Detailed Rationale

CRISIL Ratings’ ratings on the bank facilities of Hazel Mercantile Ltd (HML; part of Groupe Veritas) continues on 'Rating Watch with Developing Implications'.

 

The ratings were placed on ‘watch developing’ following the company’s plans to demerge the trading business of HML into another group entity Shimmer Trade Impex Pvt Ltd (Shimmer), which currently has no operations and is held wholly by the same promoter. Company has received approvals from unsecured creditors and is in the process of receiving it from secured creditors, post which the scheme will be filed with the National Company Law Tribunal (NCLT), requiring another 6-9 months for completion. While the demerger is not expected to have any material impact on the business and financial risk profiles of the group, the ratings would have to be reassigned post the movement of facilities to Shimmer. CRISIL Ratings will continue to be in touch with the management and monitor the transaction process, and will resolve the ‘watch’, on completion of the demerger process and transfer of asset, liabilities, and bank limits to Shimmer.

 

The ratings continue to reflect the established global presence of Groupe Veritas, its sound distribution network, strong relationships with several key suppliers and customers, and the extensive experience of the promoter in the trading business, and their commitment to bring in additional equity. These strengths are partially offset by the average financial risk profile and susceptibility of operating performance to volatility in commodity prices and foreign exchange (forex) rates despite the effective risk management practices adopted by the group.

 

Operating income of the group grew 9.7% on-year in fiscal 2023, on account of increased volumes as prices of crude oil and its derivatives fell, albeit operating margin moderated slightly to 1.9% from 2.2% in fiscal 2022. In fiscal 2024, revenues are estimated to grow ~5% year-on-year (y-o-y), driven by steady demand for traded products. Operating margin is expected to sustain at ~2.0%, driven by sustained profitability in the trading business. Financial risk profile remained average while total outside liabilities to adjusted networth ratio continued to be adequate at 0.84 time as on March 31, 2024 (0.77 time a year earlier), with liabilities primarily comprising working capital debt and payables. 

Analytical Approach

• CRISIL Ratings has applied its criteria for rating entities belonging to homogenous corporate groups. Accordingly, HML and its wholly owned subsidiaries (including Hazel Middle East FZE)and other group entities are considered a part of Groupe Veritas, in view of common promoter holding and significant operational, financial, and managerial linkages. The other group entity is Sanman Trade Impex Ltd (Sanman; ‘CRISIL A-/Stable/CRISIL A2+’).
• CRISIL Ratings has treated unsecured loan from the promoter (Rs 37 crore as on March 31, 2024) as neither debt nor equity, as the loan is interest-free, has no fixed repayment schedule, is subordinated to external debt, and expected to remain in the business over the medium term.
• CRISIL Ratings has included letter of credit (LoC) backed creditors (amounting Rs 652 crore as on March 31, 2023 and ~Rs 869 crore estimated in fiscal 2024) as short-term debt, as these are interest bearing and have a fixed maturity.

 

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:

• Established global presence with a wide distribution network: Groupe Veritas has been trading in chemicals and petrochemicals for over two decades and has a strong presence in the domestic and overseas markets. It has a vast product portfolio and derives 50-55% of its revenue from the international markets. Although naptha, palmolein, and toluene are the major traded commodities, the company is not dependent on any single product. Growing volumes and adding profitable products to the basket has aided growth in topline and margin. The group follows a prudent risk management policy, with full order backed procurement, thus ensuring negligible forex and price risk, while managing its cost to sustain and improve margin. The group has a strong network with adequate storage capacity in 12 locations and is present in 10 countries through 8 international offices.

 

• Strong relationships with several key customers and suppliers: Over the years, Groupe Veritas has maintained strong relationships with several large suppliers and customers worldwide, thereby ensuring stability in terms of sourcing and credit. Its clientele includes large corporates such as Reliance Industries Ltd (‘CRISIL AAA/Stable/CRISIL A1+’), Indian Oil Corporation Ltd (‘CRISIL AAA/Stable/CRISIL A1+’), Asian Paints Ltd (‘CRISIL AAA/Stable/CRISIL A1+’), Kansai Nerolac Paints Ltd (‘CRISIL AAA/Stable/CRISIL A1+’), Chemtrade Overseas Pvt Ltd, IOL Chemicals & Pharmaceuticals Ltd, Pon Pure Chemical India Pvt Ltd ('CRISIL A-/Stable/CRISIL A2+') and Walambia Plastics Pvt Ltd.

 

• Promoter’s extensive experience: The promoter has extensive experience and has demonstrated high proficiency in managing the commodity trading and distribution business, as reflected in the significant scaling up of operations. He has set up a team of highly qualified professionals and developed robust and effective risk-mitigating strategies in-house. Groupe Veritas has managed sharp fluctuations in prices as well as forex rates and maintained cost control over these years. The operations have been divided according to commodity and functions. Of the employee base of over 800, around 150 are engaged in international operations.

 

Weaknesses:

• Average financial risk profile: Total debt of the group is estimated to be around Rs 1025 crore as on March 31, 2024 as compared to Rs 826 crore a year earlier primarily because of short-term working capital payables in the form of LoC backed creditors increasing to Rs 869  crore as on March 31, 2023 from Rs 652 crore a year earlier. Unsecured loans from the promoter have remained at Rs 37 crore in the last three fiscals.

 

Adjusted networth stood at Rs 2,588 crore as on March 31, 2023 and is estimated to have improved to around Rs 2713 crore as on March 31, 2024 and total outside liabilities to adjusted networth ratio increased marginally from 0.77 time to 0.84 time with liabilities primarily comprising working capital debt and payables.

 

• Highly competitive industry characterised by low margins: Commodity trading owing to very low value addition remains highly competitive with very low barriers to entry and modest margins. Intense competition should keep the group’s margins at 1.5-2.0%. However, the group benefits from its large scale and strong relationships with large and key customers built over the years.

 

• Exposure to volatility in crude and petrochemical prices and fluctuations in forex rates: Groupe Veritas trades in chemicals and polymer products whose prices are directly linked to crude prices, which are highly volatile. Although Groupe Veritas has adequate risk mitigating strategies, operating performance remains susceptible to volatility in commodity prices. The group also deals in imported chemicals and hence faces forex risk. However, it benefits from a natural hedge as 50-55% of its sales are through exports and procurement is fully order backed. Any significant movement in commodity prices and forex rates could adversely impact the operating performance and will be closely monitored.

Liquidity: Adequate

Cash and cash equivalent was Rs 2 crore as on March 31, 2023. Annual cash accrual of Rs 140-170 crore expected over fiscals 2024-2026 will allow the group to comfortably meet the nominal capital expenditure, in the absence of any term debt obligation and dividend outgo. Fund-based limits in each group company were utilised ~85-90% on average over the 6 months through April 2024, and non-fund-based limits at ~95% on average. Availability of unsecured loans from the promoter, whenever required, enhances financial flexibility.

Rating Sensitivity factors

Upward factors

• Sustained and significant increase in operating profitability to more than 4%, backed by improvement in trading operations
• Steady increase in scale of trading operations, leading to better profitability
• Prudent working capital management resulting in improved key debt metrics

 

Downward factors

• Substantial decline in operating profitability to less than 2% on a sustained basis
• Weakening of the financial risk profile and debt metrics on account of working capital stretch, or cash outflows,
• Delay in financial support from the promoter during financial exigencies

About the Company

HML was set up in 1995 by Mr Nitin Kumar Didwania. It has two wholly owned subsidiaries: Hazel Middle East- Dubai and HML Europe BV – the Netherlands, and representative offices in Singapore, Ghana, Kenya, Nigeria and Shanghai. The company primarily trades in and distributes petrochemicals and solvents. It also trades in polymers, paper products, rubber, minerals, agri-products, and heavy distillates.

About the Group

Groupe Veritas, owned by Mr Nitin Kumar Didwania, primarily trades in petrochemicals, polymers, rubber, agri-products, paper, heavy distillates, minerals and metals. HML is the flagship company of the group and includes Sanman as the other trading group company. The promoter’s extensive experience in the petrochemical trading business and established relationships with customers and suppliers enabled the group to significantly scale up revenue to more than Rs 10,000 crore in fiscal 2024. The group has set up several entities for effective management of various business verticals. In the domestic market, it has a network covering 12 locations with adequate storage capacity. It has presence in 10 countries with 8 international offices.

Any other information: Not Applicable