Detailed rationale

CRISIL Ratings has assigned its ‘CRISIL A (CE)/Positive’ rating to the long-term bank facility of Epsilon Advanced Materials Private Limited (EAMPL).

 

The rating factors in the strength of the unconditional and irrevocable corporate guarantee from the parent, Epsilon Carbon Pvt Ltd (ECPL; ‘CRISIL A/Positive/CRISIL A1’).

 

ECPL has a strong credit risk profile driven by its healthy market position in the domestic coal tar pitch (CTP) segment, integrated operations and benefits derived from long-term raw material supply arrangement with JSW Steel Ltd (JSW Steel). Also, ECPL has healthy operating efficiency and improving financial risk profile. It is estimated to book a strong revenue growth in fiscal 2022 along with healthy operating margins.. Commencement of enhanced coal tar capacity duly supported by healthy demand from end-user industries and strong realisations aided bymore than doubling of revenues in the fiscal and sustained operating profitability. Also, a new carbon black capacity will ramp-up sales in fiscal 2023 and ensure sustenance of growth over the medium term. The financial risk profile has been improving because of strong accretion.

 

The rating reflects the extensive experience of the promoters in the carbon technology industry, strong support from the parent and healthy demand prospects for its products driven by offtake agreements with large customers. These strengths are partially offset by exposure to project and regulatory risks and average financial risk profile.

Analytical approach

The rating on EAMPL is based on the CRISIL Ratings criteria for rating instruments backed by guarantees. The suffix (CE) reflects the payment structure, which is designed to ensure full and timely payment to the lender, owing to the corporate guarantee by ECPL.

 

For arriving at the unsupported rating, CRISIL Ratings has combined the business and financial risk profiles of EAMPL and its subsidiary, Epsilon Graphite Private Limited (EGPL) and has applied its parent notch-up framework to factor in the support available to EAMPL from the parent, ECPL.

 

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

Key rating drivers and detailed description

Strengths:

• Strong operational and financial support from the parent along with unconditional and irrevocable corporate guarantee: The parent has extended funding support for EAMPL’s pilot project and has also extended corporate guarantee for its entire debt. The ratings are based on an unconditional, continuing and irrevocable guarantee from ECPL, and an unconditional undertaking by the latter for securing the principal and interest obligations on the entire debt of EAMPL. The payment structure is designed to ensure full and timely payment to the lender. The guarantor, ECPL, will pay any amount due and payable by EAMPL on or before the stipulated due date irrespective of the lender invoking the guarantee. Also, the central treasury team of ECPL will closely monitor the repayments and provide timely support. The guarantee and the undertaking together cover the principal, interest and other monies payable under the guaranteed bank loan.

 

The parent has rented out EAMPL’s capacity and pays monthly rent to EAMPL. ECPL is also committed to support the upcoming expansion project of bulk mesophase coke and shall extend necessary and timely funding support. Also, ECPL is setting up a special pitch capacity to supply the requisite raw material to bulk mesophase coke.

 

• Healthy demand prospects for advance carbon materials: Healthy demand for lithium-ion rechargeable batteries provides strong growth impetus for bulk mesophase coke, which is a precursor to manufacture synthetic graphite anodes. The company has a process patent for manufacturing bulk mesophase and has received product approvals and offtake memorandum of understandings (MOUs) from two large customers. Hence, it is setting up a 15,000 TPA (tonne per annum) capacity under its subsidiary, Epsilon Graphite Pvt Ltd (EGPL). Lithium-ion batteries are the major source of power for electric vehicles (EVs). The growing thrust on EVs and plug-in hybrid EVs has boosted the adoption of lithium-ion batteries and drives demand for augmented graphite anodes. Hence, demand for the company’s products will remain healthy over the medium term.

 

• Extensive experience of the promoters: The promoters have established themselves in the CTP business and have added a product, carbon black, through forward integration. Furthermore, a capacity of 2,500 TPA was set up in EAMPL for mesophase coke and post approval from prospective customers, an enhanced capacity is being set up. The extensive experience of the promoters in project execution and ramping-up operations of new capacities will aid the business over the medium term.

 

Weaknesses:

• Exposure to project and regulatory risks: The ongoing project to set up a 15,000 TPA bulk mesophase capacity is in the nascent stage and financial closure is expected in the next 2-3 months. The project is likely to be commercialised in 18-20 months. Timely completion of the project and stabilisation and ramp-up in sales remain critical. Further, the business is susceptible to regulatory challenges amid strict environmental policies.

 

• Average financial risk profile: The financial risk profile remained average in the project commissioning stage. Profitability and accretion were supported by rentals from the parent in fiscal 2022, because of which the financial metrics are estimated to have improved. Nonetheless, the company has planned moderate capital expenditure (capex) to be incurred over medium term which is to be funded by a mix of debt and promoter’s funds. Therefore, the debt level is expected to remain elevated and financial risk profile will remain average over the medium term.

Liquidity: Adequate

Liquidity is supported by the credit enhancement available in the form of an unconditional and irrevocable corporate guarantee by the parent. Also, ECPL is likely to provide financial support during exigencies. The planned capex for enhanced mesophase capacity will be funded by capital from the parent and term loan. ECPL has access to fund-based working capital limit of Rs 55 crore, which was utilised less than 50% on average in the past six months. Further, it maintains surplus cash and bank balances. EAMPL’s cash accrual is expected to be quite sufficient vis-a-vis its yearly debt repayment obligation over medium term.

Outlook: Positive

The outlook is based on the 'Positive' outlook on the guarantor's debt instruments. The rating is sensitive to any change in the rating on ECPL. CRISIL Ratings believes EAMPL will continue to benefit from the extensive experience of the promoters and strong parent support.

Rating sensitivity factors

Upward factors

• Improvement in the credit risk profile of the guarantor
• Timely completion of the project with no major cost overrun and rapid ramp-up in sales

 

Downward factors

• Significantly higher than expected capex, delay in project implementation or lower-than-expected sales
• Change in the strategy or support of parent or downward revision in CRISIL Ratings’ view on the credit risk profile of the guarantor

Adequacy of the credit enhancement structure

The rating is based on the strength of the unconditional, continuing and irrevocable guarantee extended by ECPL along with an undertaking to ensure full and timely payments to the lender. According to the payment mechanism, the guarantor, ECPL, will pay on or before the stipulated due date any amount due and payable by EAMPL in relation to these instruments in case of any default on, or shortfall in, payment. The guarantor has undertaken to monitor the availability of funds at EAMPL minimum three days prior to the stipulated due date, and in case of inadequacy of funds, shall extend fund support for meeting debt obligations on or before due dates. The guarantee and the undertaking together cover the principal, interest and other monies payable under the guaranteed loan.

Unsupported rating: CRISIL A-

CRISIL Ratings has introduced the suffix 'CE' for instruments having an explicit credit enhancement feature, in compliance with the Securities and Exchange Board of India circular dated June 13, 2019.

Key drivers for unsupported ratings

For arriving at the unsupported rating, CRISIL Ratings has combined the business and financial risk profiles of EAMPL and its subsidiary, EGPL, and has applied its parent notch-up framework to factor in the extent of support available from the parent, ECPL. EAMPL’s rating reflects the extensive experience of the promoters, strong support from the parent and healthy demand prospects for its products. These strengths are partially offset by exposure to project and regulatory risks and average financial risk profile.

About the company

EAMPL is a majority subsidiary of ECPL and produces 2,500 TPA of advanced carbon material, such as bulk mesophase and synthetic graphite, which is used for the anode material of rechargeable lithium-ion batteries. EGPL is a wholly owned subsidiary of EAMPL and is setting up a 15,000 TPA capacity to produce mesophase coke, used in the manufacturing of synthetic graphite, which is further used for anode material of lithium-ion batteries.

 

About the guarantor

Incorporated in 2010, ECPL manufactures coal tar derivatives, such as CTP, high purity naphthalene and carbon black oil. The company has set up a carbon black facility as forward integration. Its integrated manufacturing facility is within the steel complex of JSW Steel in Vijaynagar, Karnataka.

Key financial indicators (EAMPL; Standalone)

As on / for the period ended March 31		2021	2020
Operating income	Rs crore	0.39	--
Reported profit after tax (PAT)	Rs crore	(4.87)	(0.03)
PAT margin	%	(1252)	--
Adjusted debt / adjusted networth	Times	9.96	3.45
Interest coverage	Times	(0.83)	--

 

Key financial indicators (ECPL; Consolidated)

As on / for the period ended March 31		2021	2020
Operating income	Rs crore	747	852
Reported profit after tax (PAT)	Rs crore	73	65
PAT margin	%	9.8	7.7
Adjusted debt / adjusted networth	Times	1.66	1.24
Interest coverage	Times	8.1	7.6

 

List of covenants

• Any cost overrun/shortfall in debt servicing to be borne by ECPL
• Any unsecured/promoter loans to be subordinate to bank loans

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	Long Term Loan	NA	NA	Mar-26	20	NA	CRISIL A (CE) /Positive

 

Annexure – List of entities consolidated

Names of entities consolidated	Extent of consolidation	Rationale for consolidation
Epsilon Advanced Materials Pvt Ltd	Full	Strong business and financial linkages
Epsilon Graphite Pvt Ltd	Full