Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AA-/Stable’ rating on the non-convertible debentures (NCDs) of GHCL Limited (GHCL).

 

The rating factors in the company’s healthy business risk profile backed by established market position in the domestic soda ash industry and strong operating efficiency as reflected in superior profit margins. The rating also factors in strong financial risk profile as indicated by healthy capital structure and debt protection metrics. Demerger of the textile business would lead to further strengthening of the financial risk profile. These strengths are partially offset by project risk associated with large greenfield expansion planned to increase soda ash capacity by 5 lakh tonnes over the medium term, vulnerability of the inorganic chemical business to price fluctuation and volatility in key raw material prices.

 

During fiscal 2022 the operating income of the inorganic chemicals business grew significantly by 51% on the low base of fiscal 2021. This was driven by high demand and higher realisations as the company was able to pass on the rise in input costs. Operating profitability of the inorganic chemicals business remained stable on a year-on-year basis. During the first quarter of fiscal 2022 the inorganic chemical business margin improved to over 30% owing to further rise in soda ash prices. The operating performance is expected to be strong in fiscal 2023 as the realisations remain firm and demand from key end user industries remain healthy.

 

In March 2020, GHCL’s board approved the scheme to demerge its textile business into a separate entity. Once the scheme becomes effective, the textile business (along with all assets and liabilities thereof) shall be carved out and transferred to GHCL Textile Limited (GTL) on a going concern basis. As a consideration for the demerger, GTL will issue its equity shares to the shareholders of GHCL as on the record date in a 1:1 ratio. Post demerger, GHCL shall continue with the inorganic chemical business. The scheme of demerger is approved by stock exchanges, shareholders, the Competition Commission of India (CCI) and secured and unsecured creditors of GHCL and the management expects the entire demerger process to be completed within fiscal 2023. Any material delay in completing the demerger process or reversal of demerger due to any reason would be a key rating sensitivity factor. The management has also articulated that there will not be any cash flow fungibility between both the divisions post demerger and the same would remain a key monitorable.

 

Nonetheless, the textile business has seen healthy performance in fiscal 2022 driven by improved profitability of the yarn division. Also, GHCL has sold its home textile division to Indo Count Industries Limited in April 2022 on a slump sale basis for a total consideration of Rs 608.30 crores. The proceeds have helped deleverage the balance sheet further in fiscal 2023.

Analytical Approach

CRISIL Ratings has considered the business and financial risk profile of the inorganic chemical division (Soda ash, sodium bicarbonate and consumer products) as the company is under advanced stage to demerge the textile business and no business and financial linkages are expected between the two businesses post completion of the demerger.

Key Rating Drivers & Detailed Description

Strengths:

• Healthy business risk profile

GHCL is the second largest domestic soda ash manufacturer in an oligopolistic market wherein top three players accounts for over 85% of the total domestic production capacity, resulting in established market position. GHCL also procures a sizeable portion of key raw materials such as salt (30%), limestone (20%) and lignite through captive sources resulting in better control over input costs thus supporting stable and healthy profitability. The company also enjoys healthy relationships with leading detergent and glass manufacturers in the domestic market

 

• Strong financial risk profile

Over the past three years, free cash flow from operations has largely been utilised towards debt reduction, resulting in strong financial risk profile. This is reflected in debt to earnings before interest, tax, depreciation and amortization (EBITDA) ratio of 0.7 times as on March 31, 2022, and interest coverage ratio of 16 times during fiscal 2022. CRISIL Ratings expects the financial risk profile to strengthen further post demerger of the textile business. The debt to EBITDA ratio, however, may moderate over the medium term owing to the planned greenfield expansion which is likely to be partly funded by debt.

 

GHCL is currently expanding its soda ash manufacturing capacity from 11.5 lakh tonne to 12 lakh tonne by end of fiscal 2023 at the existing location through debottlenecking. However as per the management, further expansion at the existing location is difficult due to space constraint. In order to maintain its market share in domestic soda ash industry, GHCL would be undertaking a large greenfield capacity expansion of 5 lakh tonne at a new location in Kutch, Gujarat with estimated outlay of Rs 3,500 crore. At present, the company is in the process of acquiring land (more than 70% of land required has been acquired) and obtaining other regulatory approvals. As per the management this entire process of pre-clearance is expected to be completed in fiscal 2023. Given the initial stage of the project, the structure including the funding mix and other modalities is not yet finalized, however the management has articulated that the debt to equity ratio would not exceed 1 time and debt to EBITDA ratio would not exceed 3.5 times during the implementation phase. Any material increase in project cost or deviation in stated leverage philosophy would be a key rating sensitivity factors.

 

Weakness:

• Vulnerability of the soda ash business to price fluctuations and volatility in key raw material prices.

Soda ash prices are linked to the global market and thus remain susceptible to volatility in international prices, driven by capacity addition, currency fluctuations and competition from imports. While improved operating efficiency from large scale of operations offsets impact of any price fluctuation, the business will remain exposed to price volatility.

Liquidity: Strong

GHCL’s inorganic chemical business is expected to generate cash accruals of above Rs 850 crore against debt repayment of Rs 109 crore in fiscal 2023. The fund based working capital limit was sparsely utilised at 10% on average for the 12 months through June 2022. Excess accrual and undrawn bank limits are adequate to meet the working capital and capex requirement over the next two years.

Outlook: Stable

CRISIL Ratings expects that the company’s credit risk profile will continue to sustain over the medium term driven by healthy market position and strong financial risk profile.

Rating Sensitivity factors

Upward factors

• Significant improvement in scale of operations along with operating margin sustaining above 30%.
• Improved operating performance, leading to debt to EBITDA ratio of below 0.5 time on a sustained basis.

 

Downward factors

• Decline in operating performance, leading to fall in operating margin to below 22% on a sustained basis
• Bigger-than-anticipated, debt-funded capex resulting in debt to EBITDA ratio of more than 3.5 times, resulting in weakening of debt protection metrics
• Any unanticipated financial support extended towards the textile business during or post the demerger

About the Company

Incorporated in October 1983, GHCL is a diversified player with presence in chemicals, textile and consumer products segments. In the chemical segment, the company mainly manufactures soda ash (anhydrous sodium carbonate) and sodium bicarbonate (baking soda). The manufacturing unit is located in Sutrapada, Gujarat, with installed capacity of 11 lakh tonne per annum as on March 31, 2022.

 

In the consumer product division, GHCL manufactures and sells edible salt and industrial grade salt. It also markets spices, blended spices, and honey under the brand name of i-FLO. GHCL has its salt manufacturing facility at Vedaranyam in Nagapattinam district of Tamil Nadu and a refinery at Chennai for edible salt manufacturing.

 

The textile segment comprises spinning facility located in Madurai, Tamil Nadu (installed capacity of 31,425 tonne per annum). GHCL is in the process of demerging its textile business into a separate entity, which is expected to be completed within fiscal 2023. The scheme shall become effective upon filing of the certified copy of the order of the National Company Law Tribunal (NCLT) sanctioning the scheme with the Registrar of Companies.

Key Financial Indicators

Particulars	Unit	2022*	2021*
Revenue	Rs crore	3,785	2,495
Profit after tax (PAT)	Rs crore	634	310
PAT margin	%	16.7	12.42
Adjusted gearing	Times	0.25	0.31
Interest coverage	Times	16.11	7.84

*The above figures include financials of textile business as well since the demerger is not yet complete and separate financials of inorganic chemicals business is not available.

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	Non-Convertible Debenture*	NA	NA	NA	150	Simple	CRISIL AA-/Stable

*Yet to be issued