| Neogen Chemicals Limited | ||||||
| Rating outlook revised to 'Positive'; 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 revised its rating outlook on the long-term bank facilities of Neogen Chemicals Limited (NCL) to 'Positive' from 'Stable' and reaffirmed the rating at 'CRISIL BBB+'; the rating on the short-term facility has been reaffirmed at 'CRISIL A2'. |
| Key Rating Drivers & Detailed Description |
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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 increasing competition. Capital expenditure (capex) of Rs 70-80 crore is expected over the medium term for doubling the existing capacities, which would drive growth. Revenue is expected to grow to Rs 280-300 crore in fiscal 2020 and reach Rs 450-500 crore over the medium term, with a sustained operating margin of 18-19%. * Improved financial risk profile The networth and total outside liabilities to adjusted networth (TOLANW) ratio were Rs 69 crore and 2.6 times, respectively, as on March 31, 2019. The Rs 70 crore of equity raised in May 2019 through an IPO were utilised to reduce existing term debt and to partly fund working capital requirements, thereby strengthening the capital structure. The TOLANW ratio is expected to improve to around 1 time by the end of fiscal 2020. The capex of Rs 70-80 crore in fiscal 2020 and 2021 towards expansion of capacities will be 40-50% debt funded. While the absolute debt level is expected to increase to Rs 150-200 crore due to the debt-funded capex and incremental working capital financing, the capital structure should be sustained with the TOLANW ratio at around 1 time, over the medium term, backed by steady accretion to reserves and debt repayment. Debt protection metrics were above average, with interest coverage and net cash accrual to total debt ratios of 3.7 times and 0.2 time, respectively, in fiscal 2019, and are expected to improve further over the medium term. Weaknesses * Large working capital requirement GCAs were 240 days as on March 31, 2019, driven by debtors and inventory of 103 days and 135 days, respectively. Receivables cycle is driven by credit of up to 90 days and 120 days is provided to domestic and global customers, respectively, exposing the company to the risk of bad debts. However, a longstanding relationship with clients, and a diversified customer base allows the company to control its counterparty risks. While GCAs have remained high, it was consistently managed at 235-240 days in the past two fiscals. The company is in the process of renegotiating credit terms with clients and the debtor cycle is expected to reduce to 80-90 days from 103 days as on March 31, 2019, over the medium term. A large product portfolio (198 products) and the long lead time involved in import of raw materials drive the inventory cycle, which is likely to remain at 130-135 days in fiscals 2020 and 2021. Improvement is expected in fiscal 2022 once the enhanced capacities and improved scale of operations enable dedicated manufacturing lines for higher number of products, leading optimisation of inventory. The overall working capital cycle is expected to improve over the medium term with GCAs reducing by 20-30 days (10-15 days improvement is expected over the near term) * Exposure to risks associated with large capex: The capex of Rs 70-80 crore over the medium term will be funded partially by debt. The capex is aimed at doubling the inorganic and organic compounds capacities by the end of fiscals 2020 and 2021, respectively. While the inorganic capacity expansion is in progress and expected to be completed on schedule, required approvals for organic capacity expansion are expected in a short time and the capacity expansion is expected to begin within couple of months. Timely progress of the expansion within the estimated budget and scale up in utilization as per expectation is a key monitorable. * Exposure to foreign exchange volatility and to changes in government regulations NCL derives around 50% 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: Adequate Liquidity is adequate as indicated by the comfortable cushion between cash accrual and repayment obligation. Cash accrual is expected at Rs 24-30 crore, against repayment obligation of Rs 5-10 crore, per fiscal over the medium term. Average utilisation of bank lines has remained moderately high at 87% in the 12 months through July 2019. The capex of Rs 70-80 crore towards capacity addition will be funded by internal cash accrual and term loans. Improved capital structure has strengthened its financial flexibility and NCL should be able to enhance its working capital limits to fund growth, if required. |
| Outlook: Positive |
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CRISIL believes the business risk profile is likely to benefit from the established market position, favourable demand from international markets and improved utilisation of existing capacities. |
| About the Company |
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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. |
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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) | |||||||||||||||||||||||||||||||||||
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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 | ||||||||||||||||||||||||||||||||||||||||||||||||
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