Rating Rationale
February 25, 2021 | Mumbai
Dai-Ichi Karkaria Limited
Ratings Removed from 'Watch Developing'; Ratings Reaffirmed
 
Rating Action
Total Bank Loan Facilities RatedRs.119 Crore
Long Term RatingCRISIL BB/Stable (Removed from 'Rating Watch with Developing Implications'; Rating Reaffirmed)
Short Term RatingCRISIL A4+ (Removed from 'Rating Watch with Developing Implications'; Rating Reaffirmed)
1 crore = 10 million
Refer to Annexure for Details of Instruments & Bank Facilities

Detailed Rationale

CRISIL Ratings has removed its ratings on the bank facilities of Dai-ichi Karkaria Limited (DKL; part of DK group) from 'Rating Watch with Developing Implications' and has reaffirmed the rating at 'CRISIL BB/CRISIL A4+' while assigning a 'Stable' outlook.

 

CRISIL Ratings had, on December 01, 2020, placed the rating on 'Rating Watch with Developing Implications' following a fire incident at one of two DKL's manufacturing unit at Dahej, Gujarat, which led to temporary shutdown of operations. However, the other unit was not damaged and it is now operational.

 

The rating action follows clarity on quantum of loss in fire incident and management's plan on revival of business operations. DKL has recognized a loss towards impairment of Rs 49.32 crore due to fire (Rs 43.26 crore towards property plant and equipment, Rs 5.81 crore towards inventories and Rs 0.25 crore towards other expenses). A claim also has been lodged with the insurance company for the losses suffered. DKL is currently operating the other plant at full capacity and is also outsourcing some production on job work basis, till the re-installation of its facility, in order to meet demand from customers. Consequently, business risk profile would remain subdued for the current fiscal impacted initially due to lockdown and related restrictions and then further due to the aforementioned fire incident. However, liquidity profile is supported by proceeds from sale of land (Rs 47 crore has been received out of the total sale value of Rs 153.5 crore) and cushion in bank lines.

 

Timely receipt of insurance claim, normalization of operations leading to gradual recovery in business risk profile and balance receipt and utilization of the land sale proceeds to clear entire term debt would be remain monitorables.

 

The ratings continues to reflect group's established market position in specialty chemical segment and the group's moderate capital structure. These rating strengths are partially offset by operating performance being highly susceptible to stabilization risk at its new plant at Dahej and weak debt protection metrics. Further rating also factors in susceptibility of operating margins to volatility in the raw material prices.

Analytical Approach: CRISIL has consolidated the business and financial risk profiles of DKL with Dai-ichi Gosei Chemicals (India) Limited (DGCL) and Nalco Champion Dai-ichi India Pvt. Ltd. (NCDPL) for arriving at the ratings as DGCL is a 97% subsidiary while NCDPL is a 50% subsidiary of DKL. Together these entities are referred to as DK group.

 

Please refer Annexure - List of entities consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

  • Established market position: DK group has established market position in specialty chemicals catering to variety of industries such as oil field, pigment, paint, textile, polymers, paper, water, cosmetics and pharmaceutical amongst others. Diversified business segments with entrenched position in the oil field segment is backed by promoter's experience and technical collaborations.

 

  • Moderate capital structure: DK group has moderate capital structure marked by healthy net worth of Rs 120 crore and low total outside liabilities to adjusted net worth (TOLANW) of 1.17 times as on March 31, 2020.

 

Weakness:

  • Operating performance susceptible to stabilization risk at its new plant at Dahej: DK group has set up new facility in Dahej, Gujarat. There was delay in completion of capex & its subsequent stabilization due to delay in shifting of a certain portion of the machinery to new the plant at Dahej from its earlier plant at Pune; which resulted in deterioration of operating performance. Operations are expected to be further impacted due to recent fire incident. Normalization of operations at the new plant with subsequent ramp up to remain key rating sensitivity factor.

 

  • Susceptibility of operating margin to volatility in the raw material prices: DK group's operating margins remains susceptible to volatility in its raw material prices which are crude oil derivatives. The risk is partially mitigated by the company's focus on value added products which command better pricing. 

 

  • Weak debt protection metrics: Interest coverage ratio is expected to remain weak in fiscal 2021 on account operating losses.

Liquidity: Stretched

DK group’s liquidity is stretched marked by cash loss expected in FY21. However liquidity is supported by sale of land and cushion in bank lines. Out of total proceeds of Rs 153.5 crore; Rs 47 crore is already received; post meeting selling expenses balance was used mainly for term loan repayments. Currently company has liquidity of Rs 7-8 crore; out of land sale proceeds which will be utilized for meeting upcoming debt obligation. Further once entire balance proceeds is received; which is expected by March 2021; entire term loan would be paid off. Group has access to fund based limits of Rs 15 crore which are utilized at an average of 65% for last 12 months ended October 2020.

Outlook Stable

CRISIL Ratings believes that DK group's will continue to benefit over medium term from extensive industry experience and funding support from sale of land

Rating Sensitivity Factor

Upward factor

  • Significant improvement in liquidity through timely realization of entire sale proceeds from land deal leading to sharp reduction in debt levels.
  • Improvement in business risk profile with operating margin of over 5%

 

Downward factor

  • Continued operating losses on account of lower than expected scale up in revenue
  • Delay in realization of sale proceeds from land deal beyond 31st March 2021
  • Increase in working capital requirement, larger-than-expected, debt-funded capex or acquisition, or more-than-expected dividend pay-out, weakening the financial risk profile, particularly liquidity

About the Company:

DKL was incorporated on 13th May, 1960 and commenced commercial production in 1963, in technical collaboration with Dai-ichi Kogyo Seiyaku Company Limited, Japan. DKL has its registered office at Mumbai, Maharashtra. The Company, (certified with ISO 9001) is engaged in manufacture and sale of Specialty Chemicals and its manufacturing activities are carried out at its plant located at Kasarwadi and Kurukumbh, Pune. DKL is setting up new unit in Dahej, Gujarat. NCDPL is a Joint venture with CTI Chemicals Asia Pacific Pte. Ltd., Singapore.

Key Financial Indicators consolidated)

As on / for the period ended March 31

 

2020

2019

Operating income

Rs crore

108.3

93.33

Reported profit after tax

Rs crore

-24.94

-12.63

PAT margins

%

-23

-13.5

Adjusted Debt/Adjusted Net worth

Times

0.91

0.73

Interest coverage

Times

-0.2

-0.9

 

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)

Complexity Level

Rating Assigned

with Outlook

NA

Cash Credit

NA

NA

NA

20

NA

CRISIL BB/Stable

NA

Letter of Credit

NA

NA

NA

7

NA

CRISIL A4+

NA

Long Term Loan

NA

NA

Mar 2024

92

NA

CRISIL BB/Stable

 

Annexure – List of entities consolidated

Names of Entities Consolidated

Extent of Consolidation

Rationale for Consolidation

Dai-Ichi Karkaria Limited

Full

Financial, Operational and Managerial Linkages

Dai-ichi Gosei Chemicals (India) Limited

Full

Financial, Operational and Managerial Linkages

Nalco Champion Daiichi India Pvt. Ltd

Share of profit

Financial, Operational and Managerial Linkages

 

Annexure - Rating History for last 3 Years
  Current 2021 (History) 2020  2019  2018  Start of 2018
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund Based Facilities LT 112.0 CRISIL BB/Stable   -- 01-12-20 CRISIL BB/Watch Developing 22-11-19 CRISIL BB/Stable 14-11-18 CRISIL BB+ /Stable(Issuer Not Cooperating)* --
      --   --   -- 03-01-19 CRISIL BB+/Stable 05-03-18 CRISIL BBB-/Positive --
Non-Fund Based Facilities ST 7.0 CRISIL A4+   -- 01-12-20 CRISIL A4+/Watch Developing 22-11-19 CRISIL A4+ 14-11-18 CRISIL A4+ (Issuer Not Cooperating)* --
      --   --   -- 03-01-19 CRISIL A4+ 05-03-18 CRISIL A3 --
All amounts are in Rs.Cr.
* - Issuer did not cooperate; based on best-available information
 
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Cash Credit 20 CRISIL BB/Stable Cash Credit 20 CRISIL BB/Watch Developing
Letter of Credit 7 CRISIL A4+ Letter of Credit 7 CRISIL A4+/Watch Developing
Long Term Loan 92 CRISIL BB/Stable Long Term Loan 92 CRISIL BB/Watch Developing
Total 119 - Total 119 -
Links to related criteria
CRISILs Approach to Financial Ratios
Rating criteria for manufaturing and service sector companies
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating Criteria for Chemical Industry
CRISILs Criteria for Consolidation
The Rating Process
Understanding CRISILs Ratings and Rating Scales
CRISILs Bank Loan Ratings

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