Detailed Rationale

CRISIL Ratings has upgraded its rating on the long-term bank facilities of Deepak Nitrite Limited (DNL group, including its subsidiaries) to ‘CRISIL AA/Stable’ form ‘CRISIL AA-/Positive’ while reaffirming the short term rating at 'CRISIL A1+'.

 

The rating action takes in to consideration sustained improvement in DNL group’s business risk profile, despite the impact of covid in the first quarter, supported by better product diversity through ramp up of its phenol and isopropyl alcohol (IPA) business, as well as sustained growth in performance of its key business segments especially fine and specialty chemicals (FSC).

 

Despite slowdown in the demand and production loss due to covid, company to witness flattish growth in the overall revenue in fiscal 2021, healthy operating profitability over 25% will ensure material improvement in cash accruals to over Rs.750 crores (Rs 644 crore in fiscal 2020). The performance in the current year is driven by strong growth witnessed in FSC (grew by 31% in first nine months of fiscal 2021) and Phenol segment (grew by 10%). Strong growth in FSC is driven by healthy demand outlook for agrochemicals and pharmaceuticals while contribution from IPA and increased volumes of phenol has supported the performance for the phenol segment.

 

Further, with generation of healthy accruals, the company has reduced debt levels leading to improvement in its debt metrics. ~Rs.250 crore of debt was prepaid at subsidiary, Deepak Phenolics Limited (DPL), lowering consolidated long term debt to about Rs 540 crore from Rs 843 crore in fiscal 2020.  Ergo, interest coverage is estimated to improve to about 18 times in fiscal 2021 from 9 times in fiscal 2020, while the ratio of total outside liabilities (TOL)/Tangible net worth (TNW) is seen improving to 0.5 time from 1.06 time in fiscal 2020.

 

Going forward, growth over the medium term, will be driven by recovery in demand from Basic Chemical (BC) and Performance Product (PP) segments and continued steady outlook for FSC and Phenol segments. The group will be further investing in brownfield and greenfield expansion in the BC and FSC segments and addition of downstream products under Phenol segment.  New products will support growth from fiscal 2023 onwards. Operating profitability is expected to range at 24-25% over the medium term, leading to continued strong cash generation. Annual capital spend is expected to range between Rs.500-600 crores, leading to continued strong debt metrics for instance, debt by earnings before interest, tax, depreciation and amortisation (EBITDA) to remain much below 1 time over the medium term. Any large debt-funded capex or acquisition will remain a key rating sensitivity factor.

 

The ratings reflect the DNL group’s healthy business profile driven by long track record and market leadership across most of its product segments, benefits expected to emanate from recent commissioning of large phenol manufacturing capacity at DPL, diversified revenue profile and improving operating efficiency. The ratings also factors in the group’s improving financial risk profile because of healthy accruals and strong debt metrics. These strengths are partially offset by moderate working capital requirement and susceptibility to volatility in spreads between the pricing of the feedstock and the finished products in DPL.

Analytical Approach

For arriving at the ratings, CRISIL Ratings has combined the business and financial risk profiles of Deepak Nitrite Limited and its subsidiaries, DPL (100% subsidiary, India) and Deepak Nitrite Corporation Inc, (100% subsidiary, USA), and referred to as DNL group, as they have significant managerial, operational, and financial linkages.

 

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:

• Healthy business profile driven by market leadership across its most of product segments

DNL group is the market leader in most of its businesses. In the FSC segment, continuous investment in research & development (R&D), and integrated operations have made DNL establishing its relationship with key customers for supplying products which find application in pharma, personal care and agro-based chemicals. In basic chemical business, the group is the largest player in India for supplying sodium nitrite/nitrate (market share of 80%), fuel additives (75%) and nitro-toluene (50%). Its market position in the PP business (market share of 75% in optical brightening agents) is supported by large capacity, integrated operations (backward integration to Diamino Stilbene Disulfonic Acid (DASDA)) and receipt of customer approvals.

 

The group supplies to diverse end-user industries such as polymer additives, pigments, dyes, paints, pharmaceuticals, agrochemicals, refineries, ply, laminate and fast-moving consumer goods, and is insulated from downturn in any particular industry. Also, one fourth of its net revenue is from exports, providing geographical diversity. The group maintained a strong revenue growth rate (CAGR of 20% in the past five fiscals). DNL group will sustain its healthy market share, given its leadership position, established track record, and large R&D capability leading to technical expertise.

 

• Diversified revenue profile and improving operating efficiency

DNL group has a diversified revenue profile, with presence in the BC business (contributing 17% to overall revenue in first nine months of fiscal 2021), FSC business (19%), PP business (8%) and phenol & acetone business (56%). Furthermore, no customer contributes more than 7% to total revenues indicating diversified customer profile. Entry in phenol segment in fiscal 2019 has driven improvement in scale of operations and diversity profile of the group. With full ramp up of phenol/acetone capacity in the first year of operation, phenol segment (revenue at about Rs 2010 crore in fiscal 2020) contributed about 50% of the group’s revenue in fiscal 2020.

 

The management has successfully diversified geographical presence through investments in the FSC business. The diversified revenue stream protects against downswing in any one business, and keeps operating margin steady. Furthermore, cost efficiency measures in the FSC and PP businesses, strong R&D capability, and market leadership in across its product segments has kept operating profitability healthy. Benefits of operating leverage, recovery in margin for PP segment will lead to healthy operating profitability as well as return on capital employed (RoCE) over the medium term. 

 

• Improving financial profile with reduction in overall debt level

Financial risk profile of the group is expected to improve substantially in fiscal 2021, with cash accrual of over Rs 750 crore and reduction in overall debt levels. Debt protection metrics are estimated to remain healthy in fiscal 2021 with interest cover improving to about 18 times from 9 times in fiscal 2020 and net cash accruals to total debt at over 138% from 59% in fiscal 2020. Further, TOL/TNW and Debt/EBITDA are estimated to improve to 0.54 time and 0.46 time respectively in fiscal 2021 from 1.06 times and 1.02 times respectively in fiscal 2020.

 

The group has incurred capital spend of Rs.1300 crores over the past 3 fiscals in setting up the Phenol plant and brownfield expansion under BC and FSC. Going forward, capital spend is expected to range between Rs.500-600 crores annually, which can be met from internal accruals, obviating need for material debt addition, and therefore continued strong debt metrics.

 

Weaknesses:

• Moderate working capital requirement

DNL group has moderate working capital requirement owing to debtor days of 70-90 days and gross current assets (GCA; net of cash) of 130-160 days in the past 3-4 years. With increasing contribution of phenol to total revenues and its better working capital cycle, GCA days of the group to remain at 120-130 days over the medium term. Any increase in debtor days on sustained basis and working capital requirement with increasing scale will be key monitorable.

 

• Volatility of raw material prices and competition from imports:

The raw material prices are linked to movement in crude oil prices for some of the major products. Though with diversification into other segments where formula based pricing is used, the group has reduced exposure to such volatility. Increased contribution to phenol segment, wherein DNL group’s profitability will remain vulnerable to volatility in spreads between the pricing of feedstock (benzene and propylene) and finished products.

 

The domestic phenol sector faces competition from imports contributing 40% of domestic demand. Any changes in anti-dumping duty impacting demand-supply situation of some of its products may remain key monitoring factor. During fiscal 2021, DNL is estimated to increase supply by 10% in phenol sales, despite competition from imports, sustenance of similar resilience will remain key monitorable.

Liquidity: Strong

The group is expected to have healthy liquidity with annual cash accruals of over Rs. 750 crore over the medium term as against debt repayments of Rs 50-70 crore per annum. The fund based bank limit of Rs 500 crore was utilized at an average of 10% over the past 9 months ended December 31, 2020. Further, the company also had cash and equivalent of Rs 200 crore as on Feb 28, 2021. Working capital requirements, capex plans, debt obligations are expected to be met through internal accruals, leading to limited dependence on external debt over medium term.

Outlook: Stable

CRISIL Ratings believes the DNL’s business risk profile will benefit from increasing contribution of phenol segment and improving performance and market leadership across other product segments over the medium term. Moderation in capital spend and healthy cash generating ability will ensure sustained strong debt metrics

Rating Sensitivity factors

Upward factors:

• Sustained improvement in operating performance leading to annual cash accruals at levels of over Rs.1000 crore on sustained basis
• Strong  debt metrics are sustained and liquidity remains at healthy levels

 

Downward factors:

• Sharp deterioration in operating performance leading to cash accruals below Rs 500 crore
• Higher than expected debt funded capex or elongated working capital cycle, leading to weakening of debt metrics; for instance, Debt/EBITDA in excess of 1.5 times

About the Company

DNL was established in 1970s by Mr. Chimanlal K. Mehta (Founder & Promoter). It is well diversified with presence across three segments viz. Basic Chemicals (BC), Fine and Specialty Chemicals (FSC) and Performance Products (PP). The group has ventured into Phenol-Acetone segment through its 100% subsidiary Deepak Phenolics Limited in 2018. The group enjoys strong competitive positioning in most of the product categories and has a strong client base and caters to over 900+ clients in over 40+ countries. The group has manufacturing facilities located at Nandesari, Dahej (Gujarat), Roha, Taloja (Maharashtra) & Hyderabad (Telangana) & R & D facility at Nandesari, Vadodara.

 

The group reported consolidated profit after tax (PAT) of Rs.486 crore on net revenues of Rs.2897 crores in the first nine months of fiscal 2021, compared with revenues of Rs. 3174 crores and PAT of Rs.439 crore in the corresponding months of fiscal 2020.

Key Financial Indicators (Consolidated):

Particulars	Unit	2020	2019
Revenue	Rs. Cr.	4258	2713
Profit After Tax	Rs. Cr.	611	174
PAT Margin	%	14.4	6.4
Adjusted Debt/Adjusted Net worth	Times	0.7	1.1
Interest coverage	Times	9.0	5.0

 

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of Instrument	Date of Allotment	Coupon Rate (%)	Maturity Date	Issue Size (Rs Cr)	Complexity Levels	Rating Assigned with Outlook
NA	Term Loan	NA	NA	Mar-26	150	NA	CRISIL AA/Stable
NA	Fund-Based Facilities	NA	NA	NA	300	NA	CRISIL AA/Stable
NA	Non Fund Based Limit	NA	NA	NA	170	NA	CRISIL A1+
NA	Proposed Fund-Based Bank Limits	NA	NA	NA	130	NA	CRISIL AA/Stable

 

Annexure – List of entities consolidated

Names of Entities Consolidated	Extent of Consolidation	Rationale for consolidation
Deepak Phenolics Limited	Full consolidation	Subsidiary
Deepak Nitrite Corporation Inc	Full Consolidation	Subsidiary