Detailed Rationale

CRISIL Ratings has upgraded its ratings on the bank facilities of High Eximpetro Pvt Ltd (HEPL) to ‘CRISIL A/Stable/CRISIL A1’ from ‘CRISIL BBB+/Stable/CRISIL A2+’.

 

The upgrade reflects change in the analytical approach, wherein HEPL and Sidhe Petrochem Pvt Ltd (SPPL, wholly owned subsidiary of HEPL) have now been consolidated with the KLJ group (chemicals business), as against earlier approach wherein HEPL was assessed on a standalone basis. This change is driven by the increasing business and treasury synergies of HEPL and SPPL with the KLJ group and the recent change in the management’s stance to support both the entities in case of exigencies. CRISIL Ratings has received an undertaking from the promoters of KLJ stating the same. Moreover, the management is now focusing on expanding the manufacturing business in SPPL.

 

CRISIL Ratings has combined the business and financial risk profiles of HEPL, SPPL, KLJ Plasticizers Ltd (KLJ Plasticizers), KLJ Organic Ltd (KLJ Organic), KLJ Polymers & Chemicals Ltd (KLJ Polymers), KLJ Resources Ltd (KLJ Resources), KLJ Polymers Pvt Ltd (wholly owned subsidiary of KLJ Polymers & Chemicals Ltd) and KLJ Petroplast Ltd (KLJ Petroplast; wholly owned subsidiary of KLJ Plasticizers) to arrive at the rating of the KLJ group (chemicals business). All these companies have common promoters and management, same business, and strong operational and financial linkages. 

 

The ratings reflect the strong market position of the group in the plasticisers industry, its healthy operating efficiency backed by proximity to ports, established relationships with suppliers, and comfortable financial risk profile and liquidity. These strengths are partially offset by susceptibility to volatility in raw material prices and foreign exchange (forex) rates, large working capital requirement and exposure to project risks at SPPL.

 

The ratings of HEPL also factor the project risk associated with the nascent stage of operations of the 55,000 MT plant set up in SPPL in August 2022. The plant has been set up to process lubricants, paints the mixing of base oils, etc. Track record of operations and ramp-up in utilisation will remain a key monitorable.

 

The group is a leading manufacturer of plasticisers in south Asia with installed capacity of 5 lakh tonne per annum (TPA). Its position is supported by the large variety of plasticisers it offers, including phthalate, maleate, specialty and flame-retardant, and is underpinned by the large scale of operations and diverse clientele. The KLJ group is expanding plasticiser and polymer compound capacities, which will support revenue growth over the medium term. SPPL has been set up for preprocessing chemicals and mixing base oils. The new value-added segment will boost profitability. Also, backward integration through captive phthalic anhydride (PAN) capacity will help in improving operating efficiency and strengthening competitiveness in the plasticisers segment, which should result in better profitability.

  

The financial risk profile of the group will remain comfortable, supported by large networth, limited dependence on external debt and healthy cash surplus. Overall, earnings before interest, tax, depreciation and amortisation (Ebitda) margin is expected to improve to 5-6% in fiscal 2024 from around 4% in fiscal 2023. In fiscal 2023, profitability moderated on account of volatility in crude prices (as crude oil derivatives are key raw materials) leading to inventory loss in the trading business.

 

Key financial indicators will remain comfortable with interest coverage ratio expected at 13.6 times and total outside liabilities to tangible networth (TOLTNW) ratio 1.03 times in fiscal 2024.

Analytical Approach

CRISIL Ratings has revised its analytical approach and combined the business and financial risk profiles of KLJ Plasticizers, KLJ Organic, KLJ Polymers, KLJ Resources, HEPL, SPPL, KLJ Polymers Pvt Ltd and KLJ Petroplast. This is because all these companies, collectively referred to as the KLJ group, have common promoters and management, same business, and strong operational and financial linkages.

 

CRISIL Ratings has not combined the real estate business of the KLJ group's promoters as the business is unrelated to the group's core business (chemicals). Moreover, the management does not leverage the chemicals business to fund its real estate interests. Funding support from the chemicals business to the real estate business will be a key monitorable. Also, CRISIL Ratings notes that the plant at the group’s 40% joint venture (JV), KLJ Organic-Qatar WLL, has stabilised. The JV turned cash positive in 2022 and should not require the group’s support over the medium term.

 

The revision of the analytical approach is owing to the receipt of the promoter’s undertaking to consider HEPL as part of the KLJ group and reflects the change in stance of support to HEPL and SPPL.

 

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:

• Strong market position in the plasticisers segment: The KLJ group is a leading manufacturer of plasticisers in south Asia with installed capacity of 5 lakh TPA; it offers a large variety of plasticisers, including phthalate, maleate, specialty and flame-retardant. The group’s strong market position is underpinned by its large scale of operations (~Rs 9,000 crore in fiscal 2023) and diverse clientele. Plasticisers are used by compounding units and varied end-user industries, including footwear, cables, flexible polyvinyl chloride (PVC) films, leather, vinyl flooring, medical equipment, adhesives, perfumes, automobile parts, rubber belts and tube compounds.

 

Furthermore, with the enhanced capacity through KLJ Petroplast, the group is focusing on selling high-margin non-phtalate plasticisers (account for around 25% of plasticiser sales). Also, backward integration through captive PAN capacity will help to strengthen operating efficiency and competitiveness in the plasticisers segment, which should result in improvement in profitability.

 

• Healthy operating efficiency backed by proximity to ports, and strong relationships with suppliers: Production facilities are at Silvassa in Dadra and Nagar Haveli; Bharuch and Kandla in Gujarat; and Thailand. All the facilities are close to ports. Crude oil derivatives, key raw materials, are mainly imported and proximity to ports provides logistical benefits. Furthermore, the Bharuch plant of KLJ Organic receives its chlorine supply through pipelines, ensuring secured supply at low freight cost. The group also has a strong in-house research and development division that focuses on improving the throughput and proportion of value-added specialty products. Further, increasing contribution from specialised products and contribution from backward integration from fiscal 2024 should improve the operating margin over the long term. The operating margin is expected to sustain at 6-7% over the medium term.

 

• Strong financial risk profile and liquidity: The financial risk profile will remain strong over the medium term supported by healthy accrual, resulting in comfortable gearing and comfortable debt protection metrics. The networth is sizeable and the gearing is comfortable. The networth is estimated at around Rs 3,250 crore as on March 31, 2023, and is expected to increase to over Rs 4,000 crore over the medium term, driven by increasing scale and profitability. Credit metrics will remain comfortable over the medium term, with interest coverage ratio at 3-7 times, debt to Ebitda of 3.7-1.3 times and TOLTNW ratio of less than 1 time, owing to healthy accrual, moderate repayment on term debt and moderate utilisation of short-term debt. Liquidity is strong, as reflected in healthy cash accrual, small debt obligation, moderate utilisation of the working capital limit and high current ratio.

 

Weakness:

• Susceptibility to volatility in raw material prices and forex rates: Chemicals such as paraffin, PAN, alcohols and oxo-alcohols, used to manufacture plasticisers are crude derivatives and are imported (more than 50% of raw material). The group maintains large inventory because of the long lead time for importing raw material. Prices of raw materials are volatile because of fluctuations in crude oil prices, which led to operating margin of 4-15% over the past 10 fiscals. Improving domestic sourcing of raw materials and backward integration through installation of PAN plant in March 2023 will mitigate these risks to a certain extent; however, profitability will remain susceptible to raw material prices over the medium term.

 

In fiscal 2023, profitability moderated on account of volatility in crude prices, (as crude oil derivatives are key raw material for KLJ group) leading to inventory loss in the trading business. Overall, the Ebitda margin moderated to around 4% in fiscal 2023, which is lower than the earlier projections. For the trading business, delay of ~2 months in a consignment resulted in an exceptional loss owing to fall in prices as well currency fluctuations. This one-time loss also contributed to decline in operating margin in fiscal 2023 for the trading business.

 

• Large working capital requirement: Operations are working capital intensive, constrained by large inventory of 80 – 90 days (to ensure timely servicing of customer requirement) and receivables of around 60-65 days. Gross current assets were at 140-170 days over the three fiscals through 2022 and are estimated at 140 days as on March 31, 2023.

 

• Exposure to project risks at SPPL: The project plan was for setting up a plant near Kandla port, Gujarat, at cost of ~Rs 120 crore, of which expense of Rs 80 crore had been made as of September 2023. The project is expected to be completed by March 2024. Partial commercial operations of the plant commenced in August 2022; however capacity utilisation is expected to ramp up in fiscal 2024. Timely increase in utilisation along with sustained profitability will remain a key monitorable.

Liquidity: Strong

The group has strong liquidity driven by its healthy cash accruals against scheduled term loan repayments. The group had cash and equivalent of Rs 180-200 crore and unutilised bank lines of over Rs 250 crore as of September 2023. The working capital limit was utilised 76% on average over March 2023 to September 2023. With the group expected to chart a satisfactory growth trajectory with healthy cash accrual, adequate profitability, modest term debt obligation and moderate utilisation of working capital limit, liquidity will remain strong over the medium term.

Outlook: Stable

CRISIL Ratings believes the credit risk profile of the KLJ group will benefit from increasing scale through expansion in plasticiser and polymer compound capacities and improving operating efficiency through backward integration over the medium term. The group will sustain its healthy financial risk profile, supported by moderate cash accrual.

Rating Sensitivity factors

Upward factor

• Better-than-anticipated revenue growth and profitability driven by improvement in product diversity and higher proportion of specialty products resulting in the KLJ group’s  cash accrual of Rs 650-700 crore on sustained basis.
• Sustenance of healthy financial risk profile supported by better cash accrual, and efficient working capital management of the KLJ group.
• Significant increase in the revenue of HEPL, contributing above 10% in the group’s revenue, along with improvement in operating margin above 4% on a sustained basis.

 

Downward factor

• Weak operating performance of the KLJ group (chemicals business) leading to cash accrual below Rs 250 crore.
• Large capital expenditure or acquisitions weakening the debt metrics, with TOLTNW ratio exceeding 1.6 times.
• Subdued performance of the Qatar project, requiring financial support and affecting the return on capital employed of the group.

About the Company

HEPL was incorporated on August 8, 2019, for the trading and distribution of petrochemical products, their derivatives and solvents. The company started trading activities from July 2020. It is 100% owned by Mr Hemant Jain and Mr Siddhant Jain.

 

HEPL started its business with trading of paraffins, which consists of ~80% of its current traded products, while also trading in other products such as base oils, phenols, methyl isobutyl ketones, which accounted for ~20% of its traded products in fiscal 2022.

 

HEPL has started a wholly owned subsidiary, SPPL. SPPL manufactures varied categories of paraffinic solvents, olefin, lubricant, chlorinated paraffin, which are used across different industries such as paint, lubricant and adhesives. SPPL is putting up a plant near Kandla Port at cost of nearly Rs 120 crore. SPPL is a chemical mixing plant with capacity of 55,000 tonne/month. However, in fiscal 2023, capacity of 2,000 tonne/month was operational. The company started operations on July 2022.

About the Group

The KLJ group, set up by Mr K L Jain in 1967, began operations by manufacturing PVC compounds. In 1985, the group integrated backwards into manufacturing plasticisers. It is a leading manufacturer of plasticisers and chlorinated paraffin wax (CPW) in south Asia, with capacity of over 500,000 TPA. Five of its companies manufacture plasticisers, PVC compounds and CPW, while one trades in paraffin, base oils and solvents.

 

The group has set up a manufacturing facility for producing chlor-alkali in Qatar in collaboration with Qatar Industrial Manufacturing Company. The project produces caustic soda and CPW as finished products. The KLJ group owns around 40% equity stake in the JV through KLJ Organic and had given corporate guarantee of USD 67 million (around Rs 507 crore) as on March 31, 2023. The plant commenced operations in April 2019.

 

Set up in 1997 as a partnership, KLJ Plasticizers manufactures plasticisers at its unit in Silvassa. The firm was reconstituted as a public limited company in July 2008. The Silvassa unit is the single-largest manufacturing facility for plasticisers in India. The group commenced operations for manufacturing benzyl products in 2017 with capacity of 15,000 TPA.

Key financial indicators (The KLJ group)

Particulars	Unit	2022	2021
Revenue	Rs crore	8035	5296
Profit after tax (PAT)	Rs crore	668	655
PAT margin	%	8.3	12.4
Adjusted debt / adjusted networth	Times	0.42	0.37
Adjusted interest coverage	Times	23.83	43.83

 

Key financial indicators- HEPL (consolidated)*

Particulars	Unit	2023	2022
Revenue	Rs crore	584	476
Profit after tax (PAT)	Rs crore	0.3	28
PAT margin	%	0.0	5.8
Adjusted debt / adjusted networth	Times	2.59	1.28
Adjusted interest coverage	Times	1.19	9.22

* HEPL consolidated with SPPL

Any other information: Not applicable

Annexure - List of Entities Consolidated

Names of entities consolidated	Extent of consolidation	Rationale for consolidation
KLJ Plasticizers Ltd	Full	Common management and bankers, same business, and strong operational and financial linkages
KLJ Polymers & Chemicals Ltd	Full
KLJ Organic Ltd	Full
KLJ Resources Ltd	Full
KLJ Polymers Pvt Ltd	Full
KLJ Petroplast Ltd	Full
High Eximpetro Pvt Ltd	Full
Sidhe Petrochem Pvt Ltd	Full