Detailed Rationale

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

 

The rating action follows near term demand headwinds in the agro-chemical industry, especially in export markets, which is expected to impact the operational performance of the company during current fiscal. 

 

Consolidated operating income during fiscal 2023 remained flattish  at Rs. 3,922 crore as against Rs. 4,007 crore in fiscal 2022 primarily due to de-growth in the fourth quarter of fiscal 2023 caused by excessive dumping by the Chinese manufacturers in global markets. This resulted in excess channel inventories and significant price erosion for several products. The impact was more pronounced during the first quarter of fiscal 2024 wherein consolidated revenues fell sharply to ~ Rs. 390 Cr. The excess channel inventories are expected to get cleared by middle of quarter three of the current fiscal post which demand situation is expected to normalize. However, owing to a subdued first half, overall revenues for fiscal 2024 are expected to remain flattish.

 

Operating margins dipped slightly to ~22.2% in fiscal 2023 from around 24.8% previous fiscal on account of higher power and fuel cost which went up by 18% y-o-y and formed 7.9% of revenues in fiscal 2023 as against 6.5% in fiscal 22. Gross margins, however, remained healthy at ~51.7% in fiscal 2023 (fiscal 2022: 52.2%). However, owing to sharp reduction in scale and lower absorption of fixed costs, company on a consolidated basis recorded operational losses during the first quarter of current fiscal. The situation is expected to improve with gradual pick up in demand and overall operating margins are expected to be in the range of 13-15% in fiscal 2024.

 

Company’s financial risk profile remained strong marked by a strong net worth of Rs 4665 crores as on March 31, 2023 as against total debt of Rs. 365 Cr (Long Term Debt: Rs. 265 Cr; Short Term Debt: Rs. 100 Cr) resulting in gearing of 0.08 times. On a consolidated basis, company has capex plans of ~Rs. 400 crore in fiscal 2023 which shall be funded through a mix of debt and accruals. Debt is expected to peak at around ~Rs. 450 Cr over the medium term. However, financial risk profile shall continue remain robust with gearing sustaining below ~0.15 times and interest coverage remaining at over 10-15 times (Interest coverage in fiscal 2023: ~54 times) over the medium term.

 

The ratings continue to reflect GCL’s established position as one of India's leading agro- chemical manufacturers, with a 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 vagaries of the monsoon.

Analytical Approach

For arriving at the ratings, CRISIL Ratings has combined the business and financial risk profiles of GCL and its subsidiaries, namely 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 leading companies in the Indian agrochemicals industry, with an established presence in the technical segment, while offering formulations and intermediates as well. The company derives around 60% of sales from exports and operates in over 50 countries, with no substantial concentration in any one country, thus mitigating the impact of monsoon vagaries on overall business performance. Contributions from select products have increased significantly in the last three years, driven by higher demand and tie up with large multinational companies. Nonetheless, strong research capabilities and steady pipeline of new products, presence of multi-purpose plants and diversified geographic presence will continue to support the business.

 

• Strong process development capabilities: Strong research capabilities and process development skills, and solid focus on reverse engineering of off-patent molecules, helped develop low-cost alternative processes, identify cheap indigenous raw material, steadily increase yield, and achieve amongst the best purity levels in the industry, and thus, act as key differentiators. With strong focus on technicals, the company has created strong reputation of being a quality supplier (business-to-business).

 

• Strong financial risk profile: Superior financial risk profile to be sustained over the medium term with strong networth and low debt levels. Networth is expected at ~Rs. 4700 crores is fiscal 2024 while peak debt is not expected to cross ~Rs. 450-500 crore. Thus, capital structure will continue to remain strong with gearing sustaining below 0.10-0.15 times. Debt protection metrics like interest coverage and Net Cash Accruals to Total debt (NCATD) stood at ~54 times and ~0.19 times 1.8 times resectively in fiscal 2023 and is expected remain above 10-15 times and 0.8-1 time respectively over the medium term also.

 

Weaknesses:

• Large working capital requirement: Operations in the agrochemicals sector are typically working capital intensive. GCL is also a technical business-to-business supplier, and often extends elongated credit to known customers. Besides, increasing share of exports where the lead time for transport is higher than in domestic markets, has also been resulting in higher debtor days (around 103 in fiscal 2023). 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. Also, due to Gharda being a batch process manufacturer, it manufactures a single product, stores it as inventory till its season arrives and utilizes the same facilities for manufacturing other products resulting in higher inventory holding period. Same stood at 264 days in fiscal 2023. However, elongated working capital cycle hasn’t impacted the liquidity position of the company and majority of working capital needs are being funded through internal accruals.

 

• Vulnerability to risks inherent in the crop protection sector, including irregular monsoon: The agrochemical industry remains exposed to risks such as irregular monsoon, and 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 business of players such as Gharda, though the company has a strong pipeline of products which can be launched to offset/lower impact of possible ban of any key pesticides.

Liquidity: Strong

Liquidity position is also expected to remain healthy with cash accruals expected at over ~Rs. 350-400 crore in fiscal 2024 as against nil repayment obligations. Liquidity position is further bolstered by liquid surplus of Rs. 151 Cr as on 31st March 2023 and presence of working capital lines of ~Rs. 755 crore which remained utilized at an average of 52% over the past 12 months ending July’2023

Outlook: Stable

Gharda will continue to benefit from its established market position in the domestic and overseas agrochemical markets, strong process skills and healthy profitability. Financial risk profile is likely to remain strong, supported by healthy cash generation, and low reliance on debt notwithstanding ongoing capex plans.

Rating Sensitivity factors

Upward factors: 

• Strengthening of business risk profile marked by improvement in diversity, through geographies or products
• Sustained healthy revenue growth while maintaining operating profitability at 23-24%, benefitting cash generation
• Timely commissioning of new facilities with no significant time and cost over runs
• Sustenance of strong financial risk profile, robust debt metrics and healthy liquidity

 

Downward factors:

• Sluggish revenue growth, and decline in operating margin to below 15-18%
• Significant debt funded capex or acquisitions or stretch in in the 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 over runs
• Change in key management, ownership, and the consequent impact on the business performance will continue to be rating sensitivity factors

About the Company

Gharda, incorporated in 1967, acquired the business of a partnership firm set up by the promoters to manufacture dyes and dye intermediaries. The company diversified into the agrochemicals business in the late 1970s. Dr Keki Gharda, the chairman and managing director, is the key decision maker. 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 Gujarat Agro Industries Corporation Ltd, Ahmedabad (a Government of Gujarat enterprise), and Gharda, 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 Board of Directors, 44% stake held by Gharda Investment Syndicate in GIL was transferred to Gharda, thus making GIL the wholly owned subsidiary of GCL.

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of the instrument	Date of Allotment	Coupon Rate (%)	Maturity Date	Issue size (Rs. Crore)	Complexity Level	Rating assigned with outlook
NA	Fund-Based Facilities	NA	NA	NA	220	NA	CRISIL AA/Stable
NA	Fund & Non Fund Based Limits#	NA	NA	NA	820	NA	CRISIL AA/Stable
NA	Non-Fund Based Limit	NA	NA	NA	160	NA	CRISIL A1+
NA	Proposed Fund-Based Bank Limits	NA	NA	NA	200	NA	CRISIL AA/Stable

#Fully interchangeable between Fund-Based Facilities & Non-Fund Based Limit