Rating Rationale
April 21, 2020 | Mumbai
SRF Limited
Rated amount enhanced
 
Rating Action
Total Bank Loan Facilities Rated Rs.1000 Crore
Long Term Rating CRISIL AA+/Stable (Reaffirmed)
Short Term Rating CRISIL A1+ (Reaffirmed)
 
Rs.300 Crore Non Convertible Debentures CRISIL AA+/Stable (Reaffirmed)
Rs.600 Crore Commercial Paper (Enhanced from Rs.400 Crore)  CRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has reaffirmed its 'CRISIL AA+/Stable/CRISIL A1+' ratings on the bank facilities and debt programmes of SRF Limited (SRF).
 
Though operations have been temporarily disrupted by the lockdown due to the Novel Coronavirus disease (COVID-19) the business risk profile should remain strong driven by a presence across diversified businesses and continued healthy orders from clients. Moreover, liquidity is strong because of healthy cash and bank balances, liquid investments and undrawn bank lines, which should help tide over the current situation.
 
For the first nine months of fiscal 2020, the operating margin had improved to 20.4% from 17.9% in the corresponding period of the previous fiscal.
 
The ratings continue to reflect a strong business risk profile driven by market leadership, diversified revenue, and high operating efficiency, and a healthy financial risk profile. These strengths are partially offset by high capital intensity with continuous enhancement in capacities in the specialty chemicals and packaging films segments.

Analytical Approach

For arriving at its ratings, CRISIL has combined the business and financial risk profiles of SRF and all its subsidiaries, as all the entities (together referred to herein as SRF) have the same management and operate in similar businesses.
 
Please refer Annexure - List of entities consolidated, for details of the entities considered and their analytical treatment for consolidation.

Key Rating Drivers & Detailed Description
Strengths
* Market leadership: The company is the market leader in most of its business segments. Due to extensive experience in handling fluorine, it is the sole producer of some key refrigerants in India. In the fluoro-specialities segment, continuous investment in research and development (R&D), and improved manufacturing capability have made it a one-of-its-kind player, exporting products that find application in pharmaceutical and agro-based products. In the technical textile business (TTB), the company is the largest nylon tyre cord fabric manufacturer in India, and continued addition of new value-added products in the belting fabric segment (part of the TTB) should further enhance the market position. The market position in the packaging films business (PFB) is supported by large capacity and high volume of value-added products. The company is further enhancing the PFB capacity by setting up plants in foreign geographies to cater to global markets. The healthy market position is likely to be sustained, given the leadership position, established track record, and large R&D capability leading to technical expertise.

* Diversified revenue and high operating efficiency: SRF has a diversified revenue profile with presence across TTB (19% of revenue in the first nine months of fiscal 2020), CB (39%), and PFB (37%) segments. The management has successfully diversified its geographical presence through investments in the PFB segment in South Africa, Thailand and Hungary (upcoming), among other countries. The diversified revenue profile protects against downswing in any one business and keeps the operating margin steady. Furthermore, cost efficiency measures in the TTB and PFB segments, strong R&D capability in fluoro-specialities, and market leadership in refrigerants have helped in keeping the margin higher than that of peers.

In the first nine months of fiscal 2020, operating income grew marginally by 3.6% to Rs 5,352 crore from Rs 5,162 crore in the corresponding period of the previous fiscal. The operating margin, however, improved to 20.4% from 17.9%, despite a subdued performance in the TTB segment on account of slowdown in the automotive sector. The improvement in margin was primarily driven by healthy returns from the CB and PFB segments.

The operating performance in the near term is likely to be impacted by the outbreak of COVID-19, and the resultant disruption of operations. However, market leadership and diversified revenue should help to maintain a stable operating performance over the medium term.

* Healthy financial risk profile: The financial risk profile remains healthy backed by robust tangible networth leading to a comfortable gearing of 0.93 time as on March 31, 2019. Cash accrual was healthy at Rs 1,121 core in the first nine months of fiscal 2020, resulting in comfortable debt protection metrics, indicated by the interest coverage ratio of 7.10 times (6.33 times for the corresponding period of the previous fiscal).

The debt to EBITDA (earnings before interest, tax, depreciation and amortisation) ratio may weaken to above 3.0 time during fiscal 2021 on account of disruption in business operations due to COVID-19. However, the ratio is expected to improve over the medium term and remain below 2.75 time by the end of March 2022 because of the returns from large capital expenditure (capex) during fiscals 2020 and 2021. The financial risk profile should therefore remain healthy over the medium term, backed by substantial cash accrual, a comfortable gearing, and strong liquidity. The ability to sustain improvement in operations leading to better debt protection metrics will remain a key monitorable.

Weakness
* High capital intensity: The company is continuously incurring capex in specialty chemicals of the CB segment and is also expanding manufacturing facilities in the PFB segment abroad. Capex was around Rs 1,160 crore during fiscal 2019, while Rs 1,200-1,400 crore was invested during fiscal 2020. During the period from fiscal 2018 to the first half of fiscal 2020, capital employed in the CB and PFB segments increased at a compound annual growth rate of around 14% and 8% respectively. However, profitability of a molecule in the CB segment depends on successful commercialisation and acceptability, while cyclicality is inherent in the PFB segment. Therefore, the ability to maintain healthy revenue growth and sustain the operating margin will remain a key monitorable.
Liquidity Strong

Cash accrual was healthy at about Rs 1,121 crore in the first nine months of fiscal 2020, and cash equivalents/liquid investments stood at around Rs 350 crore at March 31, 2020. Liquidity is further supported by unutilised bank lines of about Rs 1,000 crore as of March 2020. The combined capex for fiscals 2021 and 2022 is expected at Rs 1,600-2,000 crore, and should be funded by a mix of internal accrual and debt. The available liquidity and cash accrual should be sufficient to meet repayment obligation of Rs 805 crore in fiscal 2021.

Outlook: Stable

CRISIL believes SRF will continue to benefit from its market leadership and healthy operating efficiency, while the financial risk profile should remain comfortable due to adequate cash accrual, over the medium term.
 
Rating Sensitivity Factors
Upward Factors
*Sustenance of the gross debt/EBITDA ratio at below 1.0 time
*Strong revenue growth, with sustained improvement in the operating margin, leading to higher cash accrual
 
Downward Factor
*A sustained increase in the gross debt/EBITDA ratio to more than 3.5 times
*A sustained decline in the operating margin with stagnant revenue. leading to lower cash accrual.

About the Company

Incorporated in 1970, SRF started operations with a nylon tyre cord plant in Manali, Himachal Pradesh. It is currently present in the TTB, CB and PFB business verticals. Under the TTB segment, the company manufactures nylon tyre cord fabrics, belting fabrics, and industrial yarn. In the CB segment, it manufactures fluoro-chemicals (including blends, chloromethanes, and refrigerant gases) and fluoro-specialty chemicals. SRF has 11 manufacturing units in India, one each in South Africa and Thailand, and an upcoming unit in Hungary. Its sales are spread across more than 75 countries, and it has a workforce of about 7,000 employees.
 
For the nine months ended December 31, 2019, operating income and profit after tax (PAT) was Rs 5,352 crore and Rs 833 crore, respectively, against Rs 5,163 crore and Rs 461 crore, respectively, for the corresponding period of the previous fiscal.

Key Financial Indicators
As on/for the period ended March 31 Unit 2019 2018
Revenue Rs.Crore 7,693 5,610
PAT Rs.Crore 642 462
PAT Margin % 8.3 8.2
Adjusted debt/adjusted networth Times 0.93 1.04
Interest coverage Times 6.83 8.0

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)
ISIN Name of instrument Date of allotment Coupon rate (%) Maturity date Issue size (Rs.Crore) Rating assigned with outlook
NA Working Capital Facility NA NA NA 173.0 CRISIL AA+/Stable
NA Working Capital Facility^ NA NA NA 150.0 CRISIL A1+
NA Proposed Working Capital Facility NA NA NA 504.0 CRISIL AA+/Stable
NA External Commercial Borrowings NA NA NA 173.0 CRISIL AA+/Stable
INE647A07033 Non Convertible Debentures 30-Jun-2017 7.33% 30-Jun-2020 300.0 CRISIL AA+/Stable
NA Commercial Paper NA NA 7-365 days 600.0 CRISIL A1+
^Interchangeable with Rs 10 crores of overdraft, Rs 50 crore of working capital demand loan, Rs 150 crore of letter of credit and Rs 50 crore of bank guarantee
 
Annexure - List of Entities Consolidated
Names of entities consolidated Extent of consolidation Rationale for consolidation
SRF Holiday Home Limited Fully consolidated Strong business and financial linkages
SRF Global BV Fully consolidated Strong business and financial linkages
SRF Overseas Limited Fully consolidated Strong business and financial linkages
SRF Industries (Thailand) Limited Fully consolidated Strong business and financial linkages
SRF Industex Belting (Pty) Limited Fully consolidated Strong business and financial linkages
SRF Flexipak (South Africa) (Pty) Limited Fully consolidated Strong business and financial linkages
SRF Europe Kft Fully consolidated Strong business and financial linkages
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
Commercial Paper  ST  600.00  CRISIL A1+      01-10-19  CRISIL A1+  06-07-18  CRISIL A1+  22-09-17  CRISIL A1+  -- 
            04-07-19  CRISIL A1+      02-06-17  CRISIL A1+   
Non Convertible Debentures  LT  300.00
21-04-20 
CRISIL AA+/Stable      01-10-19  CRISIL AA+/Stable  06-07-18  CRISIL AA+/Stable  22-09-17  CRISIL AA+/Stable  -- 
            04-07-19  CRISIL AA+/Stable      02-06-17  CRISIL AA+/Stable   
Fund-based Bank Facilities  LT/ST  1000.00  CRISIL AA+/Stable/ CRISIL A1+      01-10-19  CRISIL AA+/Stable/ CRISIL A1+    --    --  -- 
            04-07-19  CRISIL AA+/Stable           
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
External Commercial Borrowings 173 CRISIL AA+/Stable External Commercial Borrowings 173 CRISIL AA+/Stable
Proposed Working Capital Facility 504 CRISIL AA+/Stable Proposed Working Capital Facility 504 CRISIL AA+/Stable
Working Capital Facility^ 150 CRISIL A1+ Working Capital Facility^ 150 CRISIL A1+
Working Capital Facility 173 CRISIL AA+/Stable Working Capital Facility 173 CRISIL AA+/Stable
Total 1000 -- Total 1000 --
^Interchangeable with Rs 10 crores of overdraft, Rs 50 crore of working capital demand loan, Rs 150 crore of letter of credit and Rs 50 crore of bank guarantee
Links to related criteria
CRISILs Approach to Financial Ratios
Rating criteria for manufaturing and service sector companies
CRISILs Criteria for Consolidation
CRISILs Criteria for rating short term debt

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