Detailed Rationale

CRISIL Ratings has reaffirmed its ratings on the bank facilities and commercial paper of KLJ Plasticizers Ltd (KPL; part of the KLJ group), at 'CRISIL AA-/Stable/CRISIL A1+'.

 

The ratings continue to reflect the strong market position of the KLJ group in the plasticisers segment, its healthy operating efficiency backed by proximity to ports, strong relationships with suppliers, comfortable financial risk profile and strong liquidity. These strengths are partially offset by susceptibility of margins to volatility in raw material prices and foreign exchange (forex) rates, and 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) as on date. Its leading position is supported by the large variety of plasticisers it offers, including phthalate, maleate, specialty and flame-retardant. The group’s strong market position is underpinned by the large scale of operations and diverse clientele. KLJ group is expanding plasticiser and polymer compound capacities, which will further support revenue growth over the medium term. Also, backward integration through captive pthalic anhydride (PAN) capacity will help in improving its operating efficiency and strengthening competitiveness in the plasticisers segment, which should result in better profitability.

 

The financial risk profile of the group is expected to remain comfortable supported by high networth, limited dependence on external debt and healthy cash surplus.

 

In fiscal 2023, consolidated profitability moderated on account of volatility in crude prices (as crude oil derivatives are key raw material for KLJ group) leading to inventory losses in the trading business. Overall, earnings before interest, tax, depreciation and amortisation (Ebitda) margin moderated to around 4% levels in fiscal 2023, which is lower than our earlier expectation but is closer to the historical average. Despite the moderation in profitability, key financial indicators are expected to remain comfortable with interest coverage ratio of ~4 times and total outside liabilities to tangible networth (TOLTNW) ratio of less than 1 time in fiscal 2023. Furter, with increasing scale and expected improvement in profitability, key credit metrics are expected to improve further in fiscal 2024.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of 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). 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 interests 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. Any 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 stabilized. The JV turned cash positive in calendar year 2022 and should not require KLJ group’s support going forward. With expected improvement in the performance of KLJ Organic-Qatar WLL, the corporate guarantee extended by the KLJ group to the JV is expected to be waived off in the near term.

 

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 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 9,000 crore in fiscal 2023) and diverse clientele. Plasticisers are generally 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, tube compounds etc.

 

Furthermore, with the enhanced capacity through KLJ Petroplast, the group is focusing on selling high-margin non-phtalate plasticisers (currently 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 in Gujarat; and Thailand. All the facilities are close to ports. Crude oil derivatives, key raw materials for group’s products, are mainly imported and proximity to ports provides logistical benefits. Furthermore, KLJ Organic's Bharuch plant 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 medium to long term. Operating margin is expected to sustain at 6-7% over the medium term.

 

Strong financial risk profile and liquidity

The financial risk profile is expected to remain strong over the medium term supported by healthy accruals 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 3,200 crore as on March 31, 2023 and is expected to increase over Rs 4,000 crore in the medium term, led by expected healthy accruals driven by increasing scale and decent profitability. Credit metrics are expected to remain comfortable with interest coverage ratio of 6-9 times, debt to Ebitda of 0.9-1.4 times and TOLTNW ratio of less than 1 time over the medium term owing to healthy accrual, moderate repayments on term debt and moderate utilisation of short-term debt. Liquidity is strong, as reflected in healthy cash accruals, modest debt obligation, moderate utilisation of the working capital limit, and high current ratio.

 

Weaknesses:

Susceptibility to volatility in raw material prices and forex rates

Chemicals, such as phthalic anhydride, alcohols and oxo-alcohols, used to manufacture plasticisers are crude derivatives and are generally imported (more than 50% of raw material is imported). The group maintains a 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 considerable volatility in the operating margins ranging from 4% to 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 margins are expected to remain susceptible to raw material prices over the medium term.

 

In fiscal 2023, the group’s profitability moderated on account of volatility in crude prices (as crude oil derivatives are key raw material for KLJ group) leading to inventory losses in the trading business. Overall, the Ebitda margin moderated to around 4% levels in FY23, which is lower than our earlier expectation but is closer to historical average. For the trading business of the group, delay of ~2 months in a consignment resulted in an exceptional loss due to drop in prices as well currency fluctuations during this period. This one-time loss also contributed to moderation in margin in FY23 for the trading business.

 

Large working capital requirement

Operations are working capital intensive, constrained by the policy of maintaining inventory of 2-3 months (to ensure timely servicing of customer requirement) and receivables of around 2 months. Gross current assets were at 135-180 days over the three fiscals till FY2022 and is estimated around 140 days as on March 31, 2023.

Liquidity: Strong

The group has strong liquidity driven by its healthy cash accruals against scheduled term loan repayments. The group had cash and equivalents of Rs 180-200 crore and access to unutilised bank lines of over Rs 180 crore as of February 2023. Working capital bank limit was utilised 64% on average over the 12 months through February 2023. With the group expected to chart a satisfactory growth trajectory with healthy cash accruals, decent profitability metrics, modest term debt obligation and moderate utilisation of working capital limit over the medium term, liquidity is estimated to remain strong over the medium term.

Outlook: Stable

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

Rating Sensitivity Factors

Upward factors

• Better-than-anticipated revenue growth and profitability driven by improvement in product diversity, higher proportion of specialty products resulting in cash accruals of over Rs 650-700 crore on sustained basis
• Sustenance of healthy financial risk profile supported by better cash accrual, and controlled working capital management.

 

Downward factors

• Weak operating performance tempering cash accruals to below Rs. 250 crores annually.
• Further large capital expenditure or acquisitions impacting debt metrics; for instance TOLTNW ratio exceeding 1.5-1.6 times
• Tepid performance of Qatar project, requiring financial support and affecting RoCE of the group

About the Company

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 has 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 firm, KLJ Plasticizers Ltd manufactures various 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.

Any other information: Not applicable