Detailed Rationale

Crisil Ratings has downgraded its rating on the long-term bank facilities of Meghmani Organics Limited (MOL) to ‘Crisil A/Stable’ from ‘Crisil A+/Negative’. The short-term rating has been reaffirmed at ‘Crisil A1’.

 

The rating downgrade follows the expectations of Crisil Ratings that expected recovery in the profitability of core business segments (agrochemicals and pigments) is slower than expected in fiscal 2025 mainly due to subdued realisations. Also, there is longer-than-expected delay in ramping up operations of titanium di oxide (TiO2) plant of Kilburn Chemicals Ltd (KCL, wholly owned subsidiary of MOL), impacting overall operating profit and cash generation. As a result, key financial parameters such as adjusted interest coverage, and debt to earnings before interest, depreciation, tax and amortisation (Ebitda) were lower than earlier anticipated for fiscal 2025. While a gradual improvement is expected in profitability in core segments, the benefit of which will be felt only in fiscal 2026, losses at KCL are expected to continue for some more time, preventing material improvement in the financial risk profile.

 

Revenue from operations increased 32% to Rs 1,526 crore during the first nine months of fiscal 2025 (Rs 1,156 crore during the corresponding period of fiscal 2024) aided by recovery in operating performance of its two core segments - agrochemicals and pigments. Revenue from the agrochemicals segment recovered 34% to Rs 1,081 crore during the first nine months of fiscal 2025 while pigments revived 29% to Rs 435 crore during the same period. Revival in core segments was driven by improving demand conditions and gradual normalisation of inventory levels in key export regions. While there has been a recovery in volume, realisations of products largely remain suppressed due to continued dumping by China across global markets. Within the agrochemical segment, export revenues (85% of agrochemical sales) improved 38% to Rs 919 crore during the first nine months of fiscal 2025 while domestic agrochemical sales increased 19% to Rs 162 crore during the first nine months of fiscal 2025. In the pigment segment, export revenues (79% of pigment sales during the first nine months of fiscal 2025) recovered 24% to Rs 333 crore while revenue from the domestic segment increased 32% to Rs 88 crore. 

 

In fiscal 2022, MOL had fast tracked its entry into white pigment (TiO2 segment) through acquisition of KCL. Post acquisition, MOL was faced with quality and technical challenges at KCL’s plant. Furthermore, after the Covid-19 pandemic, China started dumping TiO2 aggressively in India and globally at very low prices. MOL was unable to compete at those prices resulting in delay in ramp up of operations at KCL’s TiO2 plant. While the Directorate General of Trade Remedies has recommended imposing anti-dumping duties (ADD) on TiO2 in February 2025, final decision from the Ministry of Commerce is expected in the next couple of months. Potential implementation of these duties is expected to provide some respite to the company as it is aimed at safeguarding domestic producers from cheap imports. During the first nine months of fiscal 2025, KCL reported revenue of Rs 14 crore (fiscal 2024: Rs.1.09 crore). With demand conditions improving in key export regions,  expected ramp up of the TiO2 plant post implementation of ADD and increase in revenue from the nano urea segment, the overall revenue is expected to grow at 10-15% over the medium term.

 

Operating margin was 5.06% during the first nine months of fiscal 2025 (negative 1.93% during the corresponding period of fiscal 2024) driven by expansion in gross margins by ~450 basis points and higher operating leverage. Despite the improvement, margin and operating profit remained lower than the earlier expectation of over 10% owing to operating losses (Rs 36 crore during the first nine months of fiscal 2025) at KCL.

 

With anticipated ramp up of the TiO2 plant after the potential implementation of ADD, operating losses in this segment are expected to gradually reduce. Going forward, with continued recovery in agrochemicals and pigments and an expected reduction in losses from TiO2, the overall operating margin is expected to improve and sustain at 11-13% over the medium term. Timely implementation of ADD on TiO2 and the ability of MOL to ramp up its scale and reduce loss at KCL will remain monitorable.

 

Also, sustained recovery in demand in agrochemicals and pigments coupled with developments around US tariffs will need to be monitored. MOL derived nearly 22% of its revenue from the USA in fiscal 2024. Implementation of potential US tariffs is not expected to have material impact on revenue and operating margin of MOL as China (a major agrochemical producing country) faces much higher tariff (~125%). While MOL’s sales to USA may not have a material impact, its ability to maintain market share in the domestic market as well as other key export regions where Chinese manufacturers may divert excess capacities will continue to remain monitorable.

 

Capital structure was comfortable with adjusted gearing at 0.54 time as on September 30, 2024 (0.55 time as on March 31, 2024). Tangible networth, although healthy, had declined to Rs 1,484 crore as on September 30, 2024 (Rs 1,514 crore as on March 31, 2024) owing to net loss. Overall debt reduced to Rs 797 crore as on September 30, 2024, from Rs 835 crore as on March 31, 2024 because of debt repayment. While there was some recovery in profitability during the first nine months of fiscal 2025, adjusted interest coverage ratio (Ebitda plus other income divided by interest and finance cost) remained subdued at 2.16 times (0.15 time during the corresponding period of fiscal 2024). During fiscal 2025, MOL had redeemed balance preference shares from Epigral Ltd (as part of the demerger agreement) of Rs 94 crore. Furthermore, MOL also received insurance claim of Rs 44 crore.

 

During the first nine months of fiscal 2025, MOL incurred capex of Rs 78 crore which was largely for debottlenecking and maintenance. Debt repayment of ~Rs 170 crore and capex for fiscal 2025 is estimated to have been met by internal accrual of Rs 100-120 crore and balance through redemption of preference shares and insurance claim. MOL maintained an unencumbered liquid surplus of Rs 17 crore as on December 31, 2024. In addition, it had unutilised fund-based working capital lines of over Rs 120 crore for the nine months ended December 31, 2024, which provided additional cushion. Over the next two fiscals, the company is expected to generate net cash accrual of Rs 160-200 crore which would be adequate to meet debt obligation of Rs 155-160 crore in fiscal 2026 and Rs 125-130 crore in fiscal 2027. The company is not expected to incur any major capex over the medium term.

 

However, the ratings continue to reflect the established market position of MOL in the agrochemicals segment, diversified revenue in terms of products and end-user industries, and adequate operating efficiency due to integrated nature of operations. The ratings are also supported by healthy financial flexibility and extensive experience of the promoters in the agrochemicals and pigment segments. These strengths are partially offset by average debt protection metrics following deterioration in operational performance, large working capital requirement and exposure to risks inherent in the agrochemicals sector.

Analytical Approach

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 common management with operational links and fungible cash flow.

 

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 three pigment blue players globally and enjoys longstanding relationships with key customers. In agrochemicals too, the group is among the largest manufacturers of pesticides in India, having presence across the value chain in both technical and formulations. The group has more than 30 brands of various pesticide formulations in India. MOL, through the acquisition of KCL under an NCLT (National Company Law Tribunal) order, has also ventured into manufacturing TiO2, which is a white pigment used in the paints and coatings industry. There is a large demand-supply gap in India in this segment due to fewer players. Revenue in this segment is expected to ramp up after the implementation of ADD which is expected in the next couple of months.

 

Diversified revenue profile: About 70% of the group's revenue came from the agrochemicals division and the remaining from pigments in the first nine months of fiscal 2025. Revenue diversity is further augmented by the company’s presence in both domestic (~18%) and international markets (~82%). With ramping up of the multi-purpose plant and TiO2 facility, the product portfolio is likely to improve further. The company also ventured into the crop nutrition segment by introducing products such as nano urea, bio stimulants and micor nutrients. Revenue from this segment was Rs 6.2 crore during the first nine months of fiscal 2025. MOL became the first private player to manufacture nano liquid urea.

 

Integrated operations leading to cost advantages: The group has integrated backwards into manufacturing CPC blue, resulting in considerable savings. In its agrochemicals business, it 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 imports. With the commercialisation of the multi-purpose plant, the group has also developed capabilities to manufacture more technicals. Healthy integration of production facilities will support the business risk profile over the medium term.

 

Strong financial flexibility and extensive experience of the promoters: Financial flexibility is supported by a robust capital structure, with gearing remaining at 0.5 time as on December 31, 2024. This provides sufficient headroom to avail additional loans to tide over challenging situations. During fiscal 2025, MOL also got their working capital facilities enhanced to Rs 550 crore from Rs 310 crore in fiscal 2024.

 

Weaknesses:

Large working capital requirement: Operations are working capital intensive as the 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. Although exports partially offset dependence on the seasonal domestic agrochemicals market, it exerts pressure on the working capital cycle as the group has to provide credit of 3-4 months to overseas clients, resulting in stretched receivables. 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 the 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 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 policies of these countries will affect Indian agrochemical exporters such as the Meghmani group. Ban on any key molecules will also be monitorable.

 

Modest debt protection metrics: While adjusted interest coverage is estimated to improve, it remains modest at 2.5-3 times in fiscal 2025. Over the medium term, with an expected improvement in profitability, this metric is expected to improve to 4-7 times. Debt to Ebitda ratio, which is expected to remain high at over 6 times in fiscal 2025 due to lower-than-expected profitability, is expected to recover to below 3 times over the medium term, as cash from operations improves. The extent of revival in operational performance and, thus, debt protection metrics will remain monitorable.

Liquidity: Adequate

Liquidity is expected to be supported by strong financial flexibility and healthy capital structure providing sufficient headroom to raise additional funds in case of exigencies. MOL is estimated to have generated net cash accrual (NCA) of Rs 100-120 crore in fiscal 2025 which along with redemption of preference shares from Epigral of Rs 94 crore was adequate to meet debt obligation of ~Rs 170 crore and capex of Rs 80-90 crore. MOL had unencumbered cash surplus of around Rs 17 crore as on December 31, 2024. Furthermore, Rs 120-125 crore of fund-based working capital limits remained unutilised during the nine months ending 2025 providing additional cushion.

 

MOL is expected to generate NCA of Rs 160-200 crore during fiscals 2026 and 2027 which will be sufficient to meet debt obligation of Rs 155-160 crore in fiscal 2026 and Rs 125-130 crore in fiscal 2027 and nominal capex requirements. NCA along with liquid surplus and unutilised working capital limits are expected to support liquidity.

Outlook: Stable

Crisil Ratings believes that MOL will benefit from a higher scale of operations supported by sustained growth momentum from its core segments. Ramp up in MPP, nano crop nutrition and the TiO2 plant are also expected to support revenue growth going forward. Coupled with healthy geographical diversification, diversified product profile and steady double-digit margin, this will support its healthy business risk profile. The financial risk profile is expected to remain adequate, despite elevated debt levels, supported by improving cash generation and progressive debt repayment.

Rating sensitivity factors

Upward factors

• Sustenance of healthy performance marked by double-digit revenue growth, while maintaining operating margins at over 11-13%.
• Strong cash generation and prudent funding of capex and working capital leading to sustained healthy debt protection metrics.

 

Downward factors:

• Significant moderation in cash generation due to sluggish demand conditions and lower-than-expected operating margin.
• Slower-than-expected recovery in operating performance leading to debt/Ebitda sustaining at over 4-4.25 times.

About the Company

The Meghmani group was established in 1986 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 in 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.

Any other information: Not Applicable