| Meghmani Organics Limited | ||||||
| Rated amount enhanced | ||||||
| Rating Action | ||||||
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| 1 crore = 10 million | ||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has reaffirmed its ‘CRISIL AA-/Stable/CRISIL A1+’ ratings on the bank facilities of Meghmani Organics Ltd (MOL).
The re-affirmation factors in the healthy business and financial risk profile of MOL which is expected to sustain over the medium term. As most of the company’s products were in the essential category, its operations were not hampered by the second wave of the pandemic. Both the agrochemical and pigments division witnessed healthy capacity utilization levels which coupled with contribution from the recently added capacities in the 2,4 D (herbicide) product line resulted in the company recording revenues of Rs. 1,046 crore during the first half of fiscal 2022; a year on year growth of ~45%. Operating margins for the first half of this fiscal however declined to ~16% compared to 21.7% recorded during the corresponding period previous fiscal owing to sharp increase in raw material prices and logistics costs which could not be fully passed on to the customers especially in the pigments division. CRISIL Ratings expect the revenue growth momentum to continue into the second half of this fiscal resulting in healthy double digit growth for the full year while maintaining operating margins at 16-18%.
Revenue growth momentum is expected to sustain over the medium term as well driven by commissioning of a multi-purpose plant (MPP) in fiscal 2023 and a new product line for Titanium Di-Oxide (TiO2) in the pigments division by fiscal 2024. Estimated cost for these projects stands at around Rs. 700 crore (~Rs. 310 crore for MPP project and ~Rs. 400 crore for TiO2 project) expected to be funded in debt equity ratio of 1:1. Work on the MPP plant has already started and is expected to be commissioned by first quarter of fiscal 2023. This plant with a revenue potential of around Rs 600 crore per annum would help the agrochemical division cross revenues of Rs. 2,000 crore over the next 2.5-3 years. The expansion announced for the TiO2 plant is likely to be commissioned by fiscal 2024 and will also add significant scale to the pigments division. Operating margins are expected to remain healthy in the range of 16-18% over the medium term driven by higher operating leverage and integrated nature of operations. Strong realizations and stable input prices had resulted in operating margin reaching historical highs of over 19% in fiscal 2021.
MOL’s financial risk profile is strong marked by healthy net worth of Rs. 1,162 crore and low gearing of 0.3 time as on March 31, 2021. Although debt levels are expected to go up over the medium term on account of the aforementioned expansion projects, gearing is not expected to exceed 0.4-0.6 times and debt protection metrics like debt to Earnings before Interest, depreciation, tax and amortization (EBIDTA) is expected to be maintained under 1.5 times. Fresh loans availed for the expansion projects are expected to have 1-2 years of principal moratorium. Accruals of over Rs 250 and Rs 300 crore respectively in fiscals 2022 and 2023 will be sufficient to meet modest repayment obligations of Rs 40 crore and Rs 76 crore over the corresponding period and for meeting incremental working capital requirements. While the company has a strong track record of successfully commissioning large expansion projects earlier, commercialization and ramp up of the new capacities will remain a key rating monitorable over the near to medium term.
The ratings continue to reflect Meghmani group's established market position in the pigments and agrochemicals segments, and diversified revenue in terms of products and end-user industries, as well as healthy operating efficiencies, stemming from integrated nature of operations. The ratings are also supported by its healthy financial risk profile and comfortable debt protection metrics. These strengths are partially offset by large working capital requirement and exposure to risks inherent in the agrochemicals sector.
CRISIL Ratings is no longer consolidating erstwhile subsidiary, Meghmani Finechem Limited (MFL, rated ‘CRISIL AA-/Stable/CRISIL A1+’) as the business has been demerged and MFL has been listed as a separate entity. CRISIL Ratings believes that this demerger will result in limited financial fungibility between the two entities. However, CRISIL Ratings notes that the critical operational synergies, common branding and common promoters between the two entities will remain post demerger also. Post the demerger also, the credit risk profile of MOL on a standalone basis continues to remain healthy supported by the relatively stable business risk profile of the pigments and agrochemicals divisions, and a well-managed balance sheet. |
Analytical Approach For arriving at the ratings, CRISIL Ratings has combined the business and financial risk profiles of MOL and all its subsidiaries, together referred to as the Meghmani group, as all the entities are under a common management and have operational linkages and fungible cash flow.
CRISIL Ratings no longer consolidates Meghmani Finechem Limited as the company was recently demerged from being a subsidiary of MOL, and is now operating as a separate entity.
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: Established market position in the pigments and agrochemical industries The Meghmani group has an established market position in its principal business segments: pigments and agrochemicals. It is the largest producer of copper phthalocyanine (CPC) blue and is among the top 3 pigment blue players globally, and enjoys long-standing relationship with key customers. In agrochemicals also, the group is among the largest manufacturer of pesticides in India having presence across the value chain in both technical and formulations. The group has more than 30 brands of various pesticides formulations in India. MOL has also now announced capex for setting up a plant for manufacturing TiO2 which is a white pigment primarily used in paints and coatings industry. There is a large demand supply gap in India due to limited number of players.
Diversified revenue profile The group has a diversified revenue stream with an estimated 64% coming from agrochemicals division with balance 36% coming from pigments division in fiscal 2021. Revenue diversity is further augmented by presence in both domestic (25%) and international markets (75%). Besides, post commissioning of the MPP plant, product portfolio for the agrochemical division will improve further.
Integrated operations, leading to cost advantages The Meghmani group has integrated backwards into manufacturing CPC blue, resulting in considerable savings. In its agrochemicals business, the group has facilities for manufacturing cypermethric acid chloride, meta phenoxy benzaldehyde and meta phenoxy benzyl alcohol, which are key intermediates in crop-protection products, thus reducing reliance on import. Once the MPP plant is commissioned, the company will also have capability to manufacture more technicals. CRISIL Ratings believes healthy integration of production facilities will support the Meghmani group over the medium term and operating profitability will remain healthy at 16-18%
Healthy financial risk profile The Meghmani group’s financial risk profile is supported by adequate networth and gearing.
MOL has planned a capex of around Rs 700 crore between fiscals 2022 and 2024, with MPP plant of Rs 310 crore under implementation and project for TiO2 of Rs 400 crore yet to commence. While debt is expected to be taken for these projects, CRISIL Ratings believes funding will be prudent through equal parts debt and accruals. Peak debt/EBIDTA is not expected to exceed 1.5 times. Gearing is also not expected to exceed 0.4-0.6 time despite debt addition while other debt protection metrics like interest cover too will remain at healthy levels.
Weaknesses: Large working capital requirement MOL has large working capital requirements as its key businesses are seasonal. A large proportion of agrochemical sales in the domestic market and pigment sales in the overseas market are made in the second and fourth quarters, respectively, of the fiscal. Although export partially offsets dependence on the seasonal domestic agrochemicals market, it exerts pressure on working capital management as the group has to provide credit of 3-4 months to overseas clients, resulting in large receivables. CRISIL Ratings believes the Meghmani group’s working capital requirement will remain large because of the nature of its business.
Exposure to risks inherent in the agrochemicals sector The demand for agrochemicals is driven by agricultural production, which depends on monsoon. A substantial area under cultivation in India is still not well irrigated, and depends on the monsoon to meet water requirement. Surplus or inadequate rainfall could affect the Meghmani group’s domestic revenue and profitability. Furthermore, the agrochemicals industry is regulated by specific and separate registration processes in different countries. Changes in the export and import policy of these countries will affect Indian agrochemical exporters such as the Meghmani group. Ban on any key molecules will also be a monitorable. |
Liquidity: Strong The group's liquidity is strong. It is supported by improving cash generation, expected at Rs 250-300 crore annually, which will suffice to service long term debt obligations of Rs 40 crore in fiscal 2022 and Rs 76 crore in fiscal 2023 and incremental working capital requirements. The company has also tied up long term loans for funding the MPP project. Liquidity is also enhanced by way of moderately utilized working capital limits and unencumbered cash and cash equivalents of Rs 150 crore as on September 30, 2021. Liquid surpluses are gradually expected to come down owing to its utilization for the expansion projects. |
Outlook Stable CRISIL Ratings believes that MOL will benefit from higher scale of operations post commissioning of projects for products with strong demand. This coupled with healthy geographic diversification and diversified product profile and steady double digit margins will support its healthy business risk profile. Financial risk profile is expected to remain healthy, despite higher debt levels for funding sizeable capex, supported by healthy cash generation, and progressive debt repayment. |
Rating Sensitivity factors Upgraded Factors
Downward factors:
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About the Group The Meghmani group was established in 1986, promoted by Mr Jayanti Patel, Mr Ashish Soparkar, Mr Natwarlal Patel, Mr Ramesh Patel, and Mr Anand Patel. The group manufactures green and blue pigment products, which are used to manufacture printing ink, plastic, paints, textiles, leather, and rubber. It also manufactures a wide variety of commonly used pesticides for crop and non-crop applications. The latter includes insect control in wood preservation and food grain storage.
In fiscal 2019, MOL gave an exit to the external investor – International Finance Corporation (IFC) by buying back IFC’s 25% stake in MFL for Rs 221.7 crore. As part of this transaction, MOL infused funds in its fully owned subsidiary - Meghmani Agrochemicals Private Limited (MAPL) which in turn was used to buy IFC’s stake. Subsequently, MOL merged MAPL with MFL. As part of the merger transaction, MFL redeemed the non-convertible compulsorily redeemable preference shares (NCRPS) of MAPL amounting to Rs 221.7 crore using its internal cash accruals. MFL also issued optionally convertible redeemable preference shares (OCRPS) of Rs 210.9 crore to MOL.
For the first 6 months of fiscal 2022, on a consolidated basis, MOL had revenues of Rs 1046 crore and PAT of Rs 134 crore as compared to revenues of Rs 726 crore and PAT of Rs 95 crore in the corresponding period of the previous fiscal. |
Key Financial Indicators (Consolidated)* -
*Excludes Meghmani Finechem Ltd |
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. The CRISIL Ratings' complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL Ratings' 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)
1 Interchangeable between WCDL/EPC/PCFC/PSFC. Interchangeable between Overdraft/ Short Term Loan// Export & Local Bills Discounted/ Export Invoice Financing (EPC)/ Preshipment Credit in Foreign Currency (PCFC)/PSCFC 3 Interchangeable between CC/WCDL/EPC/Foreign Usance Bills Discounting (FUBD)/Foreign Bills Purchased (FBP)/PCFC/Post Shipment Credit in Foreign Currency (PSCFC)/Inland Bills Purchased/Discounted |
Annexure – List of entities consolidated
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| Annexure - Rating History for last 3 Years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Annexure - Details of Bank Lenders & Facilities | ||||||||||||||||||||||||||||||||||||||||||||||||
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This Annexure has been updated on 07-Dec-2021 in line with the lender-wise facility details as on 07-Dec-2021 received from the rated entity.
Criteria Details
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