Rating Rationale
September 11, 2019 | Mumbai
DIC India Limited
Ratings Reaffirmed
 
Rating Action
Total Bank Loan Facilities Rated Rs.59.09 Crore
Long Term Rating CRISIL A+/Negative (Reaffirmed)
Short Term Rating CRISIL A1 (Reaffirmed)
 
Rs.10 Crore Non Convertible Debentures CRISIL A+/Negative (Reaffirmed)
Rs.50 Crore Short Term Debt CRISIL A1 (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has reaffirmed its 'CRISIL A+/Negative/CRISIL A1' ratings on the bank facilities and debt programmes of DIC India Limited (DIC India).

The ratings continue to reflect the company's established position in the Indian printing inks market and its healthy financial risk profile because of sound capital structure. The ratings also factor in the strong technological and managerial support the company receives from its ultimate parent, DIC Japan, a global leader in printing inks. These strengths are partially offset by susceptibility to risks inherent in the printing ink industry and weak operating profitability.

CRISIL also notes the announcement of DIC India's parent DIC Corporation Inc (DIC Corp) acquiring the colours and effects division of global chemical giant BASF. The acquisition will enhance the non-printing ink business of DIC Corp and will strengthen its pigments division as both businesses are complementary. The transaction is valued at JPY 116 billion which will be funded through a mix of cash and bridge loans. The transaction is likely to be completed by December 2020.

Though the transaction will improve the business risk profile of DIC Corp, the acquisition is likely to have an adverse impact on the financial risk profile with debt to EBIDTA (earnings before interest, tax, depreciation, and amortisation) ratio expected to increase to 3.5 times in 2020. Furthermore, the transaction will be completed by December 2020 and synergies from the acquisition will be realised fully only from 2021. The transaction is not likely to impact DIC India's standalone financial risk profile. Financial and technological support to DIC India from DIC Corp should continue.

For the first half of 2019, DIC India's operating margin improved to 2.53% from a negative 0.03% for the corresponding period of the previous year, backed by stable raw material prices and increase in product prices. The financial risk profile is comfortable, as indicated by gearing of 0.16 time as on June 30, 2019. Debt protection metrics have improved, with adjusted interest coverage and net cash accrual to total debt ratio at 4.27 times and 34%, respectively, in the first half of 2019, against negative 0.07 time and negative 6%, respectively, in the first half of 2018. Liquidity is adequate in the absence of long-term debt and backed by cash and equivalent of Rs 27 crore as on June 30, 2019.

Analytical Approach

For arriving at its ratings, CRISIL has factored in the business and need-based financial support from DIC India's parent, DIC Japan.

Key Rating Drivers & Detailed Description
Strengths:
* Established position in the printing inks segment
DIC India is the second largest player in the domestic printing inks market and has presence in the newsprint, publication, and packaging industries. It is increasingly focusing on the packaging ink segment to cater to growth in the end-user industry. It is increasing its presence in the packaging segment which is likely to result in higher profitability. The company closed its operations in Mumbai and has identified a buyer for the land and has received a part of the consideration as advance.

* Strong technological, managerial, and need-based financial support from DIC Japan
DIC India benefits from the 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 new product development initiatives. As per policy, the parent will also support DIC India's financial needs in times of distress. 
 
* Healthy financial risk profile
Gearing was healthy at 0.16 time as on June 30, 2019, while the bank limit utilisation was below Rs 50 crores out of the total sanctioned limit of Rs 132 crores for the 6 months ended June 30, 2019. The company has no long-term debt and met capital expenditure (capex) mainly through internal cash accrual. Reliance on external borrowing is expected to remain low over the medium term.

Weaknesses:
* Weak operating efficiency
High raw material prices since 2017 have led to a sustained decline in the operating margin from 8% in 2015 to negative 0.2% in 2018. Prices of key raw materials (solvents, resins, pigments, oils) rose 9% over the past two years. Furthermore, the end-user industries (newspaper and packaging segments) are unable to pass on the raw material price increase entirely, because of pricing pressure driven by intense competition. Return on capital employed (RoCE) declined from 14.2% in 2015 to negative 0.02% in 2018, indicating weak operating performance. DIC India has been increasing its presence in the flexible packaging segment which has a better ability to pass on raw material costs. Ability of the company to improve its operating margin through better ability to pass on increased cost to end users will remain a key monitorable.
 
* Susceptibility to risks inherent in the printing ink industry
The printing ink segment is inherently working capital intensive. DIC India had gross current assets of 221 days as on December 31, 2018, due to extensive credit extended to customers and sizeable inventory. Also, the operating margin remains susceptible to volatility in the prices of petroleum-based raw materials and foreign exchange rates. Furthermore, revenue has remained range-bound on account of weakening demand from the newsprint ink segment. Moreover, intense competition restricts pricing flexibility, resulting in modest profitability and low RoCE.

Liquidity: adequate
The company has adequate liquidity in the absence of long-term debt and bank limit utilisation capped at Rs 50 crore of the total limit of Rs 132 crore. The company had cash and equivalent of Rs 27 crore as on June 30, 2019.
Outlook: Negative

CRISIL believes DIC India's credit risk profile may weaken if its operating performance does not improve and working capital requirement remains large.
 
Rating sensitivity factors
Downward factor:
* Sustained weak operating performance leading to operating margin of 1% or below
* Large, debt-funded acquisition or capital expenditure or increase in working capital requirement, weakening the capital structure or debt protection metrics
* Deterioration in the credit risk profile of the parent with debt to EBITDA ratio increasing above 4 times
 
Upward factor:
* Sustained improvement in operating margin to 3-4%  
* Significant increase in revenue due to increase in market share in the domestic inks segment

About the Company

DIC India (formerly, Coates of India Ltd) manufactures printing ink, including newsprint ink, offset ink, liquid ink, 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 (DIC AP), a wholly owned subsidiary of DIC Japan, holds 71.75% equity stake in DIC.

For the six months ended June 30, 2019, DIC India reported net profit of Rs 11 crore and net sales of Rs 402 crore against a net loss of Rs 9 crore and net sales of Rs 397 crore for the corresponding period of the previous year.

Key Financial Indicators
As on December 31st 2018 2017
Operating Income Rs Cr 840 747
Profit after tax Rs Cr -9 -12
PAT Margin % -1.1% -1.7%
Adjusted Debt/Adjusted Networth Times 0.18 0.12
Adjusted Interest Coverage Times 1.74 3.61

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments.
Annexure - Details of Instrument(s)
ISIN Name of instrument Date of allotment Coupon
rate (%)		 Maturity date Issue size
(Rs.Cr)		 Rating assigned  with outlook
NA Non-Convertible Debentures* NA NA NA 10 CRISIL A+/Negative
NA Short Term Debt NA NA 7-365 days 50 CRISIL A1
NA Cash Credit NA NA NA 50 CRISIL A+/Negative
NA Letter of credit & Bank Guarantee NA NA NA 9.09 CRISIL A1
*Yet to be issued
Annexure - Rating History for last 3 Years
  Current 2019 (History) 2018  2017  2016  Start of 2016
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Non Convertible Debentures  LT  0.00
11-09-19  		CRISIL A+/Negative  11-06-19  CRISIL A+/Negative  26-07-18  CRISIL AA-/Stable  31-07-17  CRISIL AA-/Stable  22-12-16  CRISIL AA-/Stable  CRISIL AA-/Stable 
Short Term Debt  ST  50.00  CRISIL A1  11-06-19  CRISIL A1  26-07-18  CRISIL A1+  31-07-17  CRISIL A1+  22-12-16  CRISIL A1+  CRISIL A1+ 
Fund-based Bank Facilities  LT/ST  50.00  CRISIL A+/Negative  11-06-19  CRISIL A+/Negative  26-07-18  CRISIL AA-/Stable  31-07-17  CRISIL AA-/Stable  22-12-16  CRISIL AA-/Stable  CRISIL AA-/Stable 
Non Fund-based Bank Facilities  LT/ST  9.09  CRISIL A1  11-06-19  CRISIL A1  26-07-18  CRISIL A1+  31-07-17  CRISIL A1+  22-12-16  CRISIL A1+  CRISIL A1+ 
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 50 CRISIL A+/Negative Cash Credit 50 CRISIL A+/Negative
Letter of credit & Bank Guarantee 9.09 CRISIL A1 Letter of credit & Bank Guarantee 9.09 CRISIL A1
Total 59.09 -- Total 59.09 --
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 Criteria for rating short term debt
Criteria for Notching up Stand Alone Ratings of Companies based on Parent Support
Mapping global scale ratings onto CRISIL scale

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