Rating Rationale
October 14, 2020 | Mumbai
Gujarat Organics Limited
Rated amount enhanced
 
Rating Action
Total Bank Loan Facilities Rated Rs.85 Crore (Enhanced from Rs.84 Crore)
Long Term Rating CRISIL AA-/Stable (Reaffirmed)
Short Term Rating CRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has reaffirmed its ratings on the bank facilities of Gujarat Organics Limited (GOL) at 'CRISIL AA-/Stable/CRISIL A1+'.
 
The ratings continue to reflect GOL's healthy financial flexibility and financial risk profile. These strengths are partially offset by modest scale of operations and susceptibility to variations in raw material prices.
 
CRISIL expects GOL's holding in Asian Paints Ltd (APL; rated 'CRISIL AAA/Stable/CRISIL A1+') will be retained over the medium term.
 
Revenue is estimated to grow 15-20% in fiscal 2021 and operating margin is expected to improve due to better scale of operations. The company has generated revenue of around Rs 43 crore for the five months through August 2020.
 
The operating income grew to Rs 92 crore in fiscal 2020 from Rs 85 crore in the previous fiscal because of commencement of operations at the new plant. However, operating margin dipped sharply to negative 1% from 8% in the previous fiscal on account of disruptions in March 2020, caused by the Covid-19 pandemic. Shipments of high-margin specialty chemicals could not be dispatched, materially impacting the operating margin for the fiscal.
 
Stabilising operations from enhanced capacity, leading to steady improvement in revenue and margin will continue to be key rating monitorables.

Analytical Approach

CRISIL has followed the holding company approach for analysing the credit risk profile of GOL. CRISIL has also included the company's standalone debt, and that of other companies held by the Dani family in its analysis of GOL's aggregate debt.

Key Rating Drivers & Detailed Description
Strengths:
* High financial flexibility on account of significant shareholding in APL
The market value of GOL's 2.41% stake in APL (valued at around Rs 4,600 crore as on September 16, 2020) provides high financial flexibility. The shares are entirely unencumbered, and as per the management's policy, will not be used for pledge arrangements for share-backed borrowing. GOL's own borrowings are small, relative to the market value of these investments. The holding will likely be retained at current levels over the medium term, as well. The Dani family, along with GOL and other group companies hold a combined 20.07% stake in APL.
 
* Healthy financial risk profile
Income from operations is supported by relatively steady cash flow from investments in APL. This has resulted in steady accretion to reserves, stable cash accrual and strong debt protection metrics. Net cash accrual to total debt and adjusted interest coverage ratios were 1.35 times and 9.3 times, respectively, in fiscal 2020. Gearing improved to 0.15 time in fiscal 2020, against 0.32 time in fiscal 2019, on account of regular repayment of term debt and healthy accretion to reserves.
 
Weaknesses:
* Modest scale of operations 
Despite growth in turnover to Rs 92 crore in fiscal 2020, the scale of operations remains modest in the competitive chemical industry that has many domestic and foreign players, particularly from China. Scale may continue to be modest, despite commencement of operations at phase II of the new plant in Jhagadia, Gujarat.
 
* Susceptibility to variations in raw material prices
Margin of players in the organic chemicals industry are sensitive to raw material costs, as it constitutes nearly 80-90% of the total production cost. Phenol, methanol and propanol are the main feedstocks, with most of them being derivatives of crude oil. Also, availability of key raw materials such as carbon dioxide (CO2), sodium hydroxide and potassium hydroxide are also important concerns for the domestic industry. With volatility in crude oil prices, operating margins of players remain susceptible.
Liquidity Strong

GOL's liquidity is driven by expected net cash accrual of over Rs 20 crore per year over the medium term, which would be sufficient to meet debt obligation of Rs 17 crore and Rs 3 crore, respectively, over the next two years and also fund incremental working capital requirement. The company has access to bank limits of Rs 25 crore that have been utilised at 70-75% on average during the 12 months ended June 30, 2020. In addition, GOL holds 2.41% stake in APL worth Rs 4,600 crore as on September 16, 2020, which provides ample liquidity and financial flexibility. The company does not have any major capital expenditure (capex) over the medium term. 

Outlook: Stable

CRISIL believes GOL will maintain its healthy financial risk profile over the medium term, backed by strong financial flexibility, comfortable gearing and debt protection metrics. 

Rating Sensitivity factors
Upward factors
* Significant scale up in manufacturing operations with sustained double-digit growth and improvement in operating performance and profitability.
* Continuation of dividend income from APL at existing level
 
Downward factors
* Pledging of a significant portion of investments in APL to meet own or group companies' requirement
* Intake of sizeable debt to fund fresh capex or incremental working capital requirement, leading to increase in gearing to more than 0.5 time on consistent basis
* Decline in APL's share price
About the Company

Incorporated in 1978 and promoted by Mr Ashwin Dani, a co-promoter of APL, GOL manufactures para hydroxy benzoic acid and its derivatives (parabens), which are widely used as preservatives in cosmetics, food and pharmaceutical products. The company specialises in synthesis of organic chemicals, intermediates and fine chemicals. It has plants at Ankleshwar and Jhagadia, both in Gujarat. GOL also has an in-house research and development unit recognised by the Department of Scientific and Industrial Research, part of the Ministry of Science and Technology.

Key Financial Indicators
As on / for the period ended March 31, Units 2020 (Prov.) 2019
Operating income Rs crore 92 85
Profit after tax (PAT) Rs crore 23 22
PAT margin % 25.2 26.5
Adjusted debt/adjusted networth Times 0.15 0.32
Interest coverage Times 9.32 11.23

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments and are included (where applicable) in the Annexure -- Details of Instrument in this Rating Rationale. For more details on the CRISIL complexity levels, please visit www.crisil.com/complexity-levels.
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 Term Loan NA NA Jul-21 20.0 NA CRISIL AA-/Stable
NA Cash Credit@@ NA NA NA 25.0 NA CRISIL AA-/Stable
NA Foreign Exchange Forward NA NA NA 8.5 NA CRISIL A1+
NA Letter of Credit Bill Discounting NA NA NA 9.0 NA CRISIL A1+
NA Letter of Credit## NA NA NA 7.5 NA CRISIL A1+
NA Proposed Long Term
Bank Loan Facility		 NA NA NA 15.0 NA CRISIL AA-/Stable
@@ Fully interchangeable with Pre shipment, Post Shipment Credit and Working Capital Demand Loan
## Fully interchangeable with Bank Guarantee, Buyer's Credit, Stand by Letter of Credit and Invoice Discounting
Annexure - Rating History for last 3 Years
  Current 2020 (History) 2019  2018  2017  Start of 2017
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund-based Bank Facilities  LT/ST  77.50  CRISIL AA-/Stable/ CRISIL A1+  29-09-20  CRISIL AA-/Stable/ CRISIL A1+  10-06-19  CRISIL AA-/Stable/ CRISIL A1+  30-05-18  CRISIL A+/Positive/ CRISIL A1+  10-02-17  CRISIL A+/Positive  CRISIL A/Stable 
Non Fund-based Bank Facilities  LT/ST  7.50  CRISIL A1+  29-09-20  CRISIL A1+  10-06-19  CRISIL A1+  30-05-18  CRISIL A1+  10-02-17  CRISIL A1+  CRISIL A1 
All amounts are in Rs.Cr.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Cash Credit@@ 25 CRISIL AA-/Stable Bill Discounting under Letter of Credit 2 CRISIL A1+
Foreign Exchange Forward 8.5 CRISIL A1+ Cash Credit@ 15 CRISIL AA-/Stable
Letter of Credit## 7.5 CRISIL A1+ Foreign Exchange Forward 4.5 CRISIL A1+
Letter of Credit Bill Discounting 9 CRISIL A1+ Letter of Credit# 7.5 CRISIL A1+
Proposed Long Term Bank Loan Facility 15 CRISIL AA-/Stable Proposed Cash Credit Limit 5 CRISIL AA-/Stable
Term Loan 20 CRISIL AA-/Stable Proposed Long Term Bank Loan Facility 5 CRISIL AA-/Stable
-- 0 -- Term Loan 45 CRISIL AA-/Stable
Total 85 -- Total 84 --
@@ Fully interchangeable with Pre shipment, Post Shipment Credit and Working Capital Demand Loan
## Fully interchangeable with Bank Guarantee, Buyer's Credit, Stand by Letter of Credit and Invoice Discounting
@ Fully interchangeable with Export Packing Credit/Post Shipment Credit/Working Capital Demand Loan
# Fully interchangeable with Bank Guarantee & Buyer's Credit
Links to related criteria
CRISILs Approach to Financial Ratios
CRISILs Bank Loan Ratings - process, scale and default recognition
Criteria for rating holding companies (including debt backed by pledge of shares)
Rating criteria for manufaturing and service sector companies
Rating Criteria for Chemical Industry

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