| Nikhil Adhesives Limited | ||||||
| Ratings reaffirmed at 'CRISIL BBB- / CRISIL A3 '; outlook revised to 'Positive' | ||||||
| Rating Action | ||||||
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| 1 crore = 10 million | ||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has revised its outlook on the long-term bank loan facilities of Nikhil Adhesives Limited (NAL) to ‘Positive’ from ‘Stable’ and reaffirmed the rating at ‘CRISIL BBB-/CRISIL A3’.
The revision in outlook reflects expectation of improved business risk profile, driven by healthy and sustained growth in operating income along with better operating margin; and accordingly expectation of a sustained improvement in financial risk profile.
Operating income was Rs 489.14 crore in fiscal 2021, thus registering a 16% y-o-y growth. The revenue growth has been supported by a 10.3% y-o-y growth in volumes and 4.1% y-o-y growth in realizations. Going ahead, revenue is expected to grow by 10-12% over the medium term, which will continue to be driven by improved demand from its diversified end-user industry and favourable prices. Operating margin also inched up to 6.4% in fiscal 2021 (as against 4.6% in fiscal 2020; primarily on account of lower expenses towards travelling and conveyance, advertising, flattish employee expenses and some gains due to low cost inventory), thereby leading to generation of healthy accruals of Rs 18.4 crore in fiscal 2021 (as against Rs 9.35 crore in fiscal 2020). While operating margins may see moderation in the current fiscal, the same are expected to remain on higher side supported by better realisations and healthy demand.
Networth improved to Rs 60.9 crore (as on 31st March 2021) supported by healthy accretion to reserves. The healthy accruals have also supported the liquidity, thereby resulting in low dependence on external debt, which has thus supported the capital structure, reflected in low gearing of 0.42 time as on 31st March 2021.
The ratings reflect established relations with the customers and suppliers supported by extensive experience of the promoters, acquired technology and well-known brand; along with comfortable financial risk profile and healthy operating efficiencies. These rating strengths are partially offset by moderate scale of operations amidst large and well-established players and moderately high working capital requirements. |
Unsecured loans (of Rs 2.29 crore as on 31st March 2021), extended by promoters, have been treated as debt. |
Key Rating Drivers & Detailed Description Strengths: * Established relations with the customers and suppliers supported by extensive experience of the promoters, acquired technology and well-known brand: NAL has a strong business profile, backed by its promoters’ extensive experience of over three decades in the emulsions and adhesive manufacturing industry. Their extensive experience in the industry has helped the company establish its name and thus association with large and reputed clientele like Akzo Nobel, Dow Chemicals, Kansai Nerolac and Asian Paints for paint emulsions. In 2003, NAL had acquired the emulsion business of Mafatlal Dyes and Chemicals Limited along with their Registered Brands, Hoechst German Technology, machinery and the technical and marketing teams. This has helped support the business risk profile of the company. Company is selling its products under the brands – Mahacol, Emdilith, Emdicryl and Emditex, etc., which are well-known brands in the market. On the back of its established position, its established customer base and its diversified product portfolio, NAL’s revenue has been able to grow at a healthy CAGR of 12.6% over the last five fiscals ended 2021 to record Rs 489.14 crore. Since the company is engaged in multiple segments like paint emulsions, textile adhesives, consumer adhesives, industrial adhesives and construction chemicals, hence this mitigates the risk from concentration in any one particular segment and thus supports the overall margin.
* Comfortable financial risk profile: The networth was healthy at Rs 60.9 crore, leading to a low gearing at 0.42 time, as on March 31, 2021. The net cash accrual to adjusted debt and interest coverage ratio were adequate at 0.72 time and 4.7 times respectively in fiscal 2021. This is however partially offset by moderately high total outside liabilities to tangible networth (TOLTNW) ratio of 3.67 times as on March 31, 2021. With moderate profitability, sustenance of the working capital cycle, and absence of any major debt-funded capital expenditure plans, the financial risk profile should remain comfortable over the medium term.
Weaknesses: * Moderate scale of operations amidst large and well-established players: The revenue growth has been supported by the healthy demand, favourable prices, and healthy offtake from the new plants. Despite revenue improving over the last 5 fiscals from Rs 270.3 crore in fiscal 2016 to Rs 489.1 crore in fiscal 2021, scale remains moderate amidst the other large and well-established players. The adhesive industry India is dominated by large companies like Pidilite Industries Ltd ('CRISIL AAA/Stable/CRISL A1+') and Jesons Industries Limited (CRISIL A-/Stable/CRISIL A2+) which control over 50% of the market share. Pidilite has established its position as the leading adhesives manufacturer enjoying the strongest brand recognition. Operating margin is moderate ranging between 3.5% - 4.5% for the past five fiscals ended 2020; operating margin improved to 6.4% in fiscal 2021 (a one-off instance due to lower expenditure towards travelling and conveyance and advertising and flattish employee expenses).
* Moderately high working capital requirements: NAL has moderately high working capital requirements, with Gross Current Asset (GCA) days ranging between 120-145 days over last five fiscals ended 2020. GCA days were 171 days as on 31st March 2021 driven by debtors and inventory of 114 days and 57 days, respectively, due to higher quantum of sales in Q4 FY21. NAL offers credit period of up to 60 to 90 days to its customers, which is in line with the industry, in order to remain competitive, on account of which its debtors holding remains moderately high. NAL maintains inventory of 30 to 40 days since NAL has to keep the raw material and finished goods inventory to ensure regular production. GCA days are expected to remain moderately high at around 120-130 days over the medium term. |
Liquidity: Adequate Liquidity is adequate driven by low utilization in the bank lines, which averaged at 32% over the 12 months ended June-2021. Company is expected to generate net cash accruals of Rs 13-17 crore per fiscal, which will be more than adequate to cover repayments of Rs 5-6 crore per fiscal over the medium term. Liquidity is also supported by unsecured loans of Rs 2.29 crore (as on 31st March 2021). These are extended by promoters. |
Outlook: Positive CRISIL Ratings believes that NAL’s business risk profile will continue to improve driven by the healthy demand and favourable prices and will benefit from the extensive experience of its promoters and established relationships with customers and suppliers. |
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About the Company Incorporated in 1982 and based in Mumbai, NAL is promoted by Mr. Umesh Sanghavi, Mr. Rajesh Sanghavi, Mr. Tarak Sanghavi and Mr. Ashok Sanghavi. The company is ISO 9001 certified and is engaged in the manufacturing of speciality adhesives and emulsion through its manufacturing facilities in Dahanu (Maharashtra), Silvassa (Dadra Nagar Haveli), Dahej (Gujarat), and Bangalore (Karnataka) while its registered office is based in Mumbai. The company also trades in chemicals used in emulsions and adhesives industry. |
Key Financial Indicators
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Status of non cooperation with previous CRA: NAL has not co-operated with INFOMERICS Valuation and Rating Private Limited (Infomerics) which has classified it as 'non-cooperative' vide release dated Feb 01, 2021. The reason provided by Infomerics is non-furnishing of information for monitoring of ratings. |
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)
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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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Criteria Details
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