Detailed Rationale

CRISIL Ratings has reaffirmed its ratings on the bank facilities of Chemplast Cuddalore Vinyls Limited (CCVL) at ‘CRISIL AA-/Stable/CRISIL A1+’. The ratings continue to factor support from CCVL’s parent, Chemplast Sanmar Ltd (CSL, rated ‘CRISIL AA-/Stable/CRISIL A1+’).

 

The rating factors anticipated improvement in the operating performance of CCVL over the medium term after a difficult year in fiscal 2023, where the prices of suspension PVC had declined by more than 45% due to excessive dumping from China during the first eight months of the fiscal. Earlier, CCVL’s operating performance improved in fiscal 2022 with revenue registering growth of over 55% on year, crossing Rs.3800 crore, buoyed by strong demand for PVC and higher realizations.

 

The moderation in the operating performance during fiscal 2023 is due to implementation of strict lock down, on account of Zero covid policy, specifically in south and eastern China which brought down the construction activity to a halt, resulting in decline of local demand. However the production continued from north and western regions of China, which were not impacted by Zero covid policy resulting in oversupply. This has led the Chinese manufactures dumping the excess PVC into global markets, including India, which resulted in prices crashing by more than 45% between April and November 2022. The drop in prices significantly impacted CCVL’s realizations and as a result, despite volume growth of 14% during 9M of fiscal 2023, the revenues declined by over 16%. Further there was a lag in the correction of Vinyl Chloride Monomer (VCM) prices compared to PVC prices, which along with higher power costs and inventory losses (Rs.31 crore), resulted in operating margins declining from 16% in 9M fiscal 2022 to 5.5% in 9M fiscal 2023.

 

The domestic demand for PVC remained robust as irrigation / water conveyancing / construction activity which consumes more than 70% of the domestic PVC kept growing post lifting of COVID restriction. The demand for S-PVC from the profiles segment is also growing in India. By the end of November 2022, the COVID restriction in China was lifted and the domestic construction activity resumed in China and demand for PVC rebounded. This resulted in revival of PVC prices which increased by more than 20% from December 2022 till February 2023.

 

CCVL also added additional S-PVC capacity of 31,000 MTPA capacity during June 2022, through debottlenecking, which has resulted in total PVC capacity of 331,000 MTPA. Sales volumes are expected to grow by 7% in fiscal 2023 on account of capacity addition and strong demand for PVC in the domestic market. Due to lower realization, revenue is expected to decline by 21% in fiscal 2023. Revenue expected to grow by 5%-10% in the medium term with steady increase in realization. Operating margin expected to decline to 5-5.5% in fiscal 2023 (with EBITDA per ton under Rs.5000 per ton, compared to Rs.19000-21000 per ton in past 2 fiscals), due to lower realization of PVC, and then stabilize at 10-11% over the medium term (with EBITDA per ton of 10000-11000 per ton), due to better PVC prices, and spreads.

 

Debt protection metrics are expected to moderate due to lower operating profits; interest coverage ratio and Debt/EBITDA are expected at ~1.59x and over 5x in fiscal 2023 from 3.19x and 1.52x respectively in fiscal 2022. However, with realizations improving and better spreads, interest coverage is expected at over 3 times and debt/EBITDA at below 2x by fiscal 2025. Financial risk profile of the company is also supported by large un-encumbered cash and equivalents of ~Rs 680 crore as on December 31,2022. This along with cash accruals of Rs.60-70 crore in fiscal 2023, will suffice to meet debt servicing obligations of Rs.68 crore and capex of Rs.15 crore. Cash accruals are expected to recover to over ~Rs 185 crore per annum from fiscal 2024, which shall be adequate for debt repayment of Rs 76 crore and Rs 140 crore in fiscal 2024 and fiscal 2025 respectively and modest capex (Rs.15-20 crore per annum).

The ratings continue to reflect CCVL’s established market presence in the suspension PVC segment by virtue of being the second largest domestic player, long standing relationship with customers and suppliers, strong brand recall and healthy demand prospects for its products, and the company’s average financial risk profile. The rating also factors in the long vintage and experience of the promoters in the PVC and chemicals sector, and the strong support from and interlinkages with its parent, Chemplast Sanmar Limited (CSL).

Analytical Approach

For arriving at the ratings, CRISIL Ratings applied its parent notch up framework and factored support from its parent, CSL. This is because CCVL is an integral part of CSL and contributes to ~60% of revenues. Besides, there are strong operational and financial linkages. 

 

CCVL revalued its assets in fiscal 2019 and created a revaluation reserve of Rs. 500 crore. The same has been adjusted against the net worth and fixed assets. Depreciation has also been considered without the impact of revaluation of assets, and accordingly profit after tax has been adjusted from fiscal 2019 onwards.

Key Rating Drivers & Detailed Description

Strengths:

• Significant market share and healthy demand prospects: CCVL registered healthy double-digit growth in revenues driven by strong demand and realization post covid. Though revenue is expected to decline by 23% in fiscal 2023, volume growth continues to remain steady at 7-8% due to strong domestic demand. Total Indian consumption of PVC is expected to be at 3.3 Mn MPTA in 2023 out of which only 1.5 Mn MTPA capacity is available domestically. More than 50% of the domestic requirement is imported. CCVL has a very strong domestic market position and is the 2nd biggest manufacturer of PVC products in India only behind Reliance Industries which is the market leader. As the construction activity continues to grow, the demand for PVC is expected to remain strong in the medium term, especially from the pipes sector. Import is expected to continue to serve ~50% of the domestic demand for S-PVC market due to muted capacity addition by the PVC players which is due to high capex requirements and the need to import the key inputs . Revenue visibility over the medium term will be driven by steady demand for suspension PVC. PVC realizations which had been witnessing pressure between March-November 2022 are expected to gradually improve in the medium term.

 

• Experience of Sanmar Group in the chemicals and PVC business: The Sanmar Group has been engaged in the manufacturing of chemicals and PVC sectors for over five decades. The Group also has presence in shipping and engineering sectors through other entities. The promoters have scaled up the domestic PVC/chemicals to over Rs 3000 cr in topline and is an established player in the domestic markets for its products. Sanmar Group also ventured in the international markets through an acquisition in Egypt (TCI Sanmar S.A.E, TCIS) in 2007 and has expanded the entity to being a major PVC and chlor alkali player in the MENA region. The Group’s PVC/chemicals business on a consolidated basis has revenues of over USD 1 billion lending significant scale to the Group. This has also enabled the Group to attract investments from marque investors like Fairfax Group.

 

• Average financial risk profile: Financial risk profile of the company remained steady in fiscal 2022 with interest coverage remaining above 3x; moderation in the performance is expected in fiscal 2023, due to lower profits and cash generation. Interest coverage is expected to moderate to 1.58x in fiscal 2023 due to lower operating profits, and then recover to over 3x in fiscal 2024, supported by better S-PCV-VCM spreads. Tangible net worth is expected to remain  negative over the medium term albeit improve with higher absolute profits. Debt/EBITDA is expected to be lower than 2.2x in the medium term, though it is expected to increase to 5.36x in the fiscal 2023. With moderate capex of 15-20 crore per year in the medium term and no plan for additional capacity addition, CCVL’s financial risk profile is expected to gradually recover. The financial risk profile will also continue to be supported by unencumbered cash reserves of above Rs 620 crore expected at the end of the current fiscal.

 

Weaknesses

• Vulnerability of profitability to fluctuations in PVC prices, and long credit period: Profitability of PVC manufacturing companies depends on the prevailing PVC prices and PVC-VCM spreads. Cyclical downturns have resulted in variations in operating profitability in the past for these players. Import of PVC currently attracts an import duty of 7.5% while duties on import of key raw materials is negligible. Any adverse change in duty structure will impact operating margins.

 

CCVL is highly dependent on imports of VCM as raw material for its products. Due to long vintage and established relationship with suppliers, company receives a long credit period. On the sales side however, collection is quick as sales are almost on a cash and carry model. Inventory period is also low at 30-40 days due to high demand for end products. This results in a negative working capital cycle and low dependence on short term debt for meeting working capital requirements. However, since most of the imports are backed by Letter of Credit (LCs) on a hedged basis, company has to incur higher costs for the long credit period, which impacts profitability.

 

• High dependence on imports for key raw materials thereby exposing company to risk of forex fluctuations: CCVL has high import requirements for procuring VCM and imports ~100% if its raw material requirements.  This exposes the company to forex fluctuations as it has low exports. However, pricing of PVC products are generally dollar linked on import parity basis providing partial natural hedge. Further, CCVL also uses plain vanilla forwards to hedge its imports to mitigate forex risk.

Liquidity: Strong

CCVL’s liquidity is strong marked by healthy accruals and cash and cash equivalents of ~Rs. 680 crore as on December 31, 2022. CCVL is expected to maintain liquidity (unencumbered surpluses) at ~Rs. 600-620 crore over the near to medium term. Annual accruals of over ~Rs. 64 crores in fiscal 2023 along with the unencumbered cash reserve is expected to be sufficient to meet debt repayments of Rs 68 crore in fiscal 2023 and modest capex of Rs 15 core. Cash accrual is expected to recover to over Rs 185 crore annually from fiscal 2024 with improvement in operating performance, and suffice to make debt repayment of Rs 76 crore in fiscal 2024, and moderate capex of Rs 15-20 crore. Company’s fund based working capital limits are modest and are sub-limits of non-fund-based limits which are utilized almost 85% on an average towards raw material import.

Outlook: Stable

CRISIL Ratings expects CCVL will continue to remain an integral part of CSL and will continue to have strong operational and financial linkages with CSL. CCVL is also expected to maintain its strong market position in the domestic PVC segment, which will aid in increase in scale of operations and healthy operating efficiency. CCVL’s financial risk profile is expected to improve gradually driven by better  operating performance benefitting cash generation and aid in gradual debt reduction, benefitting its debt metrics. The outlook on CCVL is linked to that of its parent, CSL.

Rating Sensitivity factors

Upward Factors:

• Upgrade in rating of CSL by one notch or more or revision in outlook could result in similar rating action on CCVL
• Improvement in operating performance with EBITDA per ton sustaining above Rs. 14000-16000 per ton
• Sustained improvement in financial risk profile and debt metrics and debt/EBITDA at less than 1-1.1 time

 

Downward Factors:

• Downgrade in rating of CSL by 1 notch or more or revision in outlook, could result in a similar rating action on CCVL; change in stance of support to CCVL by CSL
• Significant moderation in business performance impacting cash generation
• High debt levels due to capex or elongation of working capital cycle leading to deterioration in key debt metrics and debt/EBIDTA in excess of 2.5-2.75 times on a sustained basis
• Material support, direct or indirect, to CSL, promoter holding company or associate companies, especially TCIS

About the Company

CCVL, part of the South India based Sanmar Group, is among the leading PVC players in India. CCVL is a 100% subsidiary of CSL (acquired in fiscal 2021). CSL transferred its suspension PVC business to CCVL in fiscal 2018 and CCVL currently has an installed capacity of 331,000 MTPA at Cuddalore, Tamil Nadu.

For the nine month period ended December 31, 2022, CCVL reported a net loss of Rs 31 crore on net sales of Rs. 2280 crore, compared with net profit of Rs. 186 crore on net sales of Rs. 2722 crore during corresponding period of previous fiscal.

About CSL:

CSL, part of the South India based Sanmar Group, is among the leading PVC and chemicals player in India. CSL completed its IPO on August 24, 2021 and post IPO promoter shareholding is ~55% and balance 45% is with the public. CSL started operations in 1967 with manufacturing of PVC. CSL, currently, on a standalone basis has installed capacities for manufacturing 66,000 MTPA of specialty paste PVC resin, 119,000 MTPA of caustic soda, 35,000 MTPA of Chloromethanes and 34,000 MTPA of Hydrogen Peroxide and 1068 MTPA of custom manufactured chemicals across 3 locations in Tamil Nadu. 

 

For the nine month period ended December 31, 2022, on a consolidated basis, CSL reported a net profit of 106 crore on net sales of Rs. 3794 crore, compared with net profit of Rs. 417 crore on net sales of Rs. 4085 crore during corresponding period of the previous fiscal.

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 levels	Rating Assigned with Outlook
NA	Term Loan	NA	NA	May-30	494	NA	CRISIL AA-/Stable
NA	Term Loan	NA	NA	Nov-26	139	NA	CRISIL AA-/Stable
NA	Term Loan	NA	NA	May-30	95	NA	CRISIL AA-/Stable
NA	Letter of Credit#	NA	NA	NA	110	NA	CRISIL AA-/Stable
NA	Letter of Credit*	NA	NA	NA	450	NA	CRISIL AA-/Stable
NA	Letter of Credit%	NA	NA	NA	120	NA	CRISIL AA-/Stable
NA	Letter of Credit $	NA	NA	NA	225	NA	CRISIL AA-/Stable
NA	Letter of Credit^	NA	NA	NA	145	NA	CRISIL AA-/Stable
NA	Letter of Credit	NA	NA	NA	200	NA	CRISIL AA-/Stable
NA	Cash Credit	NA	NA	NA	5	NA	CRISIL AA-/Stable
NA	Letter of Credit**	NA	NA	NA	150	NA	CRISIL AA-/Stable
NA	Letter of Credit@	NA	NA	NA	45	NA	CRISIL AA-/Stable
NA	Letter of Credit&	NA	NA	NA	140	NA	CRISIL AA-/Stable
NA	Proposed Non Fund based limits	NA	NA	NA	160	NA	CRISIL A1+
NA	Proposed Long Term Bank Loan Facility	NA	NA	NA	72	NA	CRISIL AA-/Stable

#Rs 15 crore sublimit for BG; Rs 5 crore sub limit for OD/CC

*Rs 450 crore sub limit for bank guarantee (BG)/standby letter of credit (SBLC) for Buyers Credit; Rs 15 crore sub limit of overdraft (OD)/cash credit (CC); Rs 15 crore sub limit of WCDL; Rs 5 crore sublimit for BG

$Rs 150 crore sub limit for BG/SBLC for Buyers Credit; Rs 20 crore sub limit of BG; Rs 30 crore sub limit of OD/CC

^Rs 5 crore WCDL as sublimit

%WCDL of Rs 7 crore and OD of Rs 2.8 crore as sublimits

**Rs 150 crore sub limit for BG/SBLC for Buyers Credit; Rs 20 crore sublimit for WCDL/CC

@Rs 1 crore sub limit of overdraft (OD)/cash credit (CC); Rs 20 crore sublimit for BG; Rs 5 crore sublimit for WCDL

&Rs 50 crore sublimit for BG; Rs 10 crore sub limit for OD/CC