Rating Rationale
April 09, 2020 | Mumbai
Nikhil Adhesives Limited
Ratings removed from 'Watch Developing' ; Ratings Reaffirmed
 
Rating Action
Total Bank Loan Facilities Rated Rs.100 Crore
Long Term Rating CRISIL BBB-/Stable (Removed from 'Rating Watch with Developing Implications'; Rating Reaffirmed)
Short Term Rating CRISIL A3 (Removed from 'Rating Watch with Developing Implications'; Rating Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has removed its ratings on the bank facilities of Nikhil Adhesives Limited (NAL) from 'Rating Watch with Developing Implications' and has reaffirmed the ratings at 'CRISIL BBB-/CRISIL A3' while assigning a 'Stable' outlook.
 
CRISIL had placed its ratings on the bank facilities of NAL on watch on March 17, 2020, following the inability of the company to meet its debt obligations due to the imposition of moratorium on deposits with yes Bank. This impacted company's ability to service debt in a timely manner despite having the cushion in liquidity and willingness to repay the debt. The company had working capital facilities with Yes Bank.
 
Subsequently, the debt obligations have been paid post the lifting of moratorium of Yes Bank.  
 
CRISIL has taken cognizance of the restrictions on economic activity, including closure of all non-essential manufacturing plants, due to the spread of Novel Coronavirus (Covid-19). This will impact the company's performance in fiscal 2021 as against CRISIL's earlier expectations. Impact of Covid-19 related restrictions applicable post April 14, 2020 will remain a key monitorable.
 
The ratings continues to reflect extensive industry experience of the promoters, moderate financial risk profile and controlled working capital management. These strength are partially offset by moderate scale of operations and exposure to intense competition in the adhesives industry.

Key Rating Drivers & Detailed Description
Strengths: 
* Extensive industry experience of the promoters:
NAL has a strong business profile, backed by its three decades of operations in the emulsions and adhesive manufacturing industry. Mr. Umesh Sanghavi and all his three brothers have withstood the industry cycles in last 3 decades. The promoter's experience in the industry has helped the company establish its name and thus association with large and established customers like Akzo Nobel, Dow Chemicals, Kansai Nerolac and Asian Paints for paint emulsions. On the back of its established position, its established customer base and its diversified product portfolio, NAL has been able to register healthy growth in the last five years.
 
* Moderate financial risk profile:
The networth was comfortable at Rs 39.5 crore, leading to a comfortable gearing at 0.86 times, as on March 31, 2019. The net cash accrual to adjusted debt and interest coverage ratio were adequate at 0.20 time and 2.18 times respectively in fiscal 2019. 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 moderate over the medium term.
 
* Moderately controlled working capital management:
NAL is able to manage its working capital prudently as reflected in stable GCA of 120 to 140 days over the past five years. NAL offers credit period of upto 60 to 90 days to its customers, which is in line with the industry 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 as it imports 80% of its raw material requirements.
 
Controlled working capital and sustained profitability has kept the Return on Capital employed (RoCE) healthy in the range of 17% to 21% over the past four years through fiscal 2019.
 
Weaknesses:
* Moderate scale of operations:
Despite revenue improving over the last 4 years from Rs 270.3 crore in fiscal 2016 to Rs 446 crore in fiscal 2019, scale remains moderate. However, operations are expected to ramp up over the medium term because of new value addition capacity and assured sales from its new unit in Bangalore and increasing demand from its customers.

The adhesive industry India is dominated by large companies like Pidilite Industries Ltd ('CRISIL AAA/Stable/CRISL A1+') which controls over 50 per cent of the market share. Pidilite has established its position as the leading adhesives manufacturer enjoying the strongest brand recognition. Brand recognition has resulted in it having strong pricing power in the products it manufactures. Although, NAL manufactures products that cater to diverse applications, it owns a very small market share (less than 5 per cent) as compared to larger players
 
* Operations vulnerable to raw material prices:
NAL has operated at operating margins of about 3.5% - 4.5% for the past 4 years through fiscal 2019. NAL profitability has been vulnerable to movements in raw material prices although the company has been able to pass on the increase in raw material cost to its customers but the same occurs with a lag. Adverse raw material price movements may constrain the company's margins.
Liquidity Adequate

NAL's liquidity is expected to be adequate driven by healthy cash accrual estimated at Rs 8 ' 9 crore per annum in fiscals 2020 and 2021 against debt obligation of Rs 5.2 - 5.5 crore. The company also has access to fund-based limits of Rs 25 crore, which were moderately utilised at 58% on average for the 12 months ended November 2019. The accrual will be adequate to meet debt obligation and incremental working capital need over the medium term.

Outlook: Stable

CRISIL believes that NAL will maintain a stable business risk profile backed by the extensive experience of its promoters.

Rating Sensitivity factors
Upward Factors
* Sustained improvement in scale of operation by 20% and sustenance of operating margin, leading to higher cash accruals
* Improvement in working capital cycle
 
Downward Factors
* Decline in operating profitability by over 200 bps resulting in decline in accruals
* Weakening of capital structure because of increasing working capital requirements or debt funded capex.
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
As on/for the period ended March 31  Units 2019 2018
Operating income Rs crore 446.03 329.30
Reported profit after tax Rs crore 5.21 2.86
PAT margins % 1.17 0.87
Adjusted Debt/Adjusted Networth Times 0.86 0.93
Interest coverage Times 2.18 2.03

Status of non cooperation with previous CRA:
NAL has not cooperated with ICRA Limited (ICRA) which has marked it non-cooperative and subsequently withdrawn its rating via rating release dated January 30, 2020. The reason provided by ICRA is non-furnishing of information by NAL for review of the ratings.

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)
ISIN Name of instrument Date of
Allotment
Coupon
Rate (%)
Maturity date Issue Size
(Rs Cr)
Rating Assigned
with Outlook
NA Cash Credit NA NA NA 25 CRISIL BBB-/Stable
NA Letter of Credit NA NA NA 75 CRISIL A3
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  25.00  CRISIL BBB-/Stable  17-03-20  CRISIL BBB-/Watch Developing    --    --    --  -- 
        31-01-20  CRISIL BBB-/Stable               
Non Fund-based Bank Facilities  LT/ST  75.00  CRISIL A3  17-03-20  CRISIL A3/Watch Developing    --    --    --  -- 
        31-01-20  CRISIL A3               
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 25 CRISIL BBB-/Stable Cash Credit 25 CRISIL BBB-/Watch Developing
Letter of Credit 75 CRISIL A3 Letter of Credit 75 CRISIL A3/Watch Developing
Total 100 -- Total 100 --
Links to related criteria
CRISILs Approach to Financial Ratios
Rating criteria for manufaturing and service sector companies
Rating Criteria for Chemical Industry
CRISILs Approach to Recognising Default
CRISILs Bank Loan Ratings
CRISILs Criteria for rating short term debt
The Rating Process
Understanding CRISILs Ratings and Rating Scales

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