Detailed Rationale

Crisil Ratings has reaffirmed its 'Crisil AA-/Stable/Crisil A1+' ratings on the bank facilities of KLJ Organic Limited (KOL; part of KLJ group).

 

The ratings continue to reflect the strong market position of the KLJ group in the plasticisers segment, its strong relationships with suppliers, healthy financial risk profile and adequate liquidity. These strengths are partially offset by susceptibility of operating margin to volatility in crude-linked raw material prices and the large working capital requirement.

 

The group is a leading manufacturer of plasticisers in South Asia, with an installed capacity of 5 lakh tonne per annum (TPA). Its market position is supported by its vast portfolio of plasticisers, which include phthalate, maleate, specialty and flame-retardant, and is underpinned by the large scale of operations and diverse clientele. Operating income of the group is expected to grow by 8-10% to Rs 10,000-10,300 crore in fiscal 2025, from Rs 9,388 crore in fiscal 2024, led by growth in scale. However, it may remain constrained by decline in average realisations by 5-6% due to adverse movement in crude prices.

 

Operating margin of the group remains susceptible to movement in crude oil prices. The margin improved to 5.1% in fiscal 2024, from 2.8% in the previous fiscal. However, due to decline in crude prices in the first half of fiscal 2025, and muted demand during the third quarter, the overall operating margin could decline to 4.3-4.5% in fiscal 2025 from 5.1% in fiscal 2024. With stability in crude prices, higher proportion of revenue to be generated from the higher-margin manufacturing business and lower inventory held in the trading business, the company is likely to maintain a steady-state margin of 5.5-6.0% in the medium term, starting fiscal 2026.

 

At a standalone level, KOL’s operating income declined to Rs 572 crore in fiscal 2024 from Rs 587 crore in the previous fiscal. The company also made operating profit of Rs 47 crore at an operating margin of 8.3% in fiscal 2024 as against 11.5% in the previous fiscal.

 

The group is likely to maintain a comfortable financial risk profile, supported by a large networth, moderate dependence on external debt, and healthy cash surplus, despite decline in profitability during the current fiscal. Total external debt in the KLJ group may decline to around Rs 1,800 crore in fiscal 2025, from Rs 1,961 crore in fiscal 2024. Gearing is expected to remain in the range of 0.5-0.55 time as on March 31, 2025, from 0.58 time a year before. However, due to lower operating profitability, interest coverage and net cash accrual to adjusted debt (NCA/AD) ratios are likely to moderate to 2.6-2.8 times and around 0.18 time in fiscal 2025, from 3.4 times and 0.19 time, respectively, in fiscal 2024. However, the ratios are expected to remain around 4 times and 0.25 time, respectively, over the medium term, fiscal 2026 onwards.

 

These strengths are partially offset by susceptibility to volatility in raw material prices and foreign exchange (forex) rates and the large working capital requirement. Any adverse movement in crude prices or further weakening of demand remain key monitorable.

Analytical Approach

Crisil Ratings has combined the business and financial risk profiles of KLJ Plasticisers Ltd, KOL, KLJ Polymers and Chemicals Ltd, KLJ Resources Ltd, High Eximpetro Pvt Ltd, Sidhe Petrochemicals Pvt Ltd, KLJ Polymers Pvt Ltd and KLJ Petroplast Ltd. This is because all these companies, collectively referred to as the KLJ group, have common promoters and management, are engaged in the same business and have 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 interest in the real estate business. Funding support from the chemicals business to the real estate business will be monitorable.

 

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: he KLJ group is a leading manufacturer of plasticisers in South Asia, with an 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 9,300 crore in fiscal 2024) 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 higher capacity utilisation in recently established subsidiaries, the group would focus on more value-added products, further enhancing revenue and profitability. Through the enhanced capacity under KLJ Petroplast, the group plans to sell high-margin non-phtalate plasticisers. Backward integration through captive peroxyacetyl nitrate (PAN) capacity will help strengthen operating efficiency and competitiveness in the plasticisers segment, and thus, aid growth in profitability

 

• Healthy operating efficiency backed by proximity to ports and strong relationship with suppliers: Production facilities are at Silvassa (Dadra and Nagar Haveli), Bharuch and Kandla (Gujarat) and Thailand, all in proximity to ports. As the key raw material, crude oil derivative, is imported, 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 throughput and proportion of value-added specialty products. Further, increasing contribution from specialised products and backward integration from fiscal 2024, should help the operating margin improve further. The margin should sustain at 5.5-6.0% over the medium term.

 

• Strong financial risk profile and liquidity: The financial risk profile of the group is likely to remain strong over the medium term, with sufficient cash accrual, resulting in comfortable gearing and debt protection metrics. Networth is likely to exceed Rs 3,600 crore, from Rs 3,401 crore as on March 31, 2024, driven by rising scale and profitability. Credit metrics will be comfortable, with interest coverage ratio at 3.0-3.5 times, debt to Ebitda of 3.6-3.8 times and total outside liabilities to tangible networth (TOLTNW) ratio of less than 1.2 times, owing to healthy cash accrual, term debt repayment and moderate utilisation of short-term debt.

 

Weaknesses:

• 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 over 50% of the requirement is imported. The group maintains a large stock, given the long lead time. Prices of raw material move in tandem with crude oil prices, as a result of which operating margin has fluctuated sharply between 4% and 15% over the past decade. Increased sourcing of raw material from the domestic market and backward integration via installation of the PAN plant in March 2023, should help mitigate these risks. However, profitability will remain susceptible to any fluctuation in raw material prices over the medium term.

 

In fiscal 2025, the operating margin is projected to decline due to adverse movement in crude prices and subdued demand, which may lead to some inventory loss in the trading business. Overall margin is expected to remain in the range of 4.3-4.5% in fiscal 2025.

 

• 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 60-70 days. Gross current assets ranged from 160 to 180 days for the past three fiscals and are projected to be at 170 days as on March 31, 2025.

Liquidity: Strong

Liquidity is driven by healthy cash accrual against scheduled term debt repayment. The group had cash and equivalents of over Rs 200 crore and unutilised bank lines of over Rs 377 crore as of December 2024. The working capital limit was utilised at 73% on an average. With the group likely 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

The credit risk profile of the KLJ group will benefit from increasing scale through expansion in plasticiser and polymer compound capacities and better operating efficiency, via backward integration over the medium term. The group is also likely to sustain its healthy financial risk profile, supported by adequate liquidity and moderate cash accrual.

Rating sensitivity factors

Upward factors

• Higher-than-anticipated growth in revenue and profitability, driven by better product diversity and higher proportion of specialty products, resulting in overall cash accrual of Rs 650-700 crore on a sustained basis
• Sustenance of healthy financial risk profile, supported by higher cash accrual and efficient working capital management

 

Downward factors

• Weak operating performance of the KLJ group (chemicals business), leading to cash accrual below Rs 250 crore
• Large capital expenditure or acquisition, weakening debt metrics, with TOLTNW ratio exceeding 1.6 times

About the Company

KOL was incorporated in 1995 to manufacture chlorinated paraffin as a measure of diversification of the group profile. The manufacturing unit is located at Jhagadia in Bharuch district of Gujarat. The total installed capacity of the company is 1,05,000 TPA.

About the Group

The KLJ group, set up by 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 facility to manufacture 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 Ltd and had provided a corporate guarantee of $67 million (around Rs 507 crore) as on March 31, 2023. The plant commenced operations in April 2019.

Key Financial Indicators

Key financials (the KLJ group)*

Particulars	Unit	2024	2023
Revenue	Rs crore	9388	9282
Profit after tax (PAT)	Rs crore	245	159
PAT margin	%	2.6	1.7
Adjusted debt/adjusted networth	Times	0.58	0.51
Adjusted interest coverage	Times	4.10	3.91

 

Key financials (KOL)*

Particulars	Unit	2024	2023
Revenue	Rs crore	572	587
PAT	Rs crore	23	33
PAT margin	%	4.1	5.7
Adjusted debt/adjusted networth	Times	0.38	0.29
Adjusted interest coverage	Times	5.0	7.2

*Crisil Ratings-adjusted numbers

Any other information: Not Applicable