Detailed Rationale

CRISIL Ratings has revised its outlook on the non convertible debentures (NCDs) of GHCL Ltd (GHCL) to ‘Positive’ from ‘Stable’ and reaffirmed the rating at ‘CRISIL AA-’.

 

The revision in outlook follows the successful demerger of the textile business from GHCL to GHCL Textile Ltd (GTL) and reflects CRISIL Ratings expectation that the financial risk profile of the company may strengthen further in the near term with sustenance of healthy operating performance along with healthy demand outlook of the soda ash industry over medium term. While the company remains exposed to project risk associated with large greenfield expansion planned to increase soda ash capacity by 5 lakh tonne over the medium term, the risk may get largely mitigated in case of strong cash accrual, resulting in majority funding of the capital expenditure (capex) by cash accrual, and thereby limiting leverage on the balance sheet.

 

The rating factors in the healthy business risk profile, backed by established market position in the domestic soda ash industry and strong operating efficiency as reflected in superior profit margin. The rating also factors in strong financial risk profile as indicated by healthy capital structure and debt protection metrics aided by successful demerger of the textile business. These strengths are partially offset by vulnerability to price fluctuation of soda ash and volatility in key raw material prices.

 

During fiscal 2023, the operating income and earnings before interest, tax, depreciation and amortisation (Ebitda) of the inorganic chemicals business grew 49% and 104% respectively owing to significant rise in the soda ash prices as the same was passed on to the consumer with higher input cost prices while volumes remained flat. However, with the company reducing the soda ash prices by 17% in the current fiscal year till date in line with industry trend amid lower input cost and higher imports, the operating profitability is expected to moderate to normalised level from this fiscal onwards.

Analytical Approach

CRISIL Ratings has considered the business and financial risk profiles of the inorganic chemical division (i.e., soda ash, sodium bicarbonate and consumer products) as the company has demerged the textile business with no business and financial linkages expected between the two businesses.

Key Rating Drivers & Detailed Description

Strengths:

Healthy business risk profile

GHCL is the second-largest domestic soda ash manufacturer in an oligopolistic market, wherein the top three players account for over 85% of the total domestic production capacity, resulting in an established market position. Its soda ash capacity increased to 12 lakh million tonne as on March 31, 2023, from 11 lakh tonne a year ago, while sodium bicarbonate capacity rose to 1.2 lakh tonne from 0.73 lakh tonne. GHCL also procures a sizeable portion of key raw materials such as salt (25%), limestone (35%) and lignite through captive sources, resulting in better control over input cost, thus supporting stable and healthy profitability. The company also enjoys healthy relationship with leading detergent and glass manufacturers in the domestic market

 

Strong financial risk profile

For the past four 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 Ebitda ratio of 0.2 time as on March 31, 2023, interest coverage ratio of around 40 times during fiscal 2023 and the company being net cash positive. The financial risk profile should remain strong in the near term. 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.

 

To maintain its market share in the domestic soda ash industry, GHCL is undertaking a large greenfield project to add 5 lakh tonne of soda ash capacity at a new location in Kutch, Gujarat, with estimated outlay of nearly Rs 4,500 crore. 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 now expected to be completed in fiscal 2024 (vs expectation of completion in fiscal 2023 earlier). The delay from initial timelines has resulted in additional cash accrual being available for funding the project. It is now expected to be funded to a sizeable extent via internal accruals. The management has articulated that the debt-to-equity ratio would not exceed 1 time at the company level during the implementation phase. Any material increase in project cost or leverage increasing beyond expected levels would be a key rating sensitivity factors.

 

Weaknesses:

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

Liquidity is supported by cash and equivalents of over Rs 500 crore as on March 31, 2023. Cash accrual is projected at more than Rs 650 crore in fiscal 2024, against debt repayment of Rs 103 crore. The fund-based working capital limit of Rs 300 crore was sparsely utilized at less than 2% for the 12 months through May 2023. Excess accrual, cash and equivalents and undrawn bank limit should comfortably meet the working capital and capex requirements over the next two years.

Outlook: Positive

The credit risk profile of GHCL may improve in the near term, with strengthening of its financial risk profile owing to strong cash accrual, thereby limiting project risk.

Rating Sensitivity Factors

Upward Factors

• Sustained improvement in operating performance, resulting in improvement in RoCE to above 18% on a sustainable basis
• Net debt to Ebitda ratio sustaining below 2.0 times even upon factoring cash outflows towards capex plans and/or dividends/share buy-backs.

 

Downward Factors

• Significant decline in RoCE to below 15% on a sustained basis
• Higher-than-anticipated debt-funded capex resulting in debt to Ebitda ratio of more than 2.5 times, resulting in weakening of debt protection metrics

 

ESG profile

The chemical manufacturers can have a significant impact on the environment owing to high water consumption, waste generation and greenhouse gas emissions. The social impact of the sector is characterised by health hazards, leading to higher focus on employee safety and wellbeing and the impact on local community, given the nature of its operations. GHCL has consistently focused on mitigating its environmental and social risks.

 

Key ESG highlights

• GHCL has been increasing renewable energy portfolio, using a combination of wind and solar power to provide a portion of energy needs, while lowering carbon emissions.
• The company has implemented effective wastewater treatment systems at all manufacturing locations and is collaborating with an external party to collect and safely dispose plastic waste.
• The company has also demonstrated commitment to promote gender diversity, with women compromising 53% of the total permanent employees and workers. 
• All suppliers and vendors of GHCL are required to sign the Supplier Code of Conduct and around 30% of its value chain partners have been assessed for environmental impacts as on March 31, 2023
• As on June 30, 2023, 50% of its board comprised independent directors, separate chairperson and CEO position and dedicated investor grievance redressal system.

 

There is growing importance of ESG among investors and lenders. The commitment of GHCL to ESG will play a key role in enhancing stakeholder confidence, given high access to domestic capital markets.

About the Company

Incorporated in October 1983, GHCL is a diversified player with presence in chemicals, textile and consumer products segments. The company mainly manufactures soda ash (anhydrous sodium carbonate) and sodium bicarbonate (baking soda). Its unit at Sutrapada in Gujarat had installed capacity of 12 lakh tonne per annum as on March 31, 2023.

 

In the consumer product division, GHCL manufactures and sells edible salt and industrial grade salt under the brand name i-FLO and Sapan. GHCL has its salt manufacturing facility at Vedaranyam in Nagapattinam (Tamil Nadu) and a refinery at Chennai for producing edible salt. The textile business of GHCL was successfully demerged to GHCL Textile Ltd in April 2023.

 

GHCL generated consolidated revenue of Rs 1,017 crore and profit after tax (PAT) of Rs 426 crore in the first quarter of fiscal 2024, compared with Rs 1,148 crore and Rs 359 crore, respectively, in the corresponding period of fiscal 2023.

Key Financial Indicators - Adjusted by CRISIL Ratings

Particulars	Unit	2023	2022
Revenue	Rs crore	4,562	3,060
PAT*	Rs crore	1,142	650
PAT margin	%	25.0	21.2
Adjusted debt/adjusted networth	Times	0.09	0.26
Interest coverage	Times	42.43	20.56

*Includes profit from discontinued operations

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-/Positive

*Proposed