Detailed Rationale

CRISIL Ratings has revised its outlook on the long-term bank facilities of Ddev Plastiks Industries Ltd (DPIL) to ‘Positive’ from ‘Stable’ while reaffirming the rating at ‘CRISIL A’. The rating on short term bank facilities has been reaffirmed at ‘CRISIL A1’.

 

The revision in outlook factors in the company’s healthy and improving business risk profile, supported by expectation of sustenance of growth in volume (~15% during the nine months of current fiscal) over the medium term, while maintaining operating margin at 9-11%. Steady improvement in product mix with greater share of the higher margin cross linked polyethylene compounds will support operating margins being held at these levels even if realisations remain at current low levels. Revenue share of the high-margin polyethylene (PE) compound has been steadily increasing and currently forms ~86% of the total income, against 76% four years back. Furthermore, the company has started commercial production of halogen free flame retardant (HFFR) compounds, thereby supporting business risk profile.

 

The ratings also derive comfort from company’s healthy market position, wide product range, strong clientele, experienced management, and improving financial risk profile backed by robust capital structure and debt protection metrics. These strengths are partially offset by exposure to intense competition in the compounds market, dependence on large players in the oil and gas industry for raw material, and susceptibility to sharp volatility in raw material prices and currency rates.

 

In the first nine months of fiscal 2024, revenue was Rs 1,848 crore, slightly lower than Rs 1,853 crore in the corresponding period previous fiscal due to lower realisations for all segments and lower trading sales; even as volumes increased. While fall in realisations and lower sales from the trading segment will keep revenue slightly lower this fiscal, it is expected to grow 8-10% over the medium term and cross Rs 3,000 crore over the medium term; with increasing share of revenue from the high voltage cable segment and newer segments such as HFFR ramping up.

 

The earnings before interest, tax, depreciation and amortisation (Ebitda) margin during the first nine months of fiscal 2024 improved sharply to 10.2% from 7.3% in fiscal 2023. Historically, gross margin have been lower at ~13%, but improved to ~18% in this period due to change in product mix and lower raw material prices. The company’s products are priced on a cost-plus markup model, which benefits sustenance of gross profits. The change in product mix undertaken over the past four fiscals has helped to improve gross profit per kilogramme (kg). Operating margin is expected to remain 9-11%, with gross profit per kg expected to further improve over the medium term with commencement of sales in 132 kilovolt (KV) segment. Also, increasing the share of HFFR will benefit gross profit as it is a high-margin product. Furthermore, return on capital employed is expected to remain healthy at over 20% over the medium term.

 

Financial risk profile is comfortable, with gearing of 0.23 time as on September 30, 2023, and networth of ~Rs 564 crore. The entire debt is in the form of working capital. Gearing is expected to improve further to below 0.2 time over the medium term. DPIL continues to maintain adequate debt protection metrics with interest coverage ratio of 10.6 times as on December 31, 2023, and net cash accrual to adjusted debt (NCAAD) ratios of ~118% as on September 30, 2023.Over the medium term, interest coverage and NCAAD ratios are expected to sustain at above 9-10 times and 100%, respectively.

 

Liquidity remained strong with expected accrual of ~Rs 200 crore p.a. over the medium term against nil debt obligation. Capital expenditure (capex) of ~Rs 125 crore and Rs 70 crore for fiscals 2025 and 2026, respectively, is also expected to be funded from internal accrual. Liquidity is further augmented by liquid surplus of ~Rs 50 crore.

Analytical Approach

CRISIL Ratings has considered the standalone business and financial risk profiles of DPIL.

Key Rating Drivers & Detailed Description

Strengths:

• Healthy business risk profile, extensive experience of the promoters, wide product range, and strong clientele: DPIL is promoted by Kolkata-based Surana family that has been associated with the polymer compounding industry for over five decades. Over the years, they have diversified product profile, developed a strong understanding of market dynamics, and established healthy relationships with suppliers and customers. Clientele includes large wire and cable companies such as KEI Industries Ltd, Havells India Ltd, Apar Industries Ltd, and KEC International Ltd; apart from some key international manufacturers.

 

The company is the largest polymer compounder in India with capacity of 242,000 TPA, with market leadership in PE compounds catering to the low, medium and high voltage power cable industry. This is supported by diversified products used for manufacturing building wires, control and instrumentation cables, and for insulation and jacketing of wires in the wire and cable industry, as well as in the packaging segment. The company’s strong market position is underpinned by large scale of operations (turnover of Rs 1,834 crore in the nine months ended December 31, 2023) and a diverse customer base.

 

• Disciplined inventory management and strategic location of facilities: The company has manufacturing facilities on the east and west coasts of India (West Bengal, Daman, and Silvassa). Strategic location of plants provides logistical advantages for import of raw materials as well as for exports of products. Proximity to suppliers and ports also helps keep a tight control over inventory (20-40 days in the past eight fiscals). DPIL has also increased its share of imports from the Middle East, where it gets an interest-free credit period. Volatility in raw material prices (crude oil derivatives) impacts operating profitability. However, the discipline in inventory management has helped to protect business from sharp changes in raw material prices and sustain operating profitability in the past. 

 

• Comfortable capital structure and healthy debt protection metrics: Networth was healthy at ~Rs 564 crore as on September 30, 2023, resulting in comfortable gearing of 0.23 time. Furthermore, the company does not have any term loans and the entire debt is working capital. With no major capex and effective working capital management backed by timely realisation of receivables, capital structure is expected to remain healthy over the medium term. Debt protection metrics were also robust and will remain so over the medium term.

 

Weaknesses:

• Exposure to intense competition in the compounds market and dependence on large players in the oil and gas industry for raw material: The domestic polymer compounding industry faces intense competition from import from global chemical giants such as Borealis AG, Dow Chemical Company. These players have large capacities and economies of scale. While they mainly cater to speciality grade compounds focused more on high- and extra-high-voltage power cables, DPIL’s business performance remains susceptible to competition from imports. Also, the company procures 60-70% of its raw material from Reliance Industries Ltd (rated CRISIL AAA/Stable/CRISIL A1+), Indian Oil Corporation Ltd (rated CRISIL AAA/Stable/CRISIL A1+), and ONGC Petro-additions Ltd, leading to limited bargaining power with suppliers.

 

• Susceptibility to sharp volatility in raw material prices and currency rates: Raw materials such as low density polyethylene, high density polyethylene and polyvinyl Chloride resin used to manufacture polymer compounds are crude derivatives and some portions of these are imported. Input prices and currency exchange rates have been volatile in the past because of sharp fluctuations in crude oil prices. While the company has demonstrated discipline in working capital management, profitability remains susceptible to any sharp movement in raw material prices and currency rates. 

Liquidity: Adequate

Liquidity is backed by no long-term debt and capex of ~Rs 125 crore and Rs 70 crore for fiscals 2025 and 2026, respectively, which will be funded through internal accrual of ~Rs 200 crore per annum over the same period. Working capital requirement is expected to be funded majorly from internal accrual. Bank limit of Rs 649 crore was utilised at an average of 48% for the 11 months through January 2024. The limit was increased in February 2024 to Rs 759 crore.

Outlook: Positive

CRISIL Ratings believes that Ddev Plastiks Industries will  benefit from increasing focus on the XLPE segment, introduction of HFFR compounds and the buoyant growth outlook of its key end-user segment. Further, DIPL will continue to benefit from its strong business risk profile over the medium term, backed by its leadership position in the domestic polymer compounds market. Higher cash generation with ramp up in operations and absence of major capex should support financial risk profile over the medium term.

Rating Sensitivity factors

Upward factors:

• Increase in volume of products sold, with improving share from HFFR and high voltage segments
• Sustenance of operating profitability at over 9-10% resulting in higher cash accruals
• Maintenance of healthy financial risk profile through prudent funding mix for capex and efficient working capital management

 

Downward factors:

• Sluggish revenue growth impacting operating profitability (below 5%) and cash generation
• Debt-funded capex and stretch in working capital weakening capital structure and debt protection metrics

About the Company

Incorporated in December 2020 and promoted by Surana family, DPIL houses the polymer compounding business of the Kkalpana group. In March, 2022, Kkalpana Industries (India) Ltd received National Company Law Tribunal approval for demerging its compounding business into DPIL. The compounding business was started in 1985, with a unit in Daman for manufacturing PVC compounds. Sustained expansion has resulted in a diverse product portfolio comprising PE compounds, PVC compounds, master batches, engineering plastics, and reprocessed compounds. Currently, the company has seven plants across West Bengal, Daman & Diu, Dadra & Nagar Haveli, and Noida and has aggregate installed capacity of 2,42,000 TPA.

Any other information: Not Applicable