Detailed Rationale

CRISIL Ratings has upgraded its rating on the long-term bank facilities of HG Chemicle Pvt Ltd (HGCPL) to ‘CRISIL BB/Stable’ from 'CRISIL BB-/Stable’ and reaffirmed its ‘CRISIL A4+’ rating on the short-term bank facilities of the company.

 

The upgrade in rating reflects better-than-expected business performance of HGCPL in fiscal 2024, supported by strategic tie-up with leading players and suppliers in the coating industry, diverse customer and product bases and expertise of the promoters.

 

Mr Harshavardhana Gourineni and Mr Mahindra Chavan are the promoters. Mr Harshavardhana Gourineni is a part of RN Galla family and holds key positions in multiple group companies such as Amara Raja Energy & Mobility Ltd (‘CRISIL AA+/Stable/CRISIL A1+’), Mangal Industries Ltd (‘CRISIL A/Stable/CRISIL A1’), Amara Raja Infra Pvt Ltd (‘CRISIL A-/Positive/CRISIL A2+’), Amara Raja Power Systems Ltd (‘CRISIL A+/Stable/CRISIL A1’), Amara Raja Electronics (‘CRISIL BB+/Stable/CRISIL A4+’), Amara Raja Advanced Cell Technology Ltd and Amara Raja Media and Entertainment Pvt Ltd. Mr Chavan, with a vast expertise in specialty chemicals, has worked for multiple paint companies such as Asian Paints, Asian PPG, Maharaja Paints and is also a member of India Paint Institute. These strengths are partially offset by modest scale of operations, low operating margin, large working capital requirement and susceptibility to inventory and pricing risk due to volatility in chemical prices.

 

During fiscal 2024, the first full year of operations, the company reported strong on-year revenue growth of 280% registering revenue of Rs 172 crore (against Rs 45 crore in fiscal 2023), driven by steady demand from the engineering plastics, specialty chemicals and polyvinyl chloride (PVC) resin segments coupled with the company’s ability to successfully tie-up with reputed clients. Over the medium term, revenue is expected to be stable at Rs 170-175 crore, led by healthy demand across the paint and construction industries.

 

Operating profitability in fiscal 2024 declined by 140 basis points to 2.9%, from 4.3% in fiscal 2023, owing to stabilisation of operations in fiscal 2024 (the first full year of operations). However, the margin may improve to 3.0-3.5% over the medium term, with change in the product mix i.e. catering to the high-margin specialty chemical segment.

 

The capital structure will remain leveraged due to moderate networth and the working capital requirement being majorly funded through bank debt. Although gearing and total outside liabilities to tangible networth ratio improved to 6.92 and 7.18 times, respectively, as on March 31, 2024, from 9.56 and 9.71 times a year ago, they still remain high due to the initial stage of operations which will remain so until operations start ramping up. However, the ratios may both improve to 4-5 times over the medium term owing to expected increase in networth and gradual reduction in debt aided by prudent working capital management, no major capital expenditure (capex) and absence of any long-term debt.

Analytical Approach

CRISIL Ratings has considered the standalone business and financial risk profiles of HGCPL, which is 70% held by the parent company -- HG Global Pvt Ltd (HGGPL). Further, the unsecured loan of Rs 6.75 crore extended by the promoters has been treated as debt.

Key Rating Drivers & Detailed Description

Strengths:

• Strategic tie-up with leading players and suppliers in coating industry: HGCPL has tied up with the market leader, Asian Paints, for empanelment as an authorised supplier to toll manufacturers/subcontractors of Asian Paints. The company has obtained quality clearance from Asian Paints and purchase orders started from fiscal 2024 onwards. The company also secures new orders and approvals from other leading companies such as Kansai Nerolac Paints Ltd and Nippon Paints and their subcontractors etc. Further, the company has tied up with reputed players such as Axel, Momentive USA etc., for distribution of their products In India.

 

• Extensive experience of the promoters: Mr Harshavardhana Gourineni, who holds 70% in HGCPL though HGGPL, is a part of RN Galla family and holds key positions in multiple group companies, He has expertise in planning and supply chain operations and offers need-based financial support. Mr Gourineni and HGGPL extended unsecured loan worth Rs 6.75 crore. The other promoter, Mr Mahendra Chavan, holds 26% in HGCPL and has vast expertise in specialty chemicals. HGCPL is expected to leverage the promoters’ expertise and business relationships for ramping up its operations with steady order flow from leading players.

 

• Diversified customer and product bases: HGCPL has a product basket of over 10-15 products such as plastic granules, PVC resins, redispersible powder, hydroxyethyl cellulose, acrylonitrile butadiene styrene etc., and caters to multiple end-user industries including construction, coating, specialty chemicals, engineered plastic and others, which reduces the reliance on few products. Diversity in the customer base was boosted  post tie up with leading players in the paint/coating industry from fiscal 2024 onwards. Thus, loss of a key customer or slowdown in offtake may not significantly impact the business.

 

Weaknesses:

• Modest scale of operations: Scale has been moderate, with revenue projected at Rs 170-175 crore for fiscal 2025 and under Rs 200 crore over the medium term. Steady ramp up in scale will be contingent upon healthy demand from end-user industries such as coating, construction etc., along with tie up with reputed customers and will remain monitorable.

 

• Susceptibility to volatility in raw material prices: The trading nature of the business, nil value addition and fluctuation in chemical prices linked to crude continue to constrain profitability; the operating margin is expected at 3.0-3.5% over the medium term. Profitability will remain susceptible to volatility in commodity prices; however, a large proportion of order-backed sales and low inventory holding period should partially limit this risk. Cyclicality in end-user industries will continue to restrict the business.

 

• Large working capital requirement: Gross current assets were 76 days as on March 31, 2024. HGCPL has minimum-to-nil inventory, undertakes back-to-back orders and directly delivers goods to customers. However, receivables are sizeable at 75-80 days as the company had to provide credit of 90 days to customers to gain market acceptance among the marquee clientele. This, coupled with strong revenue growth, kept the working capital requirement high, which has to be majorly funded by bank finance as HGCPL does not get any credit period from suppliers during the initial stages of operation.

Liquidity: Adequate

Cash accrual was Rs 1.6 crore in 2024, against nil debt over the medium term. Further, the working capital limit of Rs 30 crore has been moderately utilised at 79% during the 12 months through May 2024. The surplus in cash accrual and bank lines should be sufficient to meet working capital requirements. Financial assistance may also be expected from the promoters during exigencies. The parent (HGGPL) has provided corporate guarantee and Mr Gourineni (promoter) provided personal guarantee for the credit facilities sanctioned by the bank. Further, the promoter and the parent company have extended unsecured loan of Rs 6.75 crore and Rs 2 crore during the beginning of operations in fiscal 2023. HGCPL does not have any major, debt-funded capex planned during fiscal 2025.

Outlook: Stable

HGCPL will continue to benefit from the extensive experience of the promoters and its fairly diversified revenue base and new tie-ups with established customers in the paints and chemical sectors. Profitability is expected to remain modest, in keeping with the trading nature of operations. Financial risk profile will continue to improve over the medium term.

Rating Sensitivity factors

Upward factors:

• Steady revenue growth and operating margin sustained above 3.0-3.5%, leading to better-than-expected cash generation
• Improvement in financial risk profile, key debt metrics and prudent working capital management

 

Downward factors:

• Steep decline in revenue and operating profitability dropping below 2%, adversely impacting cash generation.
• Any large, debt-funded capex

About the Company

HGCPL was incorporated in May 2022 and is engaged in trading/distribution of specialty chemicals required for paint, construction, coating industry and polymer/engineering plastics etc. HGCPL is majorly held by HGGPL (70%) while employees hold 4% and remaining 26% is held by held by Mr Mahindra Chavan who has expertise in chemicals, specialty chemicals etc., and also owns a company named Chemtech Specialty India Pvt Ltd. Mr Mahindra Chavan had been R&D Head at Asian Paints and is a member of India Paint Institute.

 

HGGPL is the parent company for HGCPL, which is 91% held by Mr Harshavardhana Gourineni and remaining 9% is held by his wife, Ms Priyanka Gourineni. HGGPL is into trading of pharmaceutical-related active pharmaceutical ingredients and specialty chemicals.

Key Financial Indicators

As on/for the period ended March 31	Unit	2024*	2023
Revenue	Rs crore	172	45
Profit after tax (PAT)	Rs crore	1.6	0.8
PAT margin	%	0.9	1.7
Adjusted debt/adjusted networth	Times	6.92	9.56
Interest coverage	Times	1.73	2.15

*Fiscal year 2024 financials are provisional

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	Cash credit&	NA	NA	NA	15	NA	CRISIL BB/Stable
NA	Cash credit	NA	NA	NA	15	NA	CRISIL BB/Stable
NA	Letter of credit^	NA	NA	NA	25.8	NA	CRISIL A4+
NA	Proposed Short Term Bank Loan Facility	NA	NA	NA	44.17	NA	CRISIL A4+

&One way interchangeability from CC to LC to the extent of 100%

^Standby letter of credit of Rs.20 crore as sub-limit of LC