| Meghmani Organics Limited | ||||||
| Ratings Reaffirmed | ||||||
| Rating Action | ||||||
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| 1 crore = 10 million | ||||||
| Refer to annexure for Details of Instruments & Bank Facilities |
| Detailed Rationale |
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CRISIL has reaffirmed its 'CRISIL A+/Stable/CRISIL A1' ratings on the bank facilities of Meghmani Organics Limited (MOL; part of the Meghmani group). |
| Analytical Approach |
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For arriving at the ratings, CRISIL 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. |
| Key Rating Drivers & Detailed Description |
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Strengths: * Established market position in the pigments and agrochemical industries, and diversified revenue 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. The group also has diversified revenue streams. In fiscal 2018, an estimated 35% of its revenue came from agrochemicals, 34% from pigments, and 31% from basic chemicals. Revenue diversity is augmented by presence in both domestic (55%) and international markets (45%). Healthy market position and diverse revenue base will help the group mitigate the impact of slowdown in any particular segment, and lend stability to its business, with revenue expected to grow 14% over the medium term. * Backward integration, 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 set up a facility 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. In the base chemicals segment too, the group has announced projects for manufacturing value-added products such as hydrogen peroxide and methylene dichloride from hydrogen and chlorine, which are by-products of existing manufacturing processes. CRISIL believes healthy integration of production facilities will stand the Meghmani group in good stead over the medium term, and profitability will remain healthy above 18%. * Comfortable financial risk profile The Meghmani group's financial risk profile is supported by adequate networth and gearing. Gearing is estimated to have improved to 0.45 time as on March 31, 2018, from 0.54 time a year before, supported by steady cash generation, and progressive repayment of long-term debt. Net cash accrual to total debt and adjusted interest coverage ratios are adequate, estimated at 0.67 time and 9.97 times, respectively, in fiscal 2018. The Meghmani group plans expansion, especially for caustic soda capacity in MFL, besides setting up capacity for new products, between fiscals 2019 and 2021. The group will undertake capex of Rs 720 crore, and nearly Rs 660 crore will be in MFL. Despite the capex and the transaction to acquire stake held by IFC, the group's credit metrics are expected to remain comfortable on the back of higher margins, improving cash generation, and scheduled repayment of term debt. Weaknesses: * Large working capital requirement The Meghmani group has large working capital requirement 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 believes the Meghmani group's working capital requirement will remain large because of the nature of its business. * Susceptibility to cyclicality in the chlor alkali segment The chlor alkali industry is intensely competitive and dominated by large players. The top seven players account for close to 50% of the market share. Furthermore, the industry is susceptible to governmental regulations and cyclicality. The profitability of the caustic soda manufacturing companies depends on the prevailing electrochemical unit (ECU) prices. Caustic soda and chlorine prices are volatile. Cyclical downturns or adverse changes in the demand-supply balance may result in lower realisations for caustic soda manufacturers. * 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. Fire at the group's pigment manufacturing unit at Dahej (Gujarat) in July 2016 disrupted operations for two weeks, when orders were serviced through the group's other units in Panoli and Vatva. The Dahej unit has since ramped up operations to optimal utilisation. |
| Outlook: Stable |
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CRISIL believes the Meghmani group's business risk profile will benefit over the medium term from steady demand and healthy profitability across segments. Furthermore, higher cash generation, healthy networth, and debt repayment will help the group maintain comfortable credit metrics despite large capex. The outlook may be revised to 'Positive' if the group strengthens its market position in principal business segments and successfully commissions new capacity and ramps-up operations thereafter, leading to substantially higher-than-expected revenue while sustaining healthy profitability and financial risk profile. The outlook may be revised to 'Negative' if revenue and profitability are significantly lower than expected or if capital structure weakens due to stretch in working capital cycle, additional large debt-funded capex, or steep decline in cash accrual. Funding of capex and timely stabilisation of operations after capacity expansion will be monitorables. |
| About the Group |
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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 July 2009, the group commissioned its caustic soda plant, which has capacity of 187,600 tonne per annum and is powered by a 60-megawatt captive power plant. MOL is listed on the Singapore Stock Exchange, National Stock Exchange of India Ltd, and BSE Limited. |
| Key Financial Indicators (Consolidated) | ||||||||||||||||||||||||
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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) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
$Interchangeable between Working Capital demand loan (WCDL)/Export Packing Credit (EPC)/ Preshipment Credit in Foreign Currency (PCFC) ^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 *Interchangeable between Overdraft/ Short Term Loan/Export & Local Bills Discounted/Export Invoice Financing !Interchangeable with buyer's credit |
| Annexure - Rating History for last 3 Years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| All amounts are in Rs.Cr. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annexure - Details of various bank facilities | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
$ Interchangeable between Working Capital demand loan (WCDL)/Export Packing Credit (EPC)/ Preshipment Credit in Foreign Currency (PCFC) ^ 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 * Interchangeable between Overdraft/ Short Term Loan/Export & Local Bills Discounted/Export Invoice Financing ! Interchangeable with buyer's credit | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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