| Navratan Specialty Chemicals LLP | ||||||
| Rating outlook revised to 'Negative'; Ratings Reaffirmed | ||||||
| Rating Action | ||||||
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| Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings. | ||||||
| 1 crore = 10 million | ||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has revised its rating outlook on the long-term bank facilities of Navratan Specialty Chemicals LLP (NSCL) to ‘Negative’ from ‘Stable’ and reaffirmed the rating at ‘CRISIL BBB+’; the rating on short-term bank facilities is reaffirmed at ‘CRISIL A2’.
The revenue of NSCL grew 67% year on year in fiscal 2022 to Rs 271 crores from Rs 164 crores in FY21 majorly owing to increase in realizations by ~22% in FY22. Revenues were impacted in FY21 due to lockdowns imposed by the central government to contain the spread of Covid-19 in the first half of the fiscal 21 and first quarter of fiscal 22. However, revenue picked up sharply in the remaining 3 quarters of FY22 with pick up in outdoor advertising segment. During quarter 1 of fiscal 2023, company recorded revenues of ~Rs. 67 crore and for the full fiscal 2023 is expected to marginally cross the revenues of fiscal 2022.
Operating margin deteriorated to 2.1% in fiscal 2022 from 10.9% in fiscal 2021 primarily owing to sharp increase in price of major raw material PVC resin, the price of which is linked to crude oil prices. The increase was more pronounced during the fourth quarter following the breakout of the Russia-Ukraine war. Company couldn’t pass on the rise in raw material prices to customers as the sector was still recovering from the pandemic induced disruption over the past couple of years resulting in gross margins falling to ~16.5% in fiscal 2022 from ~25% in fiscal 2021. For fiscal 2023, company is expected to record operating margins of ~7% with PVC resin prices stabilizing currently.
However, despite lower operating margins, cash accruals were supported by higher other income. Total Debt as on March 31, 2022, is estimated at Rs 63 crores compared to Rs 61 crore a year earlier. Gearing remained at 0.69 times. Interest coverage moderated to 1.1 from 3.0 times in fiscal 2021 while net cash accrual to total debt (NCATD) remained similar at 21%. Further, it might be noted that ~80% of total debt was from group companies.
The ratings continue to reflect the extensive experience of the promoters, the Meghmani group, in the chemical industry, NSCL’s comfortable debt protection metrics and demonstrated need-based support from promoters. The rating action follows a deterioration in the company’s business risk profile as reflected in moderating margins and highlighting the limited flexibility of the company in passing on increase in raw material prices to customers. Further, central government revoked the anti-dumping duty on PVC flex films as on January 31st, 2022 which might further expose the company to competition from cheaper Chinese imports. The ratings also take into cognizance the intense competition in the flex banner segment, exposure to regulatory risks and further susceptibility to volatility in raw material prices. |
Key Rating Drivers & Detailed Description Strengths
Adequate financial risk profile: Net worth and gearing were healthy at an estimated Rs 91 crore and 0.69 times, respectively, as on March 31, 2022. Financial risk profile is expected to remain stable in the absence of any major capital expenditure (capex) and progressive repayment of long-term debt of Rs ~10 crore (around Rs 6 crore per annum) from cash accrual. Further, group companies, Meghmani Industries Ltd (‘CRISIL A+/Stable/CRISIL A1’) and Meghmani Dyes and Intermediaries LLP (‘CRISIL A+/Stable/CRISIL A1’), have extended need-based support to the company in the past. Currently, ~80% of the total debt is from the aforementioned group companies.
Moderation in business environment: The pandemic and the related restrictions had led to a moderation in outdoor advertising post fiscal 2020. NSCL also saw a fall in revenue in fiscal 2021 which subsequently picked up to ~Rs 271 crores in FY22 majorly driven by higher realizations. With demand expected to pick-up, revival in the outdoor advertisement segment will remain a key monitorable.
Exposure to regulatory risks: The domestic PVC flex banner industry faces stiff competition from China and Korea. In July 2010, the government of India imposed an anti-dumping duty of 1-13% on different types of flex. In August 2016, it extended the duty to PVC flex films imported from China for 5 years through fiscal 2021. However, central government revoked the anti-dumping duty on PVC flex films as on January 31st, 2022. This step could lead to increase in competition from import-led supply in the domestic flex banner industry as the removal of the anti-dumping duty will significantly impact domestic players such as NSCL, as Chinese imports are cheaper, their processors are world leaders in flex exports, and enjoy significant cost advantage, because of their scale of operations. |
Liquidity: Adequate Cash accruals, expected between Rs 15-17 per annum over the medium term should comfortably cover yearly debt repayment of Rs 6 crore and routine capex of ~2-3 crore. Furthermore, bank lines of Rs 40 crore were utilized only ~4% in the last 12 months. Moreover, need-based funding support from the promoters is expected to continue. |
Outlook: Negative CRISIL Ratings believes NSCL will be affected due to the removal of anti-dumping duty on PVC flex films. Furthermore, NSCL has high vulnerability to crude linked raw material prices affecting operating margins significantly as witnessed in FY22. Although continued support from group companies would ensure a comfortable financial risk profile, sustenance of healthy operating margins and changes in the business risk profile due to removal of anti-dumping duty would remain key monitorable. |
Rating Sensitivity Factors Upward Factors
Downward Factors
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About the Company Set up as a limited liability partnership in September 2011, NSCL is owned by the Gujarat-based Meghmani group and is promoted by the second generation of the founder’s family. The main shareholders are Mr Ankit Patel, Mr Lalit Patel, and Mr Karana Patel. The firm manufactures PVC flex banners and PVC board used for outdoor advertisement and has a total plant capacity of 79020 MT for production of PVC flex banners, PVC flooring, Fabrics, Foam board, WPC and Door Frames in Charodi (Gujarat). Navratan belongs to the Gujarat-based Meghmani group, promoted in 1977 by Mr. Natwarlal M. Patel and Mr. Rameshbhai M. Patel
NSCL is a part of the Meghmani Industries faction with two other companies including Meghmani Dyes and Intermediaries Limited (MDIL) and Meghmani Industries Limited (MIL). The key company in the larger group is Meghmani Organics Ltd ('CRISIL AA-/Stable/CRISIL A1+'). The group has 29 plants in and around Gujarat, and manufactures a wide range of dyestuffs, pigment powders, dye intermediates, and agrochemicals. |
Key Financial Indicators
*Provisional |
Any other information: Not applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
*Both way full interchangeability between fund-based and non-fund based working capital facilities |
| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||
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| All amounts are in Rs.Cr. | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annexure - Details of Bank Lenders & Facilities | |||
| Facility | Amount (Rs.Crore) | Name of Lender | Rating |
| Cash Credit | 40 | HDFC Bank Limited | CRISIL BBB+/Negative |
| Letter of credit & Bank Guarantee* | 28.5 | HDFC Bank Limited | CRISIL A2 |
| Long Term Loan | 11 | HDFC Bank Limited | CRISIL BBB+/Negative |
| Proposed Working Capital Facility | 25.27 | Not Applicable | CRISIL BBB+/Negative |
Criteria Details
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