Rating Rationale

Rating Rationale

December 06, 2023 | Mumbai

KLJ Plasticizers Limited

Ratings reaffirmed at 'CRISIL AA-/Stable/CRISIL A1+'

Rating Action

Total Bank Loan Facilities Rated	Rs.392 Crore
Long Term Rating	CRISIL AA-/Stable (Reaffirmed)
Short Term Rating	CRISIL A1+ (Reaffirmed)

Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings.

1 crore = 10 million

Refer to Annexure for Details of Instruments & Bank Facilities

Detailed Rationale

CRISIL Ratings has reaffirmed its ratings on the bank facilities 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 plasticizers 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 plasticizers 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 plasticizers 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 plasticizer 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 plasticizers segment, which should result in better profitability.

In fiscal 2024, revenues are expected to increase by around 12-15% y-o-y driven primarily by increased utilization in newly commissioned plants in group companies KLJ Petroplast Limited and K.L.J. Polymers Limited. Overall operating margins are also expected to improve to 5.5-6% in fiscal 2024 from around 4% in fiscal 2023 driven by lower volatility in crude prices (as crude oil derivatives are key raw material for KLJ group).

With improvement in profitability, key financial indicators key credit metrics are expected to improve with interest coverage ratio improving to greater than 5 times and total outside liabilities to tangible networth (TOL/TNW) ratio of less than 1 time in fiscal 2024.

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

Analytical Approach

CRISIL Ratings has revised its analytical approach and combined the business and financial risk profiles of KLJ Plasticizers Ltd, KLJ Organic Ltd, KLJ Polymers and Chemicals Ltd, KLJ Resources Ltd, High Eximpetro Pvt Ltd, Sidhe Petrochem Pvt Ltd, KLJ Polymers Pvt Ltd and KLJ Petroplast Pvt Ltd. 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 plasticizers segment: The KLJ group is a leading manufacturer of plasticizers in south Asia with an installed capacity of 5 lakh TPA; it offers a large variety of plasticizers, including phthalate, maleate, specialty and flame-retardant. The group’s strong market position is underpinned by its large scale of operations (~Rs 9,331 crore in fiscal 2023) and diverse clientele. Plasticizers 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 plasticizers (currently around 25% of plasticizer sales). Also, backward integration through captive PAN capacity will help to strengthen operating efficiency and competitiveness in the plasticizers segment, which should result in improvement in profitability.

Healthy operating efficiency backed by proximity to ports, and strong relationships with suppliers: The production facilities of the group are at Silvassa in Dadra and Nagar Haveli; Bharuch in Gujarat; and Thailand and 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 specialized 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 3,269 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 5-8 times, debt to Ebitda of 1-2 times and TOL/TNW ratio of less than 1 time over the medium term owing to healthy accruals, 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 plasticizers 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% 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 FY2023 and is expected to remain at similar range in the medium term.

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 unutilized bank lines of over Rs 322 crore as of October 2023. Working capital bank limit was utilized 76% on average over the past 6 months through October 2023. With the group expected to chart a satisfactory growth trajectory with healthy cash accruals, decent profitability metrics, modest term debt obligation and moderate utilization 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 plasticizers 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 TOL/TNW 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 plasticizers. It is a leading manufacturer of plasticizers and chlorinated paraffin wax (CPW) in south Asia, with capacity of over 500,000 TPA. Five of its companies manufacture plasticizers, 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 plasticizers 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 plasticizers in India.

Key Financial Indicators (The KLJ group)

As on/for the period ended March 31	Unit	2023	2022
Revenue	Rs crore	9331	7631
Profit after tax (PAT)	Rs crore	184	641
PAT margin	%	3.9	8.4
Adjusted debt / adjusted networth	Times	0.42	0.40
Adjusted interest coverage	Times	3.7	25.69

Key Financial Indicators – KPL

As on/for the period ended March 31	Unit	2023	2022
Revenue	Rs crore	1953	2813
Profit after tax (PAT)	Rs crore	149	387
PAT margin	%	7.6	13.8
Adjusted debt / adjusted networth	Times	0.05	0.02
Adjusted interest coverage	Times	20.18	74.39

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL Ratings` complexity levels are assigned to various types of financial instruments and are included (where applicable) in the 'Annexure - Details of Instrument' in this Rating Rationale.

CRISIL Ratings will disclose complexity level for all securities - including those that are yet to be placed - based on available information. The complexity level for instruments may be updated, where required, in the rating rationale published subsequent to the issuance of the instrument when details on such features are available.

For more details on the CRISIL Ratings` complexity levels please visit www.crisilratings.com. Users may also call the Customer Service Helpdesk with queries on specific instruments.

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs crore)	Complexity level	Rating assigned with outlook
NA	Bank guarantee	NA	NA	NA	2.00	NA	CRISIL A1+
NA	Cash credit	NA	NA	NA	80.00	NA	CRISIL AA-/Stable
NA	Letter of credit	NA	NA	NA	250.0	NA	CRISIL A1+
NA	Long-term loan	NA	NA	20-Feb-2025	45.00	NA	CRISIL AA-/Stable
NA	Foreign exchange forward	NA	NA	NA	15.0	NA	CRISIL A1+

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

Annexure - Rating History for last 3 Years

	Current			2023 (History)		2022		2021		2020		Start of 2020
Instrument	Type	Outstanding Amount	Rating	Date	Rating	Date	Rating	Date	Rating	Date	Rating	Rating
Fund Based Facilities	LT/ST	140.0	CRISIL A1+/ CRISIL AA-/Stable	10-08-23	CRISIL A1+/ CRISIL AA-/Stable	01-07-22	CRISIL A1+/ CRISIL AA-/Stable	29-01-21	CRISIL A+/Positive	28-04-20	CRISIL A+/Stable	CRISIL A+/Positive
			--	28-04-23	CRISIL A1+/ CRISIL AA-/Stable	31-01-22	CRISIL A1+/ CRISIL AA-/Stable		--		--	--
Non-Fund Based Facilities	ST	252.0	CRISIL A1+	10-08-23	CRISIL A1+	01-07-22	CRISIL A1+	29-01-21	CRISIL A1+	28-04-20	CRISIL A1+	CRISIL A1+
			--	28-04-23	CRISIL A1+	31-01-22	CRISIL A1+		--		--	--
Commercial Paper	ST		--	28-04-23	CRISIL A1+	01-07-22	CRISIL A1+	29-01-21	CRISIL A1+	28-04-20	CRISIL A1+	CRISIL A1+
			--		--	31-01-22	CRISIL A1+		--		--	--

All amounts are in Rs.Cr.

Annexure - Details of Bank Lenders & Facilities

Facility	Amount (Rs.Crore)	Name of Lender	Rating
Bank Guarantee	1	HDFC Bank Limited	CRISIL A1+
Bank Guarantee	1	State Bank of India	CRISIL A1+
Cash Credit	35	State Bank of India	CRISIL AA-/Stable
Cash Credit	45	HDFC Bank Limited	CRISIL AA-/Stable
Foreign Exchange Forward	9	State Bank of India	CRISIL A1+
Foreign Exchange Forward	6	HDFC Bank Limited	CRISIL A1+
Letter of Credit	175	State Bank of India	CRISIL A1+
Letter of Credit	75	HDFC Bank Limited	CRISIL A1+
Long Term Loan	45	Kotak Mahindra Bank Limited	CRISIL AA-/Stable

Criteria Details

Links to related criteria

CRISILs Approach to Financial Ratios

Rating criteria for manufaturing and service sector companies

CRISILs Bank Loan Ratings - process, scale and default recognition

Rating Criteria for Chemical Industry

Criteria for rating entities belonging to homogenous groups

CRISILs Criteria for rating short term debt

CRISILs Criteria for Consolidation

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