Detailed Rationale

CRISIL Ratings has downgraded its long term rating on the bank facilities of DIC India Limited (DIC India) to ‘CRISIL A/Stable’ from ‘CRISIL A+/Stable’ while reaffirming the short term rating at ‘CRISIL A1’.

 

The rating on the non-convertible Debentures (NCDs) of Rs 10 crores has also been downgraded to ‘CRISIL A/Stable’ from ‘CRISL A+/Stable’ and subsequently withdrawn (see Annexure: Details of rating withdrawn). The withdrawal is in line with the withdrawn policy of CRISIL Ratings.

 

The rating action follows substantial increase in balance sheet leverage of the parent DIC Corporation, Japan, which is expected to remain at elevated remains over the medium term; it stood at 1.37 times as on June 30, 2023 (1.09 times as on December 31, 2021). The increase in leverage is on account of significant expansions and strategic acquisitions being undertaken by the parent to achieve its vision 2030 objective of increasing the share of sustainable products to ~60% of total sales (~40% currently). The increase in leverage has also resulted in weakening of parent’s debt protection metrics like interest coverage which moderated to ~6.82 times during first half of calendar year 2023 from ~19.6 times in calendar year 2022. In addition, the operating performance of DIC India continued to remain subdued with operating margin and Return on Capital Employed (RoCE) at 2.4% and 3.7%, respectively in calendar year 2022. These ratios are expected to remain at current levels even in 2023 and is expected to improve thereafter as the company has undertaken necessary steps for the same. The timely improvement in DIC India’s operating performance will remain a key monitorbale.

 

The ratings continue to reflect the strong position of DIC India in the printing inks market in India and its healthy financial risk profile and strong technological and managerial support received by the company from its ultimate parent, DIC Japan, a global leader in printing inks. These strengths are partially offset by the company’s susceptibility to risks inherent in the printing ink industry and subdued operating profitability.

 

Reported Revenue for DIC India grew by ~17% y-o-y to Rs. 877 crores in calendar year 2022 (Calendar year 2021: Rs.747 Crore) driven by realization growth of ~15% and flattish volume growth of ~2%. However, operating margin for calendar year 2022 moderated to 2.4% from 3.4% in calendar year 2021 due to sharp increase in raw material cost. While the moderation in gross margin was over 400 Bps due to raw material cost inflation, reduction in operating margin was restricted to 100 Bps due to cost rationalization on other items. For first half of calendar year 2023, company reported flattish revenue at Rs.410 Crores (first half of calendar year 2022: 417 Crores) with lower operating margins of 1.2% due to higher fixed costs resulting from commissioning of new flexi-packaging (toluene free ink) plant which was under trial phase during first quarter calendar year 2023 (started commercial production in Mar 2023) and exceptional one-time expense of Rs.2.29 Crores owing to provision made  against rent to KOPT (Kolkata Port Trust Authority). The flexi-packaging (toluene free ink) product has higher gross margins and is expected to support overall margin profile going forward. Further, the board of directors of the Company had decided to close Kolkata Plant subject to regulatory approvals   which will support margins. While margins are expected to remain rangebound between 2.2-2.5% in calendar year 2023, same is expected to improve over the medium term with higher share of revenue coming from toluene free ink product. However, the same remains to be monitored.

 

Financial risk profile remains healthy with adequate networth of Rs  419 crores as on June 30, 2023 and nil external debt. DIC India has comfortable liquidity with cash surplus of Rs. 39 crores as of June 30, 2023 and minimally utilized bank limits of Rs 132 crore. Liquidity is expected to remain healthy with annual cash accruals of Rs.20-30 crore which would be sufficient to take care of capital expenditure and increased working capital requirements.

Analytical Approach

CRISIL Ratings has factored in the business and need-based financial support from DIC India's parent, DIC Japan.

Key Rating Drivers & Detailed Description

Strengths:

• Strong position in the printing inks sector: DIC India is the second largest player in the domestic printing inks market, with presence in the newsprint, publication, and packaging industries. Company has also introduced flexi-packaging toluene free ink in calendar year 2023. It is increasingly focusing on the packaging ink segment to meet demand from the end-user industry. Revenue share from the packaging segment has been gradually picking up over the past 4-5 years and is expected to further go up with higher revenues from the packaging segment. Stronger presence in the packaging segment may also result in higher profitability.

 

• Strong technological, managerial and need-based financial support from DIC Japan: DIC India receives strong support from its parent in terms of technology transfer, process improvement and understanding of the global printing inks business. Moreover, DIC Japan is actively involved in DIC India's operations and product development initiatives. As per policy, the parent will also support the financial needs of DIC India in case of distress.

 

For calendar year 2022, DIC Japan has made revenue of JPY 1054 billion (calendar year 2021: JPY 855 billion) with an operating margin of 8.4%. Credit risk profile of DIC Corporation has moderated with gearing increasing to 1.31 times  and interest coverage moderating to 19.61 times in calendar year 2022 compared to 1.09 times and 37.2 times in calendar year 2021.  The gearing and interest coverage further moderated to 1.37 times and 6.82 times during first half of calendar year 2023.

 

• Healthy financial risk profile: Gearing was nil as on June 30, 2023, on account of absence of any long-term debt and minimal bank limit utilisation over the last 12 months ended Jul 31, 2023. Debt protection metrics of DIC India remained healthy with interest coverage of over 23x as on December 31, 2022. Company has completed its major green field project of flexi-packaging plant (toluene free ink) and same was commissioned in first quarter of calendar year 2023. Going forward, capex shall range between Rs. 10-12 crores mainly for maintenance purpose. The capex is expected to be funded entirely through internal accruals and cash surplus (Rs. 39 crore as on June 30, 2023).

 

Weaknesses:

• Modest operating efficiency: Operating profitability margins moderated to 2.4% in calendar year 2022 from 3.4% in calendar year 2021. Despite moderation in gross margin by over 400 Bps due to raw material cost inflation, the operating margins moderated by around 100 bps owing to cost rationalization on other items. For 1st half of calendar year 2023, the company reported operating margins of ~1.2% (First half calendar year 2022: 2.0%). The margins during first half of calendar year 2023 were significantly impacted on account of exceptional one-time expense of Rs.2.29 Crores owing provision made against  rent to KOPT (Kolkata Port Trust Authority).Also, the plant of flexi-packaging ink (toluene free ink) was under trial between Jan’23 to Mar’23 resulting in higher fixed cost. The commercial operations of the new plant began in Mar-23, which will support overall volume growth with higher operating margins. Over the medium term, the margins are expected to improve with increasing share of revenues coming from higher margin toluene free ink product and closure of loss making Kolkata unit.

 

• Susceptibility to risks inherent in the printing ink industry: The printing ink segment is inherently working capital intensive. Substantial decline in the newspaper ink (from 33% in calendar year 2017 to 22% in calendar year 2023) mainly due to migration of users to online based news which got a boost during the pandemic. Revenue has been range-bound on account of sluggish demand from the newsprint ink segment. The operating margin remains susceptible to volatility in the prices of petroleum-based raw materials and foreign exchange rates. Moreover, intense competition restricts pricing flexibility, resulting in modest profitability and low RoCE.

Liquidity: Strong

Liquidity is expected to remain healthy with annual cash accruals of Rs. 20-30 crore as against nil repayment obligations and annual capex of ~Rs. 10 -12 crore going ahead.  Liquidity is further supported by cash surplus of Rs 39 crore as on June 30, 2023 and minimally utilized fun based – bank limits of the Rs.132 crores as on 31, July, 2023.

Outlook: Stable

The credit risk profile of DIC India will remain supported by the healthy financial risk profile and parent support, while the business risk profile will remain susceptible to fluctuations in raw material prices.

Rating Sensitivity factors

Upward factors:

• Significant improvement in scale of operations driven by increase in market share in the domestic ink segment through better product mix and segment diversity.
• Sustained improvement in operating margin to over 5-6%
• Improvement in credit risk profile of parent

 

Downward factors:

• Sustained weak operating performance with operating margins below 2% impacting cash generation.
• Large, debt-funded acquisition or capital expenditure or higher working capital, weakening the capital structure or debt protection metrics.
• Deterioration in credit risk profile of parent

About the Company

DIC India (formerly, Coates of India Ltd) manufactures printing ink, including newsprint ink, offset ink, liquid ink, Flexographic inks, and lamination adhesives used in the newspaper, publishing and packaging industries. Facilities are in Kolkata, Ahmedabad, Noida and Bengaluru. The company has the second-largest ink manufacturing capacity in India, at 60,648 tonne per annum. Singapore-based DIC Asia Pacific Pte Ltd, a wholly owned subsidiary of DIC Japan, holds 71.75% equity stake in DIC.

 

For the six months ended June 30, 2023, the company reported revenue of Rs 409 crore (Rs 419 crore for the corresponding period of the previous year), earnings before interest, taxes, depreciation and amortisation of Rs 9 crore (Rs 11 crore for the same period during last year).

Any other information: Not applicable

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	Short Term Debt	NA	NA	7-365 days	50	Simple	CRISIL A1
NA	Cash credit	NA	NA	NA	32	NA	CRISIL A/Stable
NA	Letter of credit and bank guarantee	NA	NA	NA	14.7	NA	CRISIL A1
NA	Proposed working capital facility	NA	NA	NA	12.39	NA	CRISIL A/Stable

 

Annexure - Details of Rating Withdrawn

ISIN	Name of the instrument	Date of Allotment	Coupon Rate (%)	Maturity Date	Issue size (Rs. Crore)	Complexity Level	Rating assigned with outlook
NA	Non-convertible debentures*	NA	NA	NA	10	Simple	Withdrawn