Rating Rationale
August 10, 2022 | Mumbai
Neogen Chemicals Limited
Rating outlook revised to 'Positive'; Ratings Reaffirmed
 
Rating Action
Total Bank Loan Facilities RatedRs.225 Crore
Long Term RatingCRISIL A-/Positive (Outlook revised from 'Stable'; Rating Reaffirmed)
Short Term RatingCRISIL A2+ (Reaffirmed)
1 crore = 10 million
Refer to Annexure for Details of Instruments & Bank Facilities

Detailed Rationale

CRISIL Ratings has revised it outlook on the long term bank loan facilities of Neogen Chemicals Limited (NCL) to ‘Positive’ from ‘Stable' while reaffirming the rating at ‘CRISIL A-’. The short term rating has been reaffirmed at ‘CRISIL A2+’

 

The revision in outlook reflects improvement in business risk profile backed by expected growth in revenue with sustained operating margins. Scale up in capacity utilization rates , improved contribution from custom synthesis & contract manufacturing segment and advanced intermediaries is expected to support growth and profitability. The revision in outlook also reflect, expected lower reliance on external debt to fund the on going capital expenditure; leading to healthy leverage and debt protection metrics over the medium term. Volume growth, impact of any unfavorable movement in realizations on performance and expected improvement in working capital cycle shall remain a key monetorable

 

The ratings continue to reflect an established market position in the specialty chemical segment, healthy operating efficiency, and a Strong financial risk profile. These strengths are partially offset by large working capital requirement, exposure to foreign exchange volatility and to changes in government regulations

Key Rating Drivers & Detailed Description

Strengths:

  • Established market position and healthy operating efficiency: The extensive experience of the promoter and the proven track record in developing bromine and lithium derivatives continues to support the business risk profile. Research and development initiatives have enabled the shift in focus to more niche, high value-added products, from bulk bromine-based compounds in the 1990s. Constant efforts to control the cost of production per unit have helped maintain a healthy operating margin, despite the competition. Company has commenced operations of its enhanced organic facilities in September and October 2021; incremental reactor capacity of 127000 litres should support revenue growth over the medium term.  Company has also roped in new customers in the custom synthesis segment and new products are also being introduced, driving revenue over medium term strengthening business risk profile. Ongoing capex plan of around Rs 150 crore to enhance capacities across organic, inorganic segment should support growth over medium to long term.

 

  • Healthy financial risk profile: The networth improved in fiscal 2022, supported by equity infusion of Rs 225 crore, through issuance of shares on preferential basis, in last quarter of the fiscal. Networth improved to Rs 439 crore as on 31st March 2022 from Rs 183 crore at the end of previous fiscal. Leverage levels have improved with total outside liabilities to adjusted networth ratio of 0.8 times at the end of fiscal 2022 from 1.8 times at the end of previous fiscal. The  company has ongoing capex of around Rs 150 crore; expected to be largely funded by internal accruals; hence the leverage levels are expected to be sustained below 1 time over the medium term.

 

Debt protection metrics were strong, with interest coverage and net cash accrual to total debt ratios of 4.6 times and 0.2 times in fiscal 2021. With no significant increase in debt expected over near term, lower reliance on external debt to fund the capital expenditure over the medium term and sustained profitability, debt protection metrics is expected to further improve over medium term.

 

Weaknesses:

  • Large working capital requirement: GCAs were 299 days as on March 31, 2022 (259 days as on March 31, 2021), driven by debtors and inventory of 85 and 206 days, respectively. Receivable’s cycle is driven by credit of up to 90 and 120 days provided to domestic and global customers, respectively.  Inventory level as on March 31 2022 and 2021 were higher than normal due to increase in raw material prices and higher inventory maintained to tackle delay in shipments and supply disruptions. Large product profile and many products without dedicated reactor capacity has also led to higher inventory. Inventory cycle is expected to improve to 130-165 days over the medium backed by expected moderation in input prices, increase in number of molecules with dedicated inventory and managements focus on rationalising inventory levels. Receivable cycle is expected to remain stable. The overall working capital cycle is expected to remain large with GCAs of around 230-250 days over the medium term

 

  • Exposure to foreign exchange volatility and changes in government regulations: NCL derives around 45% of its revenue from exports to multiple geographies and hence exposed volatility in foreign exchange rates. However, the risk is partially mitigated by imports of around 45-50% providing a natural hedge and monthly price reset arrangements with its customers to pass though foreign exchange movements. Bromine, being a corrosive and hazardous material, is subject to environmental and other government regulations, any adverse change in these regulations, in any of the markets it operates, could impact the business risk profile of the company.

Liquidity: Strong

Net cash accruals (NCA) were Rs.49.6 crore in fiscal 2022, adequate to meet debt obligations of Rs 19-20 crores. NCA is expected to improve to Rs.60-80 crore per fiscal over the medium term against debt obligation in the range of 22-27 crore per fiscal over the medium term. Average utilization of bank lines has been moderate at 70.1% over the past 12 months ended in May 2022. Capex of Rs 150 crore expected over fiscal 2023 to 2024 is adequately funded by proceeds of equity infusion and internal cash accruals. Strong leverage levels and ability to raise funds from capital markets continue to support financial flexibility.

Outlook: Positive

CRISIL Ratings believes the business risk profile is expected to benefit from its established market position, enhanced capacities and new products & customers being introduced

Rating Sensitivity Factors

Upward Factors:

  • Sustained revenue growth backed by improvement in capacity utilisation and improved operating margins supported by higher contribution from contract manufacturing and value-added products strengthens net cash accruals to above Rs 60 crores
  • Improvement in working capital cycle with GCA improving to around 240-250 days and sustenance of financial risk profile, with TOLANW sustained around 1 time

 

Downward Factors:

  • Delay in improvement in capacity utilisation or sluggish order book, leading to modest growth in revenue and profitability constraining net cash accruals to below Rs 40 crore
  • Higher than expected working capital requirement with GCA sustained above 280 days or larger-than-expected debt-funded capital expenditure or acquisition or large  dividend pay-out, weakens the financial risk profile

About the Company

NCL was incorporated in 1991, promoted by Mr Haridas Kanani. The company manufactures bromine and lithium-based organic and organo-metallic compounds, used in the pharmaceutical, agricultural chemicals, and engineering industries. The manufacturing units are at Mahape in Navi Mumbai, Maharashtra, and Vadodara in Gujarat. The company made an IPO in May 2019 and is currently listed on the Bombay Stock Exchange and the National Stock Exchange

Key Financial Indicators

Particulars

Unit

2022

2021

Revenue

Rs.Crore

487.3

336.4

Profit After Tax (PAT)

Rs.Crore

44.7

31.4

PAT Margin

%

9.2

9.3

Adjusted debt/adjusted networth

Times

0.5

1.3

Interest coverage

Times

4.6

4.7

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL Ratings' complexity levels are assigned to various types of financial instruments. The CRISIL Ratings' complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL Ratings' 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)

ISIN Name of instrument Date of
allotment		 Coupon
rate (%)		 Maturity
date		 Issue size
(Rs.Crore)		 Complexity 
levels		 Rating assigned
with outlook
NA Cash Credit NA NA NA 30 NA CRISIL A-/Positive
NA Cash Credit NA NA NA 75 NA CRISIL A-/Positive
NA Letter of Credit NA NA NA 5.5 NA CRISIL A2+
NA Long Term Bank Facility NA NA Aug-25 32 NA CRISIL A-/Positive
NA Long Term Loan NA NA Jan-24 5 NA CRISIL A-/Positive
NA Proposed Long Term Bank Loan Facility NA NA NA 21.5 NA CRISIL A-/Positive
NA Term Loan NA NA Mar-26 13 NA CRISIL A-/Positive
NA Term Loan NA NA Mar-28 40 NA CRISIL A-/Positive
NA Working Capital Demand Loan NA NA NA 3 NA CRISIL A-/Positive
Annexure - Rating History for last 3 Years
  Current 2022 (History) 2021  2020  2019  Start of 2019
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund Based Facilities LT 219.5 CRISIL A-/Positive 07-01-22 CRISIL A-/Stable 27-01-21 CRISIL A-/Stable   -- 31-10-19 CRISIL BBB+/Positive CRISIL BBB+/Stable
      --   -- 25-01-21 CRISIL A-/Stable   -- 07-01-19 CRISIL BBB+/Stable --
Non-Fund Based Facilities ST 5.5 CRISIL A2+ 07-01-22 CRISIL A2+ 27-01-21 CRISIL A2+   -- 31-10-19 CRISIL A2 CRISIL A2
      --   -- 25-01-21 CRISIL A2+   -- 07-01-19 CRISIL A2 --
All amounts are in Rs.Cr.
Annexure - Details of Bank Lenders & Facilities
Facility Amount (Rs.Crore) Name of Lender Rating
Cash Credit 30 DBS Bank India Limited CRISIL A-/Positive
Cash Credit 75 Citibank N. A. CRISIL A-/Positive
Letter of Credit 5.5 State Bank of India CRISIL A2+
Long Term Bank Facility 32 State Bank of India CRISIL A-/Positive
Long Term Loan 5 Citibank N. A. CRISIL A-/Positive
Proposed Long Term Bank Loan Facility 21.5 Not Applicable CRISIL A-/Positive
Term Loan 13 Citibank N. A. CRISIL A-/Positive
Term Loan 40 HDFC Bank Limited CRISIL A-/Positive
Working Capital Demand Loan 3 State Bank of India CRISIL A-/Positive

This Annexure has been updated on 10-Aug-22 in line with the lender-wise facility details as on 25-Sep-21 received from the rated entity.

Criteria Details
Links to related criteria
CRISILs Approach to Financial Ratios
Rating criteria for manufaturing and service sector companies
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating Criteria for Chemical Industry
CRISILs Criteria for rating short term debt

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