Rating Rationale
August 19, 2020 | Mumbai
NOCIL Limited
Ratings Reaffirmed
 
Rating Action
Total Bank Loan Facilities Rated Rs.200 Crore
Long Term Rating CRISIL AA/Stable (Reaffirmed)
Short Term Rating CRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has reaffirmed its 'CRISIL AA/Stable/CRISIL A1+' ratings on the bank loan facilities of NOCIL Limited (NOCIL).
 
The ratings continue to reflect NOCIL's healthy business risk profile marked by its leading market position in the rubber chemicals industry in India and established clientele as well as robust financial risk profile marked by nil debt. The strengths are partially offset by high revenue dependence on the tyre industry and exposure to competition from imports and risks associated with the ramp up of expanded capacities.
 
Operating performance is likely to be impacted in fiscal 2021 as Covid-19 pandemic is expected to impact the demand from auto industry, which contributes to around 70% of the NOCIL's revenue. Revenues are expected to move in tandem with normalisation of the auto sector and Indian economy. Resultantly the operating profitability is expected to witness some aberrations in near term. However, the financial risk profile remains healthy with nil debt and comfortable liquidity as at June 20 end.
 
Earlier in fiscal 2020, the company posted revenue de-growth of 19% contributed 4% lower volumes and remaining by realisations. The operating margins were also declined in fiscal 2020 to 21.2% from 27.9% in fiscal 2019 owing to de growth in the auto sector coupled with cessation of anti-dumping duty (ADD) from August 2020. The anti-dumping duty was present on 6 (out of 22) of its products contributing 50% to overall revenues in fiscal 2019. NOCIL has filed ADD petition for one of its products and investigations have started around it. If accepted, it may benefit operating margins for the company. The development around ADD and operating profitability remaining above 17-18% on sustainable basis, will remain a key monitorable.  
 
Furthermore, NOCIL has almost completed its ongoing capacity expansion programme (of Rs 450 crore), phase 2 of which will be capitalised by the third quarter of fiscal 2021. No major capex is expected over the medium term.
 
Over the medium term, NOCIL's growth will be driven by ramp up in new capacities to cater new orders, higher share of business with its key customers resulting in further improvement in product and geographic diversity. Furthermore, with restricted tyre imports, domestic tyre manufacturers are expected to operate at higher rate, thereby increasing domestic demand for NOCIL. This is expected to support ramp up of capacities.
 
Financial risk profile remains strong in the absence of any debt obligation. Bank lines remain unutilised, and net cash accrual should be sufficient to meet capital expenditure (capex) requirements and support working capital.

Analytical Approach

CRISIL has combined the business and financial risk profiles of NOCIL and its wholly owned subsidiary, PIL Chemicals Ltd.

Please refer Annexure - Details of Consolidation, which captures the list of entities considered and their analytical treatment of consolidation.
 

Key Rating Drivers & Detailed Description
Strengths
* Healthy business risk profile
NOCIL's healthy business risk profile is marked by its leading market position in the rubber chemicals industry in India (with around 40% market share) and its established clientele. The company is also among the few players globally with a wide product basket of 22 rubber chemicals. Furthermore, it has been able to maintain healthy relationships with major domestic and global tyre manufacturers for over 40 years, backed by its ability to meet their stringent quality requirements. NOCIL, therefore, has good international presence. In fiscal 2020, exports contributed 35% of the total revenue.
 
Commissioning of new capacities, at a time when global customers are diversifying their vendor base away from Chinese specialty chemical manufacturers, will benefit NOCIL to ramp up its new capacities faster and gain market share in global supply chain of rubber chemicals in the medium term. Substantial increase in market share in rubber chemicals in the medium term will be key rating driver.
 
Driven by strong R&D capabilities, the company has developed a process for producing a key intermediate, and has also set up and stabilised a green field production facility in Dahej. With commencement of production at the new facility in fiscal 2014, the company reported significant improvement in operating efficiencies and operating margin. The company's R&D prowess is also reflected in its large basket of 22 rubber chemicals as well as increasing contribution of value-added products. Benefits derived from the strong R&D facilities should continue to support business risk profile.
 
* Robust financial risk profile
Financial risk profile is robust, with net worth of Rs 1,184 crore as on March 31, 2020, and a debt-free balance sheet.  Given the company's healthy business risk profile and improving exports, annual net cash accrual will remain sufficient to fund the working capital requirement over the medium term. Also, no major capex is expected to happen over the medium term. Hence, reliance on borrowings is expected to remain minimal. Any additional capital expenditure and its funding will remain a key rating sensitivity factor over the medium term.
 
Weaknesses
* High revenue dependence on the tyre industry
NOCIL derives almost two-thirds of its revenues from the tyre industry. The commercial vehicle (CV) industry, which contributes a sizeable proportion to tyre demand in value terms, is the most cyclical, and also resorted to large scale imports of tyres from China and South East Asian countries in the recent past, until an anti-dumping duty was levied on imported tyres in fiscal 2018. While this has led to pick up of demand for the domestic tyre manufacturers and augurs well for input suppliers such as NOCIL, its performance nevertheless partly remains exposed to the demand pattern of the automotive sector.
 
* Competition from imports and risks associated with ramp up of expanded capacities
The domestic rubber chemicals sector faces steep competition from imports primarily from China, and Korea. These players have an advantage of large capacities and government support. In view of significant injury to the domestic industry as a result of dumping by these countries, the Government of India has levied an anti-dumping duty on import of such products in April 2014. The benefits of the duty were available to the company till July 2019. The government stance post July 2019 has an impact on the operating profitability of NOCIL and remains a key monitorable.   
 
Considering the long-term demand potential from the domestic and global tyre industry, the company carried out capacity expansions in Navi Mumbai and Dahej. Although the capex is almost completed, ramp up of the facilities remains critical. With a slowdown in domestic demand, timeliness in receipt and supply of orders to new customers and geographies is crucial for ramping up the facilities.
Liquidity Strong

Liquidity is healthy. The entire fund- based facilities remain unutilised. Also, the capex of Rs 450 crore between fiscals 2019 and 2020 was funded via accruals and no major capex are announced over the medium term. Hence, reliance on borrowings is expected to remain minimal.

Outlook: Stable

CRISIL believes NOCIL will maintain its robust financial risk profile with near debt-free balance sheet over the medium term. Furthermore, continued strong market position should help ramp up the enhanced capacities.
 
Rating sensitivity factors
Upward factors
* Significant and sustained improvement in scale of operations, backed by increased share of exports and value-added products, leading to sustained increase in global market share along with steady profitability margin over 25% on sustained basis and
* Sustenance of robust financial risk profile and material build-up of liquid surpluses
 
Downward factors
* Weaker than expected operating performance leading to operating profitability below 17% on a sustained basis
* Increase in debt on account of more-than-expected debt-funded capex / acquisition or dividend payout

About the Company

NOCIL, part of the Arvind Mafatlal group, is India's largest rubber chemicals manufacturer. The promoters held 34.03% stake in the company as of June 30, 2020, and the remaining stake was held by public and others, including mutual funds and insurance companies.
 
The company follows an integrated approach wherein it manufactures intermediates as well as a wide range of final products across two manufacturing facilities in Navi Mumbai and Dahej. NOCIL manufactures four categories of products:
* Accelerators: These help increase the speed of vulcanisation to improve productivity
* Anti-degradants/anti-oxidants: These are the ingredients in rubber compounds that deter ageing or inhibit degradation caused due to oxygen attack of rubber products, thereby enhancing their service life
* Pre-vulcanisation inhibitors: These help prevent premature vulcanisation of synthetic and natural rubbers during processing, thus reducing scrap
* Post-vulcanisation stabilisers: These improve the thermal stability of cross links in rubber products

Key Financial Indicators
Particulars Unit 2020 2019
Revenue from operations Rs crore 846 1043
Profit after tax (PAT) Rs crore 131 185
PAT margin % 15.5 17.7
Adjusted debt/adjusted net worth Times 0.00 0.00
Current Ratio Times 3.0 3.6

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments and are included (where applicable) in the Annexure -- Details of Instrument in this Rating Rationale. For more details on the CRISIL complexity levels, please visit www.crisil.com/complexity-levels.
Annexure - Details of Instrument(s)
ISIN Name of instrument Date of allotment Coupon rate (%) Maturity date Complexity Level Issue size (Rs crore) Rating assigned with outlook
NA Cash credit NA NA NA NA 95.0 CRISIL AA/Stable
NA Letter of credit and bank guarantee NA NA NA NA 55.0 CRISIL A1+
NA Proposed cash credit NA NA NA NA 25.0 CRISIL AA/Stable
NA Proposed letter of credit and bank guarantee NA NA NA NA 25.0 CRISIL A1+

Annexure - List of entities consolidated
Names of Entities Consolidated Extent of Consolidation Rationale for Consolidation
PIL Chemicals Limited Full Subsidiary
Annexure - Rating History for last 3 Years
  Current 2020 (History) 2019  2018  2017  Start of 2017
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund-based Bank Facilities  LT/ST  120.00  CRISIL AA/Stable      28-06-19  CRISIL AA/Stable  27-03-18  CRISIL AA/Stable    --  -- 
Non Fund-based Bank Facilities  LT/ST  80.00  CRISIL A1+      28-06-19  CRISIL A1+  27-03-18  CRISIL A1+    --  -- 
All amounts are in Rs.Cr.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Cash Credit 95 CRISIL AA/Stable Cash Credit 95 CRISIL AA/Stable
Letter of credit & Bank Guarantee 55 CRISIL A1+ Letter of credit & Bank Guarantee 55 CRISIL A1+
Proposed Cash Credit Limit 25 CRISIL AA/Stable Proposed Cash Credit Limit 25 CRISIL AA/Stable
Proposed Letter of Credit & Bank Guarantee 25 CRISIL A1+ Proposed Letter of Credit & Bank Guarantee 25 CRISIL A1+
Total 200 -- Total 200 --
Links to related criteria
CRISILs Approach to Financial Ratios
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating criteria for manufaturing and service sector companies
Rating Criteria for Chemical Industry
CRISILs Criteria for Consolidation

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