Rating Rationale
May 03, 2019 | Mumbai
Deepak Nitrite Limited
'CRISIL AA-/Stable/CRISIL A1+' assigned to bank debt
 
Rating Action
Total Bank Loan Facilities Rated Rs.750 Crore
Long Term Rating CRISIL AA-/Stable (Assigned)
Short Term Rating CRISIL A1+ (Assigned)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has assigned its 'CRISIL AA-/Stable/CRISIL A1+' ratings to the bank facilities of Deepak Nitrite Limited (DNL group, including its subsidiaries).
 
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 in its subsidiary ' Deepak Phenolics Ltd (DPL), diversified revenue profile and improving operating efficiency. The ratings also factors in the group's improving financial risk profile because of increase in cash accruals and robust networth. 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.
 
In India, DNL group is one of the leading supplier of basic chemicals (BC), fine and speciality chemicals(FSC), performance products (PP) and phenol with estimated revenue of over Rs 2600 crore in fiscal 2019 and a healthy estimated compound annual growth rate (CAGR) of 19% for the five-year period ended fiscal 2019. The group is the largest supplier in India for sodium nitrite, nitro-toluene products, fuel additives, optical brightening agents, agrochemicals and recently entered phenol. Furthermore, DNL group enjoys a well-diversified revenue profile in terms of geographical spread and product segments, thereby providing stability to its operations. The domestic and exports contribute about 65% and 35% respectively to the group's standalone revenue, respectively in fiscal 2018; in terms of products during same period, BC contributed around 50% to the standalone revenue, FSC products 30%, and balance from performance products with no single customer contributing more than 7% to revenues. With ramp up of phenol plan, phenol segment is expected to contribute 50% of revenue in fiscal 2020 and balance standalone operations of the group.
 
Complementing its strong market position is its improving operating efficiency with estimated operating profitability of 17% in fiscal 2019 with healthy profitability across its all product segments. Operating profitability has improved on sustained basis to 17% in fiscal 2019 from 10.5% in fiscal 2015 due to benefits of synergies in the operations by backward and forward integration in multiple segments, turnaround in PP segment, contribution of Phenol segment and favourable prices environment. RoCE, which was subdued in last three fiscals due to large size capital expenditure at DPL, is estimated to improve to 17% in fiscal 2019 and will remain at about 20% in the medium term. The strong R&D capabilities have led entry of the group into majorly import driven product category wherein it has achieved market leadership, scale and cost leadership as compared to its peers.
 
Going forward, the favourable demand outlook, ramp up of new capacities, forward integration to downstream products will support healthy revenue growth of 10-12% in the medium term. With entry into the Phenol and Acetone segment in fiscal 2019,  and its successful ramp up seen in first five months of operations since November 2018, will lead to sharp increase in scale of operations of DNL group at over Rs 3800 crore in fiscal 2020. Going forward, operating profitability is expected to remain in the range of 14-16% driven by healthy demand outlook, better operating leverage and further integration to downstream products.
 
Consolidated financial risk profile has improved in fiscal 2019, with estimated cash accrual of over Rs 250 crore increased from Rs 113 crore in fiscal 2018. Going forward, cash accruals are likely to improve to Rs 400-500 crore per annum in the medium term. Stabilisation of phenol plant, the fundamental strengths of the group's other product segments, and the management's focus on optimising the group's capital structure (including efficient risk management policies and reduced risk appetite) are expected to result in DNL's consolidated gearing and debt to EBITDA improve to 1.1 and 2.7 times for fiscal 2019 and 0.8 and below 2 times for fiscal 2020. CRISIL believes that DNL group's financial risk profile will improve further over the medium term, driven by continued healthy operating performance, and prudent capital spending. Nevertheless, any large debt-funded capex will remain a key rating sensitivity factor.

Analytical Approach

For arriving at the ratings, CRISIL 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 Xylidines, Oximes, Cumidines, Nitro Oxylene, 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, fertilisers, and fast-moving consumer goods, and is insulated from downturn in any particular industry. Also, one third of its net revenue is from exports, providing geographical diversity. The group maintained a strong revenue growth rate (CAGR of 19% 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, FSC business, PP business and phenol & acetone business. Furthermore, no customer contributes more than 7% to total revenues indicating diversified customer profile. Entry in phenol segment in fiscal 2019 is expected to drive improvement in scale of operations and diversity profile of the company. Faster ramp up of phenol in fiscal 2019 is estimated to generate revenue over Rs 800 crore and operating margin of 14% for the first 5 months since commencement of the plant in November 2018.  With full ramp up of phenol/acetone capacity, phenol segment (revenue estimated at about Rs 2000 crore in fiscal 2020) is likely to contribute 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 of 14-16% in the medium term and recovery in RoCE to 20% from 9% in fiscal 2018.  Improving operating performance diversity in revenue, integrated operations enable DNL to sustain improved operating efficiency.

* Improving financial profile with reduction in overall debt level
Financial risk profile of the group has improved in fiscal 2019, with estimated cash accrual of over Rs 250 crore increased from Rs 113 crore in fiscal 2018. Going forward, cash accruals are likely to improve to Rs 400-500 crore per annum in the medium term. During fiscals 2017-2019, the company incurred one of its largest capital expenditures (capex) ever through DPL, with 60% debt funding which led to moderation in the financial risk profile. This capex was primarily towards setting up plant for the phenol and acetone. Thus, debt to EBITDA ratio increased to 4.76 times as on March 31, 2018.

Going forward, overall debt is expected to remain at Rs 1000-1200 crore over medium term, marginally lower than Rs 1200 crore as on December 31st 2018.  Expected increase in cash accruals, lower capex intensity will result in sustained improvement in gearing and debt to EBITDA to 1.1 and 2.7 times for fiscal 2019 and 0.8 and below 2 times for fiscal 2020 respectively.  Interest coverage and ratio of net cash accrual to adjusted debt which were 4.3 times and 20% in fiscal 2019 (estimated) are expected to improve to 6 times and 30% by fiscal 2020. The ratio of total outside liabilities to adjusted networth (TOL/ANW) is expected to remain below 1.5 times over medium term from 1.82 times in fiscal 2018.

CRISIL believes that DNL group's financial risk profile will improve further over the medium term, driven by continued healthy operating performance, and prudent capital spending. Nevertheless, any large debt-funded capex will remain a key rating sensitivity factor.

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 130-160days in the past 3-4 years. During fiscal 2017 and 2018, GCA days also  increased  to 165 and 202 days (net of cash) respectively due to increase in balance with tax authorities/benefit receivables and absence of revenue from the phenol project that was undertaken. With increasing contribution of phenol to total revenues and its better working capital cycle, GCA (net of cash) 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 company 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 steep competition from imports primarily from Taiwan, South Afirca and USA. These players have an advantage of large capacities (in excess of their demand) and government support. In view of significant injury to the domestic industry as a result of dumping by these countries, the Government of India has levied an anti-dumping duty on import of such products. The benefits of the duty are available to the company till Sept 2019 and July 2020. Any changes in the government stance can have an impact on the operating profitability of DNL and will be a key monitorable. 
Liquidity

The group is expected to have healthy liquidity with annual cash accruals of Rs. 400-500 crore over the medium term. Working capital requirements, capex plans, debt obligations will be met through internal accruals. The bank limits (Rs 500 crore) have remained utilized at an average of 55% over the past 12 months ended March 2019. The group has annual long term repayment obligations around Rs 65-102 crore over fiscal 2020 to 2022. CRISIL expects internal accruals, cash & cash equivalents and unutilized bank lines to be sufficient to meet its repayment obligations. The group has a capex plan of Rs 750-800 crore over fiscal 2020 to fiscal 2022 which is expected to be mainly out of internal accrual, leading to lower dependence on external debt over medium term.

Outlook: Stable

CRISIL believes the DNL group'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. Improving leverage and ramp up in cash accruals will drive improvement in financial risk profile.

Upside scenario:
* Significant and sustained improvement in scale of operations and sustenance of profitability and
* Improvement in debt metrics backed by increase in cash accruals or equity infusion i.e. debt/EBITDA improving below 1.5 times on sustained basis

Downside scenario:
* Operating performance worsens leading to lower-than expected cash accrual leading to delay in improvement in capital structure
* Debt protection metrics weaken, most likely because of substantial working capital requirement or higher-than expected debt-funded capex or acquisition expenditure
* Adverse regulatory development with material impact on operating performance.

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 recently ventured into Phenol-Acetone segment through its 100% subsidiary Deepak Phenolics Limited.  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 Vadodara
 
In nine months ended 31st December 2018, company posted on standalone basis, operating income of Rs 1306 crore and profit after tax of Rs 81 crore as against operating income of Rs 1086 crore and profit after tax of Rs. 63 crore during similar period of last fiscal.

Key Financial Indicators
Particulars Unit 2018 2017
Revenue Rs. Cr. 1655 1371
Profit After Tax (PAT) Rs. Cr. 79 96
PAT Margin % 4.8% 7.0%
Adjusted Debt/Adjusted Networth Times 1.08 1.02
Interest coverage Times 4.36 3.93

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. Crore) Rating Assigned with Outlook
NA Term Loan NA NA Apr-2020 23.5 CRISIL AA-/Stable
NA Term Loan NA NA Mar-2026 250 CRISIL AA-/Stable
NA Fund Based Facilities NA NA NA 300 CRISIL AA-/Stable
NA Non Fund Based Limit NA NA NA 170 CRISIL A1+
NA Proposed Fund Based Bank Limits NA NA NA 6.5 CRISIL AA-/Stable
 
Annexure - List of Entities Consolidated
Names of Entities Consolidated Extent of Consolidation
Deepak Phenolics Limited Full consolidation
Deepak Nitrite Corporation Inc Full Consolidation
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
Fund-based Bank Facilities  LT/ST  580.00  CRISIL AA-/Stable    --    --    --    --  -- 
Non Fund-based Bank Facilities  LT/ST  170.00  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
Term Loan 273.5 CRISIL AA-/Stable -- 0 --
Proposed Fund-Based Bank Limits 6.5 CRISIL AA-/Stable -- 0 --
Fund-Based Facilities 300 CRISIL AA-/Stable -- 0 --
Non-Fund Based Limit 170 CRISIL A1+ -- 0 --
Total 750 -- Total 0 --
Links to related criteria
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 Consolidation

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