Rating Rationale
September 29, 2020 | Mumbai
Chemcon Speciality Chemicals Limited
Rating upgraded to 'CRISIL BBB+/Stable'
 
Rating Action
Total Bank Loan Facilities Rated Rs.53 Crore
Long Term Rating CRISIL BBB+/Stable (Upgraded from 'CRISIL BBB/Stable')
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has upgraded its rating on the long term bank facilities of Chemcon Speciality Chemicals Limited (CSCL) to 'CRISIL BBB+/Stable' from 'CRISIL BBB/Stable'.
 
The rating revision reflects CRISIL's belief that CSCL's liquidity profile is expected to improve significantly post conclusion of initial public offering (IPO) and strong internal accruals. The company launched an IPO for Rs 318 crore in September 2020, out of which Rs 165 crore is expected to be primary. Out of the proceeds, Rs 41 crore are expected to be utilized for capacity expansion while Rs 90 crore are expected to be utilized for incremental working capital requirements and balance towards general corporate purpose. Subsequently CSCL's reliance on bank borrowing is expected to reduce which is expected to further strengthen its capital structure. Gross current assets (GCA) estimated over 200 days in FY20, due to debtors and inventory of 3-4 months and 2-3 months, respectively. Rating upgrade also factors strong market position in bromides, HMDS (Hexamethyldisilazane) and CMIC (Chloromethyl Isopropyl Carbonate) segment. The diverse product basket and enhanced efficiency at the new capacities should ensure sustenance of the operating margin at over 25%.

The rating reflects the extensive experience of promoters in the industrial chemical industry, and robust financial risk profile. These strengths are partially offset by moderate working capital intensive operations and exposure to foreign exchange volatility and to changes in government regulations.

Key Rating Drivers & Detailed Description
Strengths
* Established market position with large clientele, and track record of over three decades
CSCL has been manufacturing specialty chemical for more than three decades and has established itself as a reliable supplier of specialty chemicals, these products are used in end user industries such as Pharmaceutical, oil exploration and refining. The business risk profile is supported by strong market position in Bromides, HMDS and CMIC in world. The long standing experience helped company to grow at CAGR of 45% to Rs 265 crore during last three year ended fiscal year 2020. Promoters of CSCL are resourceful and have supported operations through infusion of unsecured loans as in past. The operations are marginally affected by outbreak of COVID 19 and subsequent lockdown. The ability of the company to grow its operation and maintain profitability in the backdrop of COVID 19 will remain a key monitorable.
 
* Robust financial risk profile
Financial risk profile is strong, driven by estimated networth of over Rs 140 crore and gearing of 0.33 times as on March 31, 2020. Financial risk profile is further supported by healthy debt protection measures as reflected in interest coverage and net cash accrual to total debt ratios of 12 times and 1.14 times, respectively, in fiscal 2020. The reliance of CSCL on working capital bank borrowing is expected to remain lower post IPO and capital structure expected to strengthen over the medium term.
 
Weaknesses
* Intensive working capital requirements
Gross current assets estimated over 200 days in fiscal year 2020, driven by receivables of 4 months and inventory of 3 months. The portion of working capital requirements are being met by creditors of 2 months.
 
* Exposure to foreign exchange volatility and to changes in government regulations
CSCL derives 25-30% of its revenue from exports to multiple geographies and hence exposed volatility in foreign exchange rates. However, the risk is partially mitigated by imports of around 45-50% providing a natural hedge and monthly price reset arrangements with its customers to pass though foreign exchange movements. Bromine, being a corrosive and hazardous material, is subject to environmental and other government regulations, any adverse change in these regulations, in any of the markets it operates, could impact the business risk profile of the company.
Liquidity Adequate

The liquidity profile of CSCL expected to improve post IPO due to fresh net proceeds of Rs 165 crore resulting in lower reliance on external bank lines. CSCL expected to generate net cash accrual over Rs 50 crore against term debt repayment of Rs 1-3 crore, the surplus cash should be used to meet the working capital requirement. The bank lines of Rs 53 crore are moderately utilised at 52% during last six months ended June 2020. Improved capital structure has strengthened its financial flexibility and liquidity is expected to improve further post IPO. The working capital requirement and deployment of IPO proceeds post stabilisation of capacity expansion project remain key monitorable.

Outlook: Stable

CRISIL believes the company will continue to benefit from its experience of promoter and robust financial risk profile.
 
Rating Sensitivity Factors
Upward factor
* Steady growth in cash accrual of over 20-25%
* Sustained financial risk profile
 
Downward factor
* Elongation of gross current assets (excluding unencumbered cash and bank balance) over 280-300 days
* Large debt funded capex weakening capital structure.

About the Company

CSCL, is a Vadodara, Gujarat based company incorporated in 1988, involved in manufacture of Pharmaceutical intermediates and Oilfield Chemicals. The company has manufacturing facility based in Savli District. Vadodara. The company made an IPO in September 2020 and is expected to list on the Bombay Stock Exchange and the National Stock Exchange in October 2020.

Key Financial Indicators
Particulars Unit 2020^ 2019
Revenue Rs.Crore 265.45 304.17
Profit After Tax (PAT) Rs.Crore 47.49 43.04
PAT Margin % 17.89 14.15
Adjusted debt/adjusted networth Times 0.32 0.35
Interest coverage Times 12.36 16.99
^Provisional

Status of non cooperation with previous CRA
CSCL has not cooperated with Acuite Ratings and Research Limited, which has published its ratings as an issuer not cooperating vide a release dated January 02, 2020. The reason provided by Acuite Ratings and Research Limited was non-furnishing of information by CSCL for monitoring the ratings.

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL 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. For more details on the CRISIL complexity levels, please visit www.crisil.com/complexity-levels.
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 Cash Credit NA NA NA 53 NA CRISIL BBB+/Stable
Annexure - Rating History for last 3 Years
  Current 2020 (History) 2019  2018  2017  Start of 2017
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund-based Bank Facilities  LT/ST  53.00  CRISIL BBB+/Stable  24-03-20  CRISIL BBB/Stable      28-12-18  CRISIL BBB/Stable    --  -- 
Non Fund-based Bank Facilities  LT/ST    --    --    --  28-12-18  CRISIL A3+    --  -- 
All amounts are in Rs.Cr.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Cash Credit 53 CRISIL BBB+/Stable Cash Credit 53 CRISIL BBB/Stable
Total 53 -- Total 53 --
Links to related criteria
CRISILs Approach to Financial Ratios
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating criteria for manufaturing and service sector companies
Rating Criteria for Chemical Industry
CRISILs Bank Loan Ratings

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