Rating Rationale
September 28, 2018 | Mumbai
Mangalam Organics Limited
Rating outlook revised to 'Positive'
 
Rating Action
Total Bank Loan Facilities Rated Rs.77 Crore (Enhanced from Rs.55 Crore)
Long Term Rating CRISIL BBB+/Positive (Outlook revised from 'Stable' and rating reaffirmed)
Short Term Rating CRISIL A2 (Assigned)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has revised its outlook on the long-term bank facility of Mangalam Organics Ltd (MOL) to 'Positive' from 'Stable' while reaffirming the rating at 'CRISIL BBB+.CRISIL has also assigned its 'CRISIL A2' rating to te the short term bank facilities of MOL.
 
The outlook revision reflects sustained improvement in MOL's operating performance, backed by increase in revenue and profitability. Revenue and operating margin rose to Rs 87.71 crore and 19%, respectively, in the first quarter of fiscal 2019, from 38.3 crore and 11.4% during the same period the previous year. The performance could be attributed to significant improvement in realisation of camphor on account of the prevailing demand-supply situation. Although, the realisations are likely to moderate going forward, it should stay above past levels. Profitability should be better than historical levels going forward, driven by higher realisations compared with the hike in input prices and measures undertaken to improve operating efficiencies.
 
The ratings continue to reflect the extensive experience of MOL's promoters, and established market position in the camphor industry. The ratings also factor in a healthy financial risk profile. These strengths are partially offset by susceptibility to volatility in realisation and raw material prices, and intense competition from domestic manufacturers as well as imports from China.

Key Rating Drivers & Detailed Description
Strengths
* Promoters' extensive experience and established market position in the camphor industry
The promoters (Dujodwala family) have experience of around five decades in the industry. MOL is presently headed by Mr Kamal Kumar Dujodwala, who is well supported by a qualified and experienced management team.
 
The company is one of the leading players in the Indian camphor market. Revenue improved to Rs.87.71 crores in first quarter of fiscal 2019 compared to Rs.38.3 crore during the same period in fiscal 2017. The improvement is on account of significant improvement in realisation and strong demand from domestic market. Average realisations improved to around Rs 635 per kg in the quarter ended June 30, 2018, compared to Rs 395 per kg the previous fiscal. Realisation was high on account of the demand-supply gap in the market, due to lower imports from China and sustained demand.
 
Operating margins have shown significant growth in first quarter of fiscal 2019 (19% compared to 11.44% during similar period for fiscal 2018). Operating margins are expected to be significantly higher than historical averages over the medium term due to higher realisation compared to hike in input prices and improved operational efficiencies.
 
Revenue and operating margin will, likely, be significantly higher in fiscal 2019 compared to fiscal 2018, but should remain susceptible to volatility in input prices and realisations. Sustainability of realisations and movement of input prices will remain major rating sensitivity factors over the medium term.
 
* Healthy financial risk profile
Financial risk profile is supported by comfortable networth and debt protection metrics. As on March 31, 2018, networth was Rs 61.2 crore, and is expected to improve to Rs 90-100 crore over the medium term, supported by strong growth in accrual. On account of a stable working capital cycle and the absence of any significant long-term loan, total outside liability to adjusted networth (TOLANW) was healthy at 1.1 time as of March 31, 2018. The ratio is expected to remain comfortable at 1.7 times as on March 31, 2019, moderating to around 1.3 times by the end of fiscal 2020.
 
Debt protection metrics are healthy: interest coverage and net cash accrual to total debt ratios were 10.3 times and 0.5 time, respectively, in fiscal 2018, and will, likely, be over 6 times and 0.4 time over the medium term.
 
Weaknesses
* Susceptibility to volatility in raw material prices
The cost of raw materials (alpha pine and gum turpentine) accounts for 70-75% of total sales. The materials are primarily imported from Indonesia, Brazil, Russia, and China, and their availability and prices are subject to the demand and supply situation. The prices were highly volatile in fiscal 2018, increasing by around 65%. The margin declined to 10.6% from 12.5% in fiscal 2018. Operations will, likely, remain susceptible to volatility in input prices.
 
* Intense competition from domestic manufacturers as well as imports from China
Intense competition in the Indian camphor industry and imports from China continue to constrain business risk profile. Imports have, however, declined significantly due to supply constraints and increase in domestic demand in China. However, any significant increase in imports from China will impinge on realisations, and thereby, profitability.
Outlook: Positive

CRISIL believes MOL's business risk profile will improve significantly over the medium term, backed by growing demand, higher realisations, and capacity expansion. The ratings may be upgraded if there is significant ramp-up in revenue and profitability, and sustained financial risk profile. The outlook may be revised to 'Stable' if lower-than-expected operating performance, or a large debt-funded capex weakens key credit metrics.

About the Company

Mumbai-based MOL (formerly, Allied Collides Pvt Ltd) was incorporated in 1981 and manufactures and trades in fine specialty chemicals, including camphor, resins, and dipentene. Installed capacity is about 16,000 tonne per annum. Daily operations are managed by Mr Kamal Kumar Dujodwala. In 2013, the company was listed on BSE (Bombay Stock Exchange).

Key Financial Indicators
Particulars Unit 2018 2017
Revenue Rs.Cr 244.2 196.7
Profit After Tax (PAT) Rs.Cr 14.4 4.8
PAT Margins % 5.9 2.4
Adjusted Debt/Adjusted Networth Times 0.65 1.07
Interest coverage Times 10.3 5.6

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. 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.Cr)		 Rating assigned  with outlook
NA Cash Credit NA NA NA 22 CRISIL BBB+/Positive
NA Letter of Credit NA NA NA 55 CRISIL A2
Annexure - Rating History for last 3 Years
  Current 2018 (History) 2017  2016  2015  Start of 2015
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund-based Bank Facilities  LT/ST  22.00  CRISIL BBB+/Positive      31-08-17  CRISIL BBB+/Stable    --    --  -- 
Non Fund-based Bank Facilities  LT/ST  55.00  CRISIL A2    --    --    --    --  -- 
All amounts are in Rs.Cr.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Cash Credit 22 CRISIL BBB+/Positive Buyer`s Credit 32 CRISIL BBB+/Stable
Letter of Credit 55 CRISIL A2 Cash Credit 10.5 CRISIL BBB+/Stable
-- 0 -- Corporate Loan 6.2 CRISIL BBB+/Stable
-- 0 -- Working Capital Term Loan 6.3 CRISIL BBB+/Stable
Total 77 -- Total 55 --
Links to related criteria
CRISILs Approach to Financial Ratios
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating criteria for manufaturing and service sector companies

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