| Nirma Limited | ||||||
| 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 reaffirmed its ‘CRISIL AA/Stable/CRISIL A1+’ ratings on the bank facilities and debt instruments of Nirma LImited (Nirma).
CRISIL Ratings has noted the announcement by Nirma on September 21, 2023 regarding execution of share purchase agreement with Glenmark Pharmaceuticals Ltd (GPL) and Glenmark Life Sciences Ltd (GLSL) for acquisition of 75.0% stake in GLSL at a price of Rs 615 per equity share amounting to Rs 5,652 crore. It has also triggered mandatory open offer to acquire the 17.33% stake from public shareholders at a price of Rs 631.2 per equity share.
GLSL develops and sells active pharmaceuticals ingredients (API) to formulation manufacturers with external sales (i.e. excluding GPL) comprising two third of its total operating income (TOI) with overall earnings before interest, tax, depreciation and amortization (EBITDA) margin ranging between 29-32% over the past five years. It has a portfolio of 139 API molecules that it supplies to over 75 countries, has filed 476 Drug Master Files & Certificate of Suitability and boasts of a strong pipeline of products. The acquisition will enable the Nirma group to increase its footprint in the healthcare segment which is expected to be their key focus area over the medium term apart from the soda ash and cement businesses.
GLSL is expected to benefit from presence of a five-year supply agreement (starting from April 01, 2024) between GPL and GLSL that is expected to lead to revenue visibility and sustain the margins of GLSL over the medium term. The transaction is expected to be completed by fiscal 2024.
CRISIL Ratings had previously factored the intent of the management to diversify its business and undertake large acquisitions aggregating Rs 5,000-7,000 crore in the domestic or overseas markets. The actual acquisition cost even after considering full subscription of mandatory offer is expected to be within the above range. The acquisition is likely to be funded largely through debt which will increase the financial leverage (net debt to EBITDA) up to 2.5 times in fiscal 2024. The leverage is expected to moderate from these levels over the next couple of years and the ratings will remain sensitive to management’s plan around de-leveraging. That said, the company benefits from the presence of an experienced management, with past track record of successfully consummating inorganic expansions and subsequent deleveraging of its balance sheet post acquisitions, which is reflected in the rating.
During fiscal 2023, operating performance improved further. Standalone revenue grew ~30% (~26% on consolidated basis) owing to rise in realisations across key products. Standalone operating margin rose further to ~26% (versus 23% in fiscal 2022), owing to better product mix and adequate pass through of rise in input costs. Profitability of the overseas subsidiary (Searles Valley Minerals Inc, USA – SVM), though, moderated during the year owing to presence of yearly contracts that had to be honored at stated prices despite rise in input cost during the year. However, the renewal of contracts in January 2023 repriced at better prices and subsequent softening of input costs would likely result in margin expansion in the overseas business.
Further, healthy cash accruals owing to strong revenue growth and margin expansion over the past three fiscals resulted in high liquidity and led to significant deleveraging of the balance sheet. The net debt to EBITDA improved to 0.5 time in fiscal 2023 from 1.1 times in fiscal 2022 and peak level of 2.8 times in fiscal 2020.
The ratings also factor in diversified business risk profile of Nirma, backed by its established market position in the domestic soda ash, soaps and detergent businesses. Moreover, forward and backward integration, coupled with various cost initiatives, helps the company in commanding healthy profit margin. These strengths are partially offset by vulnerability of the business to price fluctuations owing to the commoditized nature of the chemicals business and shall be monitorable. |
Analytical Approach CRISIL Ratings continues to combine the business and financial risk profiles of Nirma and its subsidiaries and considers the consolidated financials of Nirma.
Please refer Annexure – List of entities consolidated, which captures the list of entities considered and their analytical treatment of consolidation |
Key Rating Drivers & Detailed Description Strengths: Healthy market position in the domestic soda ash, soaps and detergents businesses, supported by significant backward integration Nirma is among the largest players in the domestic soda ash, soaps and detergents segment. Backward integration is a major strategic strength. The company manufactures key raw materials, including soda ash and linear alkyl benzene (LAB), which are used to make detergents. Captive production of raw materials ensures timely and adequate supply and facilitates greater control over quality and raw material cost.
Diversity in business risk profile and geographical presence Nirma has diversified its revenue profile through a wider geographical reach with capacities in India and the USA. For India operations too, revenue and profitability are well diversified, across soda ash, soaps and detergents, caustic soda, LAB and other industrial chemicals.
In fiscal 2023, the demand for consumer products has remained healthy, along with continued recovery in demand and prices for industrial products such as soda ash and caustic soda. The operating margin benefits from integrated operations and has remained between 24-26% over the previous three fiscals on standalone basis. The operating margin in the overseas business was impacted in the last fiscal on account of elevated input costs. Operating margin is expected to remain range bound in fiscal 2024 as the declining input prices are expected to be passed on to consumers as visible in declining soda ash prices.
Strong financial risk profile The financial risk profile of the company was constrained in the past owing to acquisitions in the Nirma group being part funded by using cash accruals of the company or raising debt on its balance sheet. However, over the past three fiscals, the company has successfully deleveraged the balance sheet with net debt to EBITDA improving to 0.5 times as on March 31, 2023 from its peak of 2.8 times as on March 31, 2020. The company also has a track record of deleveraging within 2 -3 years of any large debt funded expansion or acquisition.
As on March 31, 2023, the debt protection metrics have also improved with interest cover improving to above 10 times from 5.3 times in fiscal 2022 and net cash accruals to adjusted debt improving to 0.54 times as against 0.39 times during the previous year. While the leverage is likely to rise in the near term owing to acquisition of GLSL, it is expected to fall back within desired thresholds over the next couple of years and, thus, shall be monitorable.
Weakness: Vulnerability of the chemicals segment to price fluctuations and cyclicality In the past few years, the revenue mix has changed significantly towards soda ash, caustic soda and LAB, thereby increasing the susceptibility to fluctuation in prices, which are linked to global markets. |
Liquidity: Strong Liquidity is primarily driven by Nirma's financial flexibility to raise short- and long-term debt at short notice, and at competitive rates. The liquidity position is supported by moderately utilised working capital limits and healthy liquidity of around Rs 1800 crore at consolidated level. Company is expected to generate annual cash accruals of more than Rs 1,700 crore, against debt repayment of Rs 650-750 crore in fiscal 2024. While the liquid funds are expected to be partly uitilised for funding the acquisition of GLSL, surplus accrual along with the liquid fund balance shall comfortably cover the debt obligations. |
Outlook: Stable The outlook signifies that the credit risk profile of Nirma is likely to remain strong owing to its diversified products and healthy margins and supported by strong debt protection metrics |
Rating Sensitivity Factors Upward Factors
Downward Factors
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About the Company Nirma, set up by Dr Karsanbhai K Patel in 1980 to manufacture detergents, expanded its operations to soaps, chemicals and processing of minerals. It has plants in Searles Valley, USA, and Mehsana, Ahmedabad, Vadodara and Bhavnagar in Gujarat.
The largest soda ash manufacturer in India, Nirma acquired the California-based natural soda ash producer, Searles Valley Minerals Inc, in fiscal 2008, which has manufacturing facilities in Argus, Trona and Westend in USA.
In the first quarter of fiscal 2024, standalone operating income stood at Rs 2,043 crore with a profit after tax (PAT) of Rs 321 crore compared to Rs 2,210 crore and Rs 355 crore respectively in the corresponding quarter of previous fiscal. |
Key Financial Indicators*
*CRISIL Ratings-adjusted consolidated financials. |
Any other information: Not applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
*Fund based limits may be fully interchangeable into non fund based and vice a versa subject to Maximum Permissible Bank Finance Limit (Drawing Power) and as per Bank’s Sanction Letters (as amended from time to time) and as advised Banks time to time $Yet to be placed |
Annexure - List of Entities Consolidated
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| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Annexure - Details of Bank Lenders & Facilities | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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#Non Fund based limits are interchangeable with fund based limits as per Bank’s Sanction Letters (as amended from time to time) and as advised Banks time to time
Criteria Details
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