Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL A+/Positive’ rating on the long term bank facilities of Meghmani Finechem Ltd (MFL).

 

The rating reflects MFL’s improving business profile supported by commissioning and subsequent ramp up of projects undertaken for caustic soda, chloromethane sulphonate (CMS) and Hydrogen Peroxide. Further, operating margin has been maintained at a healthy level of ~30%, and is expected to be maintained at similar levels over the medium term also.

 

MFL, supported by additional revenues from its recently set up capacities across businesses, is likely to register a 25-30% growth in revenues in fiscal 2021, despite subdued performance in the first quarter owing to COVID-19 related disruptions in operations, and temporary plant closures. Operations gradually ramped up since May 2020, post receipt of necessary approvals for re-opening the plants from concerned authorities. Besides, MFL’s end-user industries include essential services such as pharmaceuticals, agrochemicals, soaps and detergents, etc. Operating profitability is also expected to be maintained at ~30% in fiscal 2021, albeit lower than fiscal 2020.

 

MFL’s business risk profile should benefit over the medium term from increased capacities, improving product mix with addition of CMS and hydrogen peroxide, and healthy operating efficiency, supporting double digit revenue growth. The CMS capacity which was commissioned in July 2019 has already ramped up to over 95% utilization. Additional caustic soda capacity and Hydrogen peroxide plants were also commissioned in June, 2020 and July, 2020 respectively. The commissioning of the hydrogen peroxide plant which was delayed due to lockdown related disruptions, has also ramped up in the fourth quarter of fiscal 2021.

 

With the commissioning of the above projects, MFL’s project implementation risk has reduced considerably. Presently, the company is implementing an epichlorohydrin (ECH) project which is expected to commence operations by fiscal 2022 end, by when the Hydrogen peroxide capacity is expected to fully stabilise. MFL has also started work on further expansion of caustic soda capacity to ~400,000 tonnes from the existing 294,000 tonnes and captive power plant to 132 MW from 96 MW at an estimated cost of ~Rs 230 crore. Work on the 30,000 ton per annum CPVC plant is also at initial stages. Both these projects are expected to be commissioned in fiscal 2023. MFL’s business risk profile is expected to improve further with the commissioning of these downstream chlorine capacities as revenue contribution from these capacities will increase and form a substantial part of the total revenue mix. Proportion of caustic soda (which is largely a commoditized product) will decrease in the overall revenue mix which will also aid in stabilization of operating margins and accruals. However, commercialization and ramp up of these capacities and consequent stabilization of operating margins will be a monitorable. 

 

Despite ongoing capex, CRISIL Ratings expects MFL’s key debt metrics will continue to witness steady improvement over the medium, due to improving accruals, progressive repayment of existing long debt term, not withstanding ongoing project debt addition. Gearing is expected to decline to 0.7-8 times by March 31, 2023, from an estimated ~1 time at March 31, 2021, while interest cover is also expected at over 6 times in fiscal 2023, from ~5 times in fiscal 2021. Debt to Earnings before Interest, Depreciation and Tax and Amortisation (EBITDA) ratio is also estimated at below 2.2 times in fiscal 2021, from over 2.6 times in fiscal 2020, and is expected at below 2 times by fiscal 2023. Improvement in debt metrics, will nevertheless, remain sensitive to any cost overruns, which may necessitate additional debt funding.

 

The rating continues to reflect MFL's improving business risk profile supported by steady revenue growth, healthy operating margin and good demand prospects. The rating also factors its adequate and improving financial risk profile. These strengths are partially offset by the company’s high revenue dependence on the intensely competitive chlor alkali industry, exposure to regulatory risks, moderate vulnerability of operating margin to fluctuations in caustic soda prices and also exposure to project implementation risks, though lower than earlier.

 

CRISIL Ratings had removed its rating on the long term bank facilities of MFL from 'Rating Watch with Developing Implications' and reaffirmed the rating at 'CRISIL A+' and revised outlook to ‘Positive’ on April 27, 2021.

Analytical Approach

For arriving at the ratings, CRISIL Ratings has considered the standalone business and financial risk profile of MFL.

Key Rating Drivers & Detailed Description

Strengths:

* Steady revenue growth, healthy operating margin and good demand prospects: Revenue visibility over the medium term will be driven by steady demand for caustic soda and ramping of new capacities, such as hydrogen peroxide, and increased capacity for caustic soda, even as electrochemical unit (ECU) realizations have greatly moderated from the highs seen in fiscal 2019. The company has maintained a comfortable operating margin of over 30% (despite certain volatility), owing to its low-cost production model. It supplies 6-7% of its production to MOL, and 4-5% of output to other group companies. The rest is sold to external clients, with whom the company has maintained strong relationships.

 

* Adequate and improving financial risk profile: MFL has availed debt for funding past capex which has resulted in gearing increasing to ~1 time as of March 31, 2021 from 0.14 times as of March 31, 2018. Capex spending is expected to continue over the next two fiscals, but a relatively lower level than in the recent past. The ECH plant is expected to be commissioned in fiscal 2022. As the benefits of new projects and capacities accrue into business, capital structure and debt protection metrics should improve over the medium term. Besides, ongoing capex is also modular in nature, and can be postponed, in the event of sharp deterioration in demand or any external exigencies.

 

Weaknesses:

* High though moderating dependence on the intensely competitive chlor alkali industry: The chlor alkali industry is intensely competitive and dominated by large players such as Gujarat Alkalis and Chemicals Ltd, DCM Shriram Ltd, Grasim Industries Ltd, and Reliance Industries Ltd (rated ‘CRISIL AAA/Stable/CRISIL A1+’). The top 7 players together hold 40-50% of the market share. While MFL has been growing at a healthy pace and new products will add to revenue visibility further, scale of operations remains moderate compared to peers. Besides, currently over 70% of its revenues are derived from the chlor-alkali segment, especially caustic sodia, which is commoditized in nature, and prone to business cycles. Nevertheless, with addition of new downstream products, dependence on caustic soda revenues will gradually decline over the medium term.

 

* Vulnerability to fluctuations in caustic soda prices and regulatory risk: Profitability of caustic manufacturing companies depends on the prevailing ECU prices. Cyclical downturns or adverse variability in demand-supply balance, may drag down realisations for caustic soda players. In August 2015, the government of India imposed an anti-dumping duty of $48.39 per tonne and $21.90 per tonne on caustic soda imports from South Korea and China, respectively. Hence, prices could come under pressure in the event of increased imports from China, and removal of anti-dumping duty, thus impacting profitability of domestic players including MFL. The company’s operating margin has ranged from 30-45% in the past six years, reflective of the aforesaid factors.

 

With MFL diversifying into downstream chlorine derivative products like CMS, ECH and CPVC, contribution from caustic soda is expected to reduce in the future which will help in stabilizing operating profitability and accruals.

Liquidity: Strong

MFL's liquidity is strong. Cash generation is expected to exceed Rs.190 crore in fiscal 2022, and over Rs.250 crore in fiscal 2022, which will suffice to meet long term debt obligations of about 120 crore and Rs.160 crore in respective years, besides incremental working capital requirements. CRISIL Ratings also draws comfort from the headroom available in its fund based working capital limits which have been moderately utilised at less than 50% on average over the past twelve months ended March, 2021. The company is expected to rely on the same in case of any cash flow mismatches. Besides, refinancing is also not expected to be a challenge considering the strong vintage and franchise with lenders being a part of ‘Meghmani’ group. Capex of ~Rs. 560 crore proposed in fiscals 2022 and 2023, is likely to be debt funded to extent of ~Rs.400 crore.

Outlook: Positive

CRISIL Ratings believes the MFL's business risk profile will continue to benefit from the diversity in revenues from downstream derivative products and from healthy operating efficiency over the medium term. Healthy cash accruals and progressive debt repayment, will help buttress impact of debt addition for ongoing projects, enabling improvement in debt metrics over the medium term.

Rating Sensitivity Factors

Upward factors:

• Improvement in operating performance driven by swift ramp up of new capacities, supporting double digit revenue growth and operating margins of ~30%
• Continued improvement in financial profile and debt metrics; for instance, debt/EBITDA remaining at less than 2.0 times, post commissioning of new capacities.  

 

Downward factors:

• Significant moderation in performance – operating margins deteriorating to less than 18-20% on a sustained basis
• Significant delay in commissioning of new capacities or higher than expected debt availed for funding the capex leading to deterioration in credit metrics - debt/EBITDA of over 2.5-2.7 times on a sustained basis. 

About the Company

MFL, part of the Ahmedabad-based Meghmani group, was incorporated in September 2007 as a subsidiary of Meghmani Organics Ltd (MOL), to establish a captive source of caustic soda and chlorine derivatives. Currently, MOL holds 57.16% stake in MFL, while the Meghmani group’s promoters hold the balance 42.84%. The company is in the process of being demerged as a subsidiary of MOL, and will become an associate company shortly.

 

MFL started operations from July 2009 with an installed capacity for manufacturing 119,000 tonne per annum (tpa) of caustic soda; the capacity was enhanced to 187,600 tpa (caustic soda 166,600 tpa and caustic potash 21,000 tpa) as of March 31, 2016, and a 60-megawatt captive power plant was added at Dahej, Gujarat.

 

For the first 9 months of fiscal 2021, MFL registered revenues of about Rs 570 crore and operating profits of Rs 181 crore as compared to revenues of Rs 490 crore and operating profits of Rs 167 crore in the corresponding period of the previous fiscal.

Key Financial Indicators

Particulars	Unit	2020	2019
Revenue	Rs.Crore	611	710
Profit After Tax (PAT)	Rs.Crore	114	183
PAT Margin	%	18.7	25.7
Adjusted Debt/Adjusted networth	Times	0.9	0.9
Interest Coverage	Times	7.1	14.0

 

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of Instrument	Date of Allotment	Coupon Rate (%)	Maturity Date	Issue Size (Rs.Crore)	Complexity levels	Rating Assigned with Outlook
NA	Working Capital Facility	NA	NA	NA	133.5	NA	CRISIL A+/Positive
NA	Long Term Loan	NA	NA	July-2024	290.9	NA	CRISIL A+/Positive
NA	Long Term Loan	NA	NA	Sept-2027	190.0	NA	CRISIL A+/Positive
NA	External Commercial Borrowing	NA	NA	NA	105.6	NA	CRISIL A+/Positive