. Post the completion of business separation, water treatment chemicals will operate under a new entity (Chembond Chemicals Specialty Limited (CCSL)) which will be subsequently demerged from the group and will operate separately on an independent basis with limited cashflow fungibilities.

 

Crisil Ratings will resolve the watch once it receives clarity on the demerged operations and its potential impact on the business risk profile of the group.

 

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: The 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 net worth of Rs.379.2 Crores  as on Sept 2024 (Rs 361 crore as on March 31, 2024) adjusted for intangibles and moderate leverage levels with gearing at 0.02 times and total outside liabilities to tangible networth (TOL/TNW) ratio at 0.30 times as on March 31, 2024. Debt protection metrics remain comfortable with interest coverage and net cash accrual to adjusted debt ratios at 10 times and above 3 time, respectively, in fiscal 2024. Interest coverage ratio is expected to be above 40 times in fiscal 2025. 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 over 160 days as on Sept, 2024, because of debtors of 128 days and inventory levels of 36 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 less than 10 percent for the past twelve months ended Jan 2025. 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 over 2 times on March 31, 2024. No major capex plans over medium term.

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, 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).

 

On 22nd April 2025, NCLT approved the scheme of merger/demerger and is pending ROC filing. According to which, Construction Chemical and Water Chemical business of CCL and Chembond Clean Water Technologies Limited (CCWTL) will amalgamate with Chembond Chemicals Specialty Limited (CCSL) while Chembond Water Technologies Limited (CWTL), Chembond Water Technologies (Malaysia) Sdn. Bhd., Chembond-Calvatis Industrial Hygiene Systems Limited and  Chembond Distribution Limited will become subsidiaries of Chembond Chemicals Specialty Limited (CCSL, currently a 100% subsidiary of CCL), while remaining entities will remain 100% owned subsidiaries of CCL except Phiroze Sethna Private Limited, Gramos Chemicals India Private Limited as these will be amalgamated with CCL.

Any other information: Not Applicable