Key Rating Drivers & Detailed Description
Strengths:
Strong market position in the plasticisers segment
The group is a leading manufacturer of plasticisers in south Asia with an installed capacity of 2 lakh tonne per annum as on December 31, 2021. Its leadership position is supported by the large variety of plasticisers it offers, including phthalate, maleate, specialty, and flame-retardant. The group also has a healthy presence in the polymer compounds and chlorinated paraffin segments (16% of revenue in fiscal 2021). Its strong market position is underpinned by the large scale of operations (estimated turnover range of Rs 7000-7500 crores in fiscal 2022) and diverse customer base. Plasticisers are generally used by compounding units, and end-user industries are varied, including footwear, cables, flexible polyvinyl chloride (PVC) films, leather, vinyl flooring, medical equipment, adhesives, perfumes, automobile parts, rubber belts and tube compounds.
Further, with the enhanced capacity through KLJ Petroplast, the group will focus on selling high-margin non-phtalate plasticisers (currently around 25% of plasticiser sales). Also, backward integration through captive PAN capacity will help in further reducing operating costs and strengthening competitiveness in the plasticisers segment, which should result in overall improvement in profitability.
Healthy operating efficiency, supported by proximity to ports, and a strong relationship with suppliers
The 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, are mainly imported. Proximity to ports provides logistical advantages. 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, with reduction in domestic supply, the group has been able to sell its products at a premium while products such as benzyl chloride are seeing increasing demand from international markets, which has resulted in higher realisations in the first half of fiscal 2022 and is expected to benefit profitability in the near term. However, the operating margin in fiscals 2023 and 2024 is expected to return to normal levels at 6-8% considering the initiation of plasticiser capacities and stabilisation of prices. Increasing contribution from specialised products and contribution from backward integration from fiscal 2024 should improve the operating margin over the medium to long term. Return on capital employed (RoCE) ranged from 12-30% over last five fiscals and is expected to remain over 20% in the medium term.
Strong financial risk profile and liquidity
The networth is sizeable and the adjusted gearing comfortable. As on March 31, 2022, the networth is estimated at over Rs 3100 crore, and the adjusted debt (including the guaranteed portion under the Qatar JV) at Rs 1194 crore. The capex of Rs 465 crore and Rs 290 crore in fiscals 2022 and 2023, respectively, is likely to be funded through a mix of long-term debt of Rs 475 crore and internal cash accrual. Healthy cash surplus generated in fiscal 2022 will be partly used for supporting the capex. Also, cash accrual should be sufficient to meet debt obligation over the medium term.
Despite the capex, the adjusted TOLTNW ratio, estimated at 0.92 time as on March 31, 2022, is likely to remain below 1 time over the medium term, owing to steady cash accrual and phased drawdown of debt. Liquidity is strong, as reflected in healthy cash accrual, small-term debt obligation, low utilisation of the fund-based limit, and a high current ratio.
Weakness:
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 (the group imports more than 50% of its raw material). The group maintains a large inventory because of the long lead time for importing raw material. Inventory remained at 50-100 days during the five fiscals through 2021. Prices of raw materials are volatile because of sharp fluctuations in crude oil prices which led to considerable volatility in the operating margins ranging from 5% to 15% over the last 10 fiscals. Improving domestic sourcing of raw materials and backward integration will mitigate these risks to a certain extent, however margins are expected to remain susceptible over the medium term
Large working capital requirement
The business is working capital intensive, driven 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 125-180 days over the three fiscals through 2021.
Project implementation and stabilisation risk
The group has undertaken a large capex programme with project cost of Rs 841 crores over fiscals 2022 and 2023. The group plans to enhance its plasticizer and polymer compounds capacity by 3,00,000 MT and 45,456MT respectively, as well as install PAN capacity of 1,04,000 MT. While commercial operations for polymer compounds capacity is expected to commence from March 2022, the plasticizers and PAN plants are expected to be fully commercialised by December 2022. Timely commencement of commercial operations, within budgeted costs, will remain key rating sensitivities. The plant is also susceptible to initial stabilisation issues with capacity utilisations remaining a key monitorable.
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