| 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 ratings on Meghmani Organics Limited (MOL; part of the Meghmani Group) at 'CRISIL A+/Positive/CRISIL A1'. |
| 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 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. * Diversified revenue profile The group has diversified revenue streams with an estimated 38% of its revenue came from agrochemicals, 29% from pigments, and 34% from basic chemicals in fiscal 2019. Revenue diversity is further augmented by presence in both domestic (47%) and international markets (53%). Besides, new products in base chemicals, agrochemicals and pigments will add to further diversity in revenue streams. * 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. In the base chemicals segment too, the group has announced projects for manufacturing value-added products such as hydrogen peroxide, methylene dichloride, ECH, chloroform and carbon tetra chloride 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 20%. * Comfortable financial risk profile The Meghmani group's financial risk profile is supported by adequate networth and gearing. Gearing was 0.7 time as of March 31, 2019, 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, at about 0.5 times and 9 times, respectively, estimated for fiscal 2019. The Meghmani group has planned a capex of around Rs 1100 Cr between fiscals 2020 and 2022, largely towards expansion of caustic soda capacity and new facility for chloromethane, hydrogen peroxide and ECH in MFL, besides setting up capacity for new products in the agrochemical division. Despite this part debt funded capex, the group's credit metrics are expected to remain adequate on the back of healthy 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. However lower working capital requirements in base chemicals business partly offsets high GCA in agrochemical and pigments division. Nevertheless, 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 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. Ban on any key molecules will also be a monitorable. * Exposure to risks related to project implementation and stabilisation The group has four ongoing projects ' Capacity addition for CMS, Caustic Soda, Hydrogen peroxide and Agrochemicals, of which, one is in the early stage of implementation (Agrochemicals), two have made moderate progress (Caustic Soda and Hydrogen Peroxide) and one is recently commissioned (CMS). The company has also recently announced a new project (ECH) which is yet to be initiated and will come on stream over the medium term. This in turn exposes the group to project-related risks over the medium term such as the risk of time or cost overrun, stabilisation and ramp up in operations post completion. Significant delays in project implementation and stabilization can impact ability to generate cash flows and will remain a key rating sensitivity factor. 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 64 crore in fiscal 2020 and Rs 160-180 crore per annum in fiscals 2021 and 2022 and incremental working capital requirements. The group has also tied up long term loans for funding the incremental capex in the base chemicals business over fiscals 2020 to 2022. The group also has headroom in its fund based working capital limits, which have been utilized on average at about 49% over the past 12 months ended April 2019. |
| Outlook: Positive |
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CRISIL believes that Meghmani group's business performance will improve further over the medium term marked by improving product mix, higher revenue growth and healthy margins leading to healthy cash accruals. Besides, financial risk profile is also expected to remain healthy driven by comfortable capital structure and healthy accretion to reserves, despite large on-going capex plans. |
| 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 - List of entities consolidated | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| 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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