Detailed Rationale

Crisil Ratings has reaffirmed its rating on the long-term bank facilities of Paushak Limited (Paushak) at ‘Crisil A/Stable’.

 

The rating continues to factor the strong parental support from Nirayu Limited (Nirayu, rated ‘Crisil AA+/Stable’), the holding company of the Alembic group. Nirayu overall holds a 53% stake in the company. This analytical approach follows a clear intent by the parent to extend the requisite financial support in terms of letter of comfort, should it be required for any capital expenditure (capex) plans.

 

Fiscal 2024 saw a de-growth of 3% in revenues to Rs 206 crore, owing to a slow volume pickup affected by the lack of steadiness in order books due to the impact of China dumping in H1FY24. The company posted a YoY growth of 6% in H1FY25 with the gradual revival in realizations of semi-specialized products after bottoming out in Q4FY24 and expects a better second half of the fiscal. Operating profitability moderated to 31.3% in fiscal 2024 owing to the lower levels of specialized products, inventory pileups & reduction in pricing of semi-specialized products. Margins further declined to ~27% in H1FY25 with the company shifting towards producing high volumes of semi-specialized products which yield lower margins. Over the medium term, expansion into semi-specialized products through new capacities will lead to margins sustaining at around similar levels on a sustainable basis.

 

The company is undertaking a capex of ~Rs 240 crore over fiscals 2025 and 2026 towards further increasing its downstream capacities and expand into semi-specialized products. This capex will be funded through a mix of internal accruals and debt. However, with a strong balance sheet with nil debt as on March 31, 2024, credit metrics are expected to remain comfortable over the medium term. Liquidity continues to aid the overall financial risk profile of the company, with cash and investments amounting to ~ Rs 100 crore as on September 30, 2024.

 

The rating continues to reflect the company’s established market position in the phosgene-based specialty chemicals market, its strong operating efficiency, and healthy financial risk profile. These strengths are partially offset by the moderate scale of operations.

Analytical Approach

Crisil Ratings has applied its parent notch-up framework to factor in the expected support from Nirayu.

Key Rating Drivers & Detailed Description

Strengths:

• Established market position in the speciality chemicals industry: Paushak has an established market position, backed by its presence of over four decades in the phosgene-based intermediates segment. The company derives revenue from chloroformates, isocyanates, specialty chemicals, carbonates and phosgene gas. These products find application across industries, primarily pharmaceuticals and agro- chemicals.

 

• Strong operating efficiency: Backward integration of operations has led to robust operating margins (31% in fiscal 2024 and 35% in fiscal 2023). Return on capital employed was healthy at 16% in fiscal 2024. While most players in the specialty chemicals industry depend heavily on imports for their raw material supplies, the company has a low import bill. The company is one of the few players licenced to manufacture phosgene gas, which is highly restricted by the government. Furthermore, the working capital cycle is moderate, as reflected in receivables and inventory of 90 and 56 days, respectively, as on March 31, 2024. 

 

• Healthy financial risk profile: Networth has grown steadily, aided by accretion to reserves, and was healthy at Rs 408 crore as on March 31, 2024. The company’s continued debt-free status has led to comfortable debt protection metrics. The company is undertaking a capex of ~Rs 240 crore over fiscals 2025 and 2026 towards further increasing its downstream capacities and expand into semi-specialized products. This capex will be funded through a mix of internal accruals and debt
   
• Strong parentage and expected financial support from Nirayu: Paushak benefits from the strong parentage and need-based support of Nirayu, which has healthy financial flexibility. This arises from the ability to raise additional funds mainly on account of Nirayu’s holding in equity shares of Alembic Pharmaceuticals Ltd (Alembic Pharma; rated ‘Crisil AA+/Stable/Crisil A1+’). As on September 19, 2024, the combined market value of Nirayu’s shares in Alembic Pharma, Alembic Ltd and Paushak was over Rs 15,200 crore against minimal debt. While Paushak’s management is largely independent, the company remains critical to Nirayu and underlying comfort support is expected to be forthcoming should it be required for capital expenditures or exigencies.

 

Weaknesses:

• Moderate scale of operations: Despite being in existence for nearly five decades, the company operates on a moderate scale. Revenue growth has picked up in the past six years, driven by diversification of customer base and product portfolio. Apart from pharmaceuticals, the company now caters to other sectors such as agro-chemicals and performance-based materials. With downstream capacities running at optimal capacities currently, the company is expected to gradually improve its capacities over the medium term. Timely execution and commercialisation of any planned capex will be critical for a faster growth momentum.

 

• Susceptibility to fluctuations in input prices and demand sentiments:  Paushak’s profitability, similar to other players in the specialty chemicals industry, remains susceptible to movement in the prices of key raw materials and end-user demand especially in the agrochemical and pharmaceutical industries. A dip in demand owing to destocking up the value chain, combined with some pricing corrections owing to macroeconomic headwinds led to margins moderating in fiscal 2024 and in the first half of fiscal 2025. The ability of the company to sustain its operating margins amidst the pricing volatility seen in the industry would be a key monitorable. However, a strong degree of backward integration and low fixed cost structure lends support. 

Liquidity: Adequate

Expected annual cash accrual of over Rs 50 crore is likely to be adequate for incremental working capital requirement. Liquidity is marked by cash equivalents of Rs 100 crore as on September 30, 2024, and nil bank limit utilisation. The company’s liquidity and financial risk profiles are expected to remain comfortable over the medium term.

Outlook: Stable

Crisil Ratings believes Paushak will continue to benefit from its established market position, diverse product profile and strong operating efficiency.

Rating sensitivity factors

Upward factors:

• Improvement in product mix and a strong revenue growth and operating profitability of 30%, resulting in higher cash accrual
• Sustenance of robust financial risk profile and debt metrics, supported by prudent capex spend and working capital management
• Improvement in credit risk profile or a stronger support stance from Nirayu

 

Downward factors:

• Sustained decline in operating profitability to below 20%
• Time or cost overruns in capex, or large debt-funded capex or acquisition, weakening the key credit metrics
• Deterioration in Nirayu’s credit risk profile or an adverse change in its support stance towards Paushak

About the Company

Incorporated in 1972, Paushak is managed by Mr Chirayu Amin and his family members, promoters of Alembic Pharma. Paushak manufactures phosgene-based specialty chemicals, used in the pharmaceuticals, agro-chemicals and performance-enhancement industries.

 

Paushak is listed on the Bombay Stock Exchange. As on September 30, 2024, the promoters and their group entities held a 66.97% stake, and the balance is with the public.

 

The company recorded Rs 109 crore of revenue and Rs 24 crore of profit after taxes in the first half of fiscal 2025, as against Rs 101 crore of revenue and Rs 22 crore of profit after taxes in the corresponding half last fiscal.

Any other information: Not Applicable