Detailed Rationale

CRISIL Ratings has reaffirmed its ratings on the bank facilities of Chemplast Cuddalore Vinyls Limited (CCVL) at ‘CRISIL AA-/Negative/CRISIL A1+’

 

The rating action follows reaffirmation of ratings of CCVL’s parent, Chemplast Sanmar Ltd (CSL), whose ratings have been reaffirmed at ‘CRISIL AA-/Negative/CRISIL A1+’ .Earlier, on January 2, 2024, the outlook on the long term bank facilities of CSL was revised to ‘Negative’ from ‘Stable’ following a similar action on the outlook of its parent, CSL and moderation in the business risk profile of CCVL due to declining realization in suspension PVC (S-PVC) prices, in fiscal 2024, the second year in succession.

 

The moderation in S-PVC prices, which commenced in fiscal 2023, continued in fiscal 2024 with realizations declining by 19% on-year, post witnessing a decline of 29% in fiscal 2023. The moderation was driven by dumping of S-PVC from China and other countries due to excess inventory amid subdued local Chinese demand which impacted domestic S-PVC prices. Despite over 50% of the domestic demand of PVC being imported due to limited domestic capacity, lower PVC realizations and sharp decline in PVC-VCM spread impacted revenues which declined by 18% in fiscal 2024. Operating profitability dropped to 3.5% in fiscal 2024 (5.4% in fiscal 2023). That said, volumes were flat in fiscal 2024.

 

CCVL’s revenues are expected to grow by 4-6% in fiscal 2025 driven by expected improvement in realization of S-PVC post implementation of provisional anti-dumping duty and pick-up in domestic volumes in the second half of fiscal 2025.  In the first half of fiscal 2025, S-PVC realizations increased by 2% on-year due to increase in freight costs; however, volumes declined by 10% due to increase in sales of lower priced imported S-PVC. Operating profitability improved in first half of fiscal 2025 to 8.6% (3.4% in the corresponding period last fiscal) due to better PVC-VCM spreads which led to improvement in earnings before interest, tax, depreciation and amortization (EBITDA) per ton to Rs 6500-6600 per ton compared to Rs 2500-2600 per ton in the first half of fiscal 2024. Operating profitability is expected to increase to 7-8% supported by better PVC-VCM spreads and improvement in EBITDA per ton in fiscal 2025. With stabilization of  S-PVC prices and spreads, operating margins are expected at ~8% over the medium term.

 

CCVL’s financial risk profile moderated in fiscal 2024 due to weak profitability also impacting debt metrics; the interest coverage ratio and net debt/EBITDA declined to below 1 time and 4.34 times (0.84 times in fiscal 2023) in fiscal 2024.  Healthy cash reserves (~Rs.400 crores on September 30, 2024) will continue to support CCVL’s financial risk profile. Annual cash generation in fiscals 2025 and 2026 may not suffice to entirely meet long term debt obligations of  Rs 110-140 crore, necessitating dipping into the cash surpluses.

 

CRISIL Ratings also expects CCVL’s financial profile to improve gradually over the near to medium term with better profitability, and progressive debt reduction with capex spend expected to be modest. Net debt/EBITDA is expected to be below 2 times in fiscal 2025 and further improve to below 1.5 times over the medium term. The improvement in key debt metrics will remain monitorable.

 

The ratings continue to reflect CCVL’s established market presence in the S-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. 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, CSL. These strengths are partially offset by moderate financial risk profile, vulnerability of profitability to fluctuations in PVC prices and high dependence on raw material imports thereby exposing to risk of forex fluctuations. However, CCVL also uses plain vanilla forwards to hedge its imports to reduce forex risk.

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 the consolidated revenues. Besides, there are strong operational and financial linkages. 

 

CCVL revalued its assets in fiscal 2019 and created a revaluation reserve of Rs. 500 crores. 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:

• Healthy domestic market share and demand prospects: CCVL is the second largest producer of suspension PVC in the domestic market only behind Reliance Industries Limited. It increased its total capacity from 300,000 MT per annum to 331,000 MT per annum in fiscal 2023 through internal process improvement. Even though the revenues declined in fiscal 2024, volumes remained stable. With steady demand, utilization is expected to remain high at above 90% in the medium term. Total Indian consumption of PVC is expected at over 4.0 MMT in 2025 out of which only 1.5 MMT capacity is available domestically. More than 50% of the domestic requirement is imported. 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.

 

Imports are expected to continue to serve over ~50% of the domestic demand for S-PVC market due to lower capacity addition by the PVC players which is due to high capex requirements and the need to import the key inputs. PVC realizations dipped in fiscal 2023 and fiscal 2024 post highs witnessed in fiscals 2021 and 2022 but are expected to stabilize in the medium term.  Demand will continue to benefit from the large demand supply mismatch in India and market leadership position in the domestic markets.

 

• Experience of Sanmar Group in the chemicals and PVC business: The Sanmar group has been engaged in the manufacturing of chemicals and PVC 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 business to over USD 500 million and is an established player in the domestic markets for its products. The Sanmar group also ventured in the international markets through an acquisition in Egypt (TCI Sanmar S.A.E, TCIS, rated ‘CRISIL BBB-/Negative/A3) 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 has consolidated revenues of over USD 1 billion, making the group a major player in this space. This has also enabled the Group to attract investments from marquee investors like Fairfax Group and successful IPO of CSL wherein it raised Rs 3850 crore in August 2021.

 

• Parent support expected to be forthcoming: CCVL is an integral part of CSL, and accounts for sizeable portion of consolidated revenues and profits. CSL and CCVL share common management, treasury and financial teams, reflecting CSL’s continuing support. CRISIL Ratings expects timely financial support from CSL will be forthcoming in the event of any financial distress.

 

Weaknesses:

• Moderate financial risk profile: Financial risk profile of the company is expected to improve in the near to medium term, albeit remain moderate due to modest operating profitability even though no additional debt is expected to be added. Interest cover, which declined to 0.83 times in fiscal 2024, is expected to improve to over 1.5 times over the medium term, supported by better profitability.  Net Debt / EBITDA earlier increased to 4.34 times in fiscal 2024 (0.84 times in fiscal 2023) due to dip in profitability. Improvement in PVC realizations and spread over VCM will be key monitorables in the medium term.

 

• 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. PVC-VCM spreads have been impacted since fiscal 2023 due to excess supply of cheaper Chinese PVC in the domestic market. 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% (earlier 10%) 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 30-35 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 too 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

Liquidity is strong marked by healthy cash reserves of Rs 400 crore as on September 30, 2024. The company has only moderate capex plans of Rs 12-15 crore per annum and annual debt repayment of Rs 110-140 crore in fiscals 2025 and 2026. However, due to improving though moderate profitability, cash accruals are expected to be modest and annual debt repayment will be partly supported by cash surpluses. The company also does not have any fund based working capital debt utilization in the past 12 months. However, as all of the raw material is purchased through letter of credit (LC), average utilization of non-fund based bank limits especially LC remained at ~72% in the past 10 months ended September 2024. CCVL has stable collection of Rs 220-250 crore per month which is sufficient for monthly letter of credit LC repayment of Rs 180-200 crore.

Outlook: Negative

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. CRISIL expects the PVC prices to recover in the medium term and stabilize with gradual improvement in the Chinese economy. Stable PVC prices and PVC-VCM spread will lead to better operating profitability and cash generation. CCVL’s financial risk profile is moderate and expected to improve gradually driven by better  cash generation and along with progressive debt reduction, benefit 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
• Improvement in operating performance with EBITDA sustaining above Rs. 12,000-14000 per ton
• Sustained improvement in financial risk profile and debt metrics

 

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 continued deterioration in key debt metrics ; for instance  net-debt/EBIDTA in excess of 3.5-3.75 times
• 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 six-month period ended September 30, 2024, CCVL reported a net profit of Rs 3 crore on net sales of Rs. 1062 crore, compared with net loss of Rs. 24 crores on net sales of Rs. 1284 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 on a standalone basis has installed capacities for manufacturing 107,000 tonne per annum (tpa) of paste PVC resin, 119,000 tpa of caustic soda, 35,000 tpa of Chloromethanes and 34,000 tpa of Hydrogen Peroxide and custom manufactured chemicals across 3 locations in Tamil Nadu. Additionally, CCVL has manufacturing capacity of suspension PVC of 331,000 tpa at Cuddalore.

 

 For the six month period ended September 30, 2024, CSL reported a net loss of Rs 7 crore on net sales of Rs. 2138 crore, compared with net loss of Rs. 38 crore on net sales of Rs. 1984 crore during corresponding period of previous fiscal.

Key Financial Indicators*

Particulars	Unit	2024	2023
Revenue	Rs.Crore	2448	3000
Profit After Tax (PAT)	Rs.Crore	(56)	11
PAT Margin	%	(2.3)	0.4
Adjusted Debt/Adjusted networth	Times	(0.88)	NM
Interest Coverage	Times	0.83	1.54

*CRISIL Ratings Adjusted

Any other information: Not Applicable