Detailed Rationale

CRISIL Ratings has upgraded its ratings on the bank facilities of Deccan Fine Chemicals India Private Limited (Deccan; part of Deccan group) to ‘CRISIL AA-/Stable/CRISIL A1+’ from 'CRISIL A+/Positive/CRISIL A1’.

 

The ratings upgrade factor in the continued strengthening of the business and financial risk profiles of the Deccan group, and further expectation of consolidation of operations. This is largely supported by the healthy revenue growth expected post stabilization of large green field capex at Tuni, sustained high profitability margins, superior execution capabilities and strong relationships with leading global agrochemical companies, thereby leading to healthier cash generation from operations. Revenue is estimated to grow 35-38% in fiscal 2022 and is expected to further grow at ~ 15 to 20 % over the next two fiscals. Addition of new products, availability of enhanced capacities, steady revenue from existing molecules and commercialization of new molecules should continue to support the business growth. Improving scale, continued offtake by customers and strong portfolio of molecules will help sustain the operating margin.

 

The Deccan group’s financial risk profile is also improving backed by its robust busines performance as reflected in significant improvement in networth and debt protection metrics. Capital expenditure is likely to remain high over the medium term. However, it is not expected to impact the financial risk profile as strong net cash accrual will continue to support the liquidity and financial risk profile. Total outside liabilities to net worth (TOLTNW) ratio is expected to improve to 1.1 times for fiscal 2022 as compared to 1.2 times for fiscal 2021. Further, interest coverage and net cash accruals to debt (NCTAD) ratio is expected to stay comfortable at 13.5 and 0.42 times, respectively for fiscal 2022. Also, substantial free cash balances, maintained through fiscal 2022, have continued to support the liquidity and is expected to remain in the business for any exigent requirements. Any large debt funded acquisition or higher than expected cash outflow which reduces the liquidity cushion will remain a key monitorable.

 

The ratings reflect the group’s established presence in custom synthesis and contract manufacturing (CSM) and healthy relationships with global agrochemical companies and its healthy financial risk profile along with a superior liquidity profile. These rating strengths are partially offset by its working capital-intensive operations, exposure to forex fluctuation risks and exposure to product concentration risk.

Analytical Approach:

For arriving at its ratings, CRISIL Ratings has combined the business and financial risk profiles of Deccan and its wholly owned subsidiaries Deccan Advanced Sciences Private Limited (DASPL) and Deccan Fine Chemicals USA LLC. Also, Deccan’s other subsidiaries Escientia Advanced Sciences Private Limited (EASPL), Escientia BioPharma Pvt. Ltd, Escientia Switzerland AG, and Escientia Life Sciences LLC are proportionately consolidated to the extent of interest in these businesses. All these entities, together referred to as the Deccan group, are under the same management.

 

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 presence in CSM business and healthy relationships with global agrochemical players: The Deccan group is one of the largest contract manufacturers of agrochemicals in the world. The group has built an established reputation with leading multinationals in USA, Europe and Japan and has long-term contracts for key agrochemical active ingredients and intermediates for crop-protection /agrochemical products across the globe. The group has a track record of development of more than 30 new molecules in the last five years and several new molecules are under trial at various stages. The group has been continuously augmenting its product basket year-on-year with commercialization of newer molecules in the CSM space. The group, given its early-stage association with innovators, technical expertise, high-end infrastructure and scaling up abilities is largely insulated from potential competitors. Also, innovators typically register the Deccan group as a contract manufacturer for a given product while registering overseas, amending which would require additional time and costs. Given the group’s dominant market position in the CSM space and longstanding associations with all major global agrochemical players, CRISIL Ratings expects revenue to continue to grow about 15-20 % over the medium term.,

 

• Healthy financial risk profile and superior liquidity: Financial risk profile is expected to remain strong with networth, and TOL/TNW ratios estimated at Rs 2912 crore, and 1.13 times respectively as of March 31, 2022. Debt protection metrics have also remained robust supported by healthy operating margin and comfortable capital structure. Net cash accrual to total debt (NCATD) and interest coverage ratios are estimated at 0.42 and 13.5 times respectively for fiscal 2022. Further cushion available in the bank limits along with substantial free bank balances maintained through fiscal 2022 support the liquidity.

 

Weaknesses:

• Working capital-intensive operations: Operations remain working capital intensive with gross current assets estimated at 188 days as on March 31, 2022, driven by estimated inventory and receivables of 100 and 75 days, respectively. However, the group is not much exposed to inventory price fluctuation risk as it is secured by back-to-back contracts with the customers which helps it maintain its operating margin. 

 

• Exposure to product concentration risk: Product and customer concentration risks persist, with the top 5/10 products continuing to contribute substantially to the Deccan group’s revenue. However, the group’s molecules are of the 4th generation, the very latest, and comply with current regulations in the developed markets. CSM involves early-stage association with innovators and these molecules are not generic. These 4th generation patented molecules have strong revenue potential not only during 10-15 years of patented phase but also post expiry as innovators hold large market share even after the expiry of patent. Moreover, the group chooses only those molecules for R&D which have long-term demand potential. Generally, older molecules that do not adhere to current regulations have been banned in the past. Deccan is a registered vendor with other global agro-chemical players also, and the product concentration is also gradually decreasing. The present high degree of product concentration, however, makes the group highly susceptible to its relationships with customers and regulatory changes in key markets. Any deterioration in the credit quality or change in key credit terms by these customers is likely to have an impact on performance and credit profile. Though, co dependence of the customers and the group on each other, mitigates this risk to a certain extent.

Liquidity: Superior

Company generates adequate cash accruals to meet its term debt obligations as well as to fund part of the capex and incremental working capital requirements. Utilization of working limits was about 74% for the 12 months ended September 2021. Recent enhancement of Rs 290 crore in the working capital limit will also support the incremental working capital requirements. Deccan continues to maintain healthy cash and bank balances which also supports its liquidity.

Outlook: Stable

CRISIL Ratings expects Deccan's business risk profile will continue to improve over the medium term, driven by established relationships with global agrochemical companies, an expanding product portfolio, and steady margin.

Rating Sensitivity factors

Upward factors:

• Sustained revenue growth of 30-40% while maintaining the operating margin, thereby strengthening the cash flows and credit metrics.
• Reduction of debt to about Rs 1800 crore while maintaining its strong business performance.

 

Downward factors:

• Net cash accrual falling by over 25-30%
• Any large debt-funded capex, acquisition or stretch in the working capital cycle, weakening key credit metrics

About the Group

Deccan was incorporated in August 2006, by the promoters, Mr GS Raju and his family and associates. Mitsubishi Corporation, Japan holds a 20% stake in the company, while the rest is held by promoters and their close associates. The Hyderabad-based company has manufacturing units at Tuni (Andhra Pradesh), Ankleshwar (Gujarat) and Goa, all of which are export-oriented units (EOUs).

 

Deccan through its wholly owned subsidiary DASPL acquired majority stake (74%) in EASPL. EASPL is a pharmaceutical CDMO (contract development & manufacturing organization) manufacturer for leading life sciences companies. It focuses on developing and making complex APIs (active pharma ingredients) for human and animal health applications.

Key Financial Indicators

As on / for the period ended March 31		2021	2020
Operating income	Rs crore	4258	3585
Reported profit after tax (PAT)	Rs crore	NA	NA
PAT margin	%	NA	NA
Adjusted debt/adjusted networth	Times	0.96	1.14
Interest coverage	Times	NA	NA

 

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs crore)	Complexity Level	Rating assigned with outlook
NA	Composite Working Capital Limit	NA	NA	NA	156	NA	CRISIL AA-/Stable
NA	External Commercial Borrowings	NA	NA	Oct-25	111.38	NA	CRISIL AA-/Stable
NA	External Commercial Borrowings	NA	NA	Nov-23	24.08	NA	CRISIL AA-/Stable
NA	External Commercial Borrowings	NA	NA	Oct-25	148.51	NA	CRISIL AA-/Stable
NA	External Commercial Borrowings	NA	NA	Oct-25	185.64	NA	CRISIL AA-/Stable
NA	External Commercial Borrowings	NA	NA	Oct-25	111.38	NA	CRISIL AA-/Stable
NA	External Commercial Borrowings	NA	NA	Oct-25	185.64	NA	CRISIL AA-/Stable
NA	External Commercial Borrowings	NA	NA	Dec-22	19.31	NA	CRISIL AA-/Stable
NA	External Commercial Borrowings	NA	NA	Sep-24	31.26	NA	CRISIL AA-/Stable
NA	External Commercial Borrowings	NA	NA	Oct-25	37.13	NA	CRISIL AA-/Stable
NA	External Commercial Borrowings	NA	NA	Oct-25	259.89	NA	CRISIL AA-/Stable
NA	Foreign Currency Term Loan	NA	NA	Sep-27	148.51	NA	CRISIL AA-/Stable
NA	Foreign Currency Term Loan	NA	NA	May-22	13.4	NA	CRISIL AA-/Stable
NA	Foreign Currency Term Loan	NA	NA	Aug-22	2.33	NA	CRISIL AA-/Stable
NA	Foreign Currency Term Loan	NA	NA	Apr-22	1.53	NA	CRISIL AA-/Stable
NA	Foreign Currency Term Loan	NA	NA	Jul-25	177.9	NA	CRISIL AA-/Stable
NA	Foreign Currency Term Loan	NA	NA	Aug-22	2.78	NA	CRISIL AA-/Stable
NA	Foreign Currency Term Loan	NA	NA	Aug-22	0.66	NA	CRISIL AA-/Stable
NA	Foreign Currency Term Loan	NA	NA	Sep-23	20.56	NA	CRISIL AA-/Stable
NA	Foreign Currency Term Loan	NA	NA	Feb-23	15.22	NA	CRISIL AA-/Stable
NA	Foreign Currency Term Loan	NA	NA	Jun-23	18.78	NA	CRISIL AA-/Stable
NA	Foreign Currency Term Loan	NA	NA	Sep-24	62.81	NA	CRISIL AA-/Stable
NA	Foreign Currency Term Loan	NA	NA	Sep-27	150.24	NA	CRISIL AA-/Stable
NA	Letter of credit & Bank Guarantee	NA	NA	NA	10	NA	CRISIL A1+
NA	Packing Credit in Foreign Currency	NA	NA	NA	125	NA	CRISIL A1+
NA	Packing Credit in Foreign Currency	NA	NA	NA	125	NA	CRISIL A1+
NA	Packing Credit in Foreign Currency	NA	NA	NA	141	NA	CRISIL A1+
NA	Packing Credit in Foreign Currency	NA	NA	NA	30.95	NA	CRISIL A1+
NA	Packing Credit in Foreign Currency	NA	NA	NA	100	NA	CRISIL A1+
NA	Packing Credit in Foreign Currency	NA	NA	NA	150	NA	CRISIL A1+
NA	Packing Credit in Foreign Currency	NA	NA	NA	44.05	NA	CRISIL A1+
NA	Packing Credit in Foreign Currency	NA	NA	NA	65	NA	CRISIL A1+
NA	Packing Credit in Foreign Currency	NA	NA	NA	100	NA	CRISIL A1+
NA	Proposed Long Term Bank Loan Facility	NA	NA	NA	0.16	NA	CRISIL AA-/Stable

 

Annexure – List of entities consolidated

Names of Entities Consolidated	Extent of Consolidation	Rationale for Consolidation
Deccan Fine Chemicals India Pvt Ltd	Full	Parent/Holding Company
Deccan Advanced Sciences Pvt Ltd	Full	Wholly owned subsidiary of Deccan
Escientia Advanced Sciences Pvt. Ltd	Proportionate	Step-down subsidiary of Deccan
Escientia BioPharma Pvt. Ltd	Proportionate	Step-down Subsidiary of Deccan
Escientia Switzerland AG	Proportionate	Step-down Subsidiary of Deccan
Deccan Fine Chemicals USA LLC	Full	Step-down Subsidiary of Deccan
Escientia Life Sciences LLC	Proportionate	Wholly owned step-down subsidiary of Deccan