Detailed Rationale

CRISIL Ratings has revised its rating outlook on the long-term bank facilities of Gharda Chemicals Limited (Gharda) to ‘Positive’ from ‘Stable’ and reaffirmed the rating at ‘CRISIL AA’; the short-term rating has been reaffirmed at ‘CRISIL A1+’.

 

The revision in outlook factors in the established position of Gharda as one of India's leading agro-chemical manufacturers, diverse product portfolio and geographic reach, and strong process development capabilities. These strengths are partially offset by large working capital requirement, exposure to regulatory risks and susceptibility to uneven monsoon inherent in the agrochemical segment.

 

Revenue grew 26%year on year to about Rs 4,000 crore in fiscal 2022, driven by improved offtake in the export market which contributed ~65% to the total revenues and stable performance in the domestic segment. The revenue growth could be attributed to a healthy mix of volume and realization growth. Around 55-60% of the revenues were derived from the herbicide segment, 25-30% from insecticide and pesticide segment while balance came from plant nutrients, pigments, polymers etc. The company had sales to more than 50 countries with no substantial concentration in any one country, thus mitigating the risk of uneven monsoon to a great extent.  Growth momentum is expected to be sustained with revenues expected to cross Rs. 5,000 crore by fiscal 2023. 

 

Operating margin was impacted in fiscal 2022 primarily due to increase in logistic costs and raw material price inflation caused by supply chain disruptions and war (Russia-Ukraine)-related inflation. Inability to fully pass on the raw material prices to end customers led to a moderation in margins by 420 basis points but still remain at healthy levels of 24.8%. Going forward, margins are expected to sustain at 23-25% over the medium term, driven by higher scale of operations benefitting better fixed cost absorption, increased backward integration and improvement in product mix.

 

Networth remained strong at Rs 4,196 crore as on March 31, 2022 and is expected to surpass Rs 6,000 crore by fiscal 2025. This coupled with minimal debt levels are expected to help sustain the already strong capital structure and healthy debt protection metrics. The company has planned capital expenditure (capex) of ~Rs 950 crore in fiscal 2023 and Rs 570-650 crore over fiscals 2024 and 2025 towards capacity expansion, new product development, backward integration and routine maintenance. This is expected to be majorly funded through internal accrual and healthy liquid surplus (Cash surplus as on March 31, 2022 ~Rs 252 crore).

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of Gharda and its subsidiaries, Gujarat Insecticides Ltd (GIL; ‘CRISIL A+/Stable/CRISIL A1’), Gharda Chemicals International Inc, Gharda Australia Pty Ltd and Gharda Generics Inc, as all these entities are in the same business.

 

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:

Leading manufacturer of agrochemicals with diversified revenue

Gharda is one of the top players in the Indian agrochemicals industry with an established presence in the technical segment, while also offering formulations and intermediates. The company derives over 65% of sales from exports to over 50 countries. Contributions from select products have increased significantly in the last three years, driven by higher demand and tie-ups with large multinational companies. Strong R&D capabilities, steady pipeline of new products, presence of multi-purpose plants and diversified geographic presence will continue to support the business risk profile. 

 

Strong process development capabilities

Healthy research capabilities and process development skills, and solid focus on reverse engineering of off-patent molecules helped the company to develop low-cost alternative processes, identify cheap indigenous raw material, steadily increase yield, and achieve some of the best purity levels in the industry. Gharda has created a strong reputation of being a quality supplier (business-to-business) to global agro-chemical giants

 

Strong financial risk profile

Company has a strong capital structure driven by a sizeable networth of above Rs 4,000 crore and minimal debt levels as on March 31, 2022. As majority of the planned capex over the medium term is expected to be funded through internal accruals with minimal dependence on external debt, the financial risk profile is expected to sustain at healthy levels.

 

Weaknesses

Large working capital requirement

Operations in the agrochemicals sector are typically working capital intensive. Gharda is also a technical business-to-business supplier and often extends long credit to customers. Increasing share of exports, where lead time for transport is higher than in the domestic market, has also resulted in stretched receivables (124 days as on March 31, 2022). The company also does opportunistic inventory stocking of key raw materials, some of which are in limited supply, and at times, huge price swings does result in inventory related losses. Creditors are almost similar to debtor days (at about 125 days).

 

Vulnerability to risks inherent in the crop protection sector

The agrochemicals industry remains exposed to uneven monsoon, volatility in farm income, specific registration processes in different countries, and various environmental rules and regulations. Any ban on key products will also pose a threat to players such as Gharda, though the company has a strong pipeline of products that can be launched to offset the impact of such a ban.

Liquidity: Strong

Cash accrual in excess of Rs. 900 crore per annum together with liquid surplus of Rs. 252 crore as on March 31, 2022 should be adequate to meet majority of capex and increased working capital requirements. Further, company also has access to fund-based limits of Rs 555 crore against which utilisation remained negligible over the past 12 months through May 2022.

Outlook: Positive

Gharda should continue to benefit from its established position in the domestic and overseas markets, strong process skills and healthy profitability. Financial risk profile is likely to remain comfortable over the medium term, supported by healthy cash generation and low reliance on debt (notwithstanding the large capex).

Rating Sensitivity Factors

Upward Factors

• Strengthening of business risk profile with improvement in geographical or product diversity
• Sustained healthy revenue growth while maintaining operating profitability at 23-24%, leading to healthy cash generation
• Timely commissioning of new facilities with no significant cost overrun
• Sustenance of strong financial risk profile, robust debt metrics and healthy liquidity

 

Downward Factors

• Sluggish revenue growth and decline in margin below 15-18%
• Significant debt-funded capex or acquisitions or stretch in working capital cycle impacting debt metrics
• Material withdrawal of funds through buyback, dividend or capital reduction impacting liquidity
• Significant delay in commissioning new projects, resulting in major cost overruns

 

Change in key management, ownership and the consequent impact on business performance will continue to be rating sensitivity factors.

About the Company

Incorporated in 1967, Gharda acquired the business of a partnership firm set up by its promoters to manufacture dyes and dye intermediaries. The company diversified into the agrochemicals business in the late 1970s. Dr Keki Gharda is the chairman and managing director. Pigments and polymer chemicals also account for a small share of revenue.

 

GIL was set up in 1980 as a 51:49 joint venture between Ahmedabad-based Gujarat Agro Industries Corporation Ltd (a Government of Gujarat enterprise) and Gharda in Mumbai. GIL manufactures intermediaries and technical grade pesticides. In August 1996, Gharda and Gharda Investment Syndicate purchased the entire holdings of Gujarat Agro Industries Corporation Ltd. In fiscal 2015, pursuant to resolution of the board of directors, 44% stake held by Gharda Investment Syndicate in GIL was transferred to Gharda, thus making GIL the wholly owned subsidiary of Gharda.

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Date of redemption	Coupon rate (%)	Issue size (Rs.Crore)	Complexity Level	Rating assigned with outlook
NA	Fund-Based Facilities*	NA	NA	NA	100	NA	CRISIL AA/Positive
NA	Fund-Based Facilities#	NA	NA	NA	90	NA	CRISIL AA/Positive
NA	Fund & Non Fund Based Limits#	NA	NA	NA	265	NA	CRISIL AA/Positive
NA	Non-Fund Based Limit$	NA	NA	NA	81	NA	CRISIL A1+
NA	Proposed Fund-Based Bank Limits	NA	NA	NA	19	NA	CRISIL AA/Positive

*Fully interchangeable between cash credit facility, working capital demand loan, packing credit, and bill discounting

#Fully interchangeable between cash credit facility, working capital demand loan, packing credit, bill discounting, letter of credit and bank guarantee

$Fully interchangeable between letter of credit and bank guarantee