Rating Rationale
September 09, 2020 | Mumbai
SRF Limited
'CRISIL AA+/Stable' assigned to NCD
 
Rating Action
Total Bank Loan Facilities Rated Rs.1000 Crore
Long Term Rating CRISIL AA+/Stable (Reaffirmed)
Short Term Rating CRISIL A1+ (Reaffirmed)
 
Rs.250 Crore Non Convertible Debentures CRISIL AA+/Stable (Assigned)
Rs.300 Crore Non Convertible Debentures CRISIL AA+/Stable (Withdrawn)
Rs.600 Crore Commercial Paper CRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has assigned its 'CRISIL AA+/Stable' rating to Rs 250 crore non-convertible debentures (NCDs) of SRF Limited (SRF) and has reaffirmed its 'CRISIL AA+/Stable/CRISIL A1+' ratings on the bank facilities and other debt programmes.
 
Additionally, CRISIL has withdrawn its rating on the Rs 300 crore NCDs on receipt of confirmation of their redemption by the trustee. This is in line with CRISIL's rating withdrawal policy.
 
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.
 
For the three months through June 2020, operating income declined by 12% as compared with the corresponding period of fiscal 2019 due to around 60% reduction in sales in the Technical textile segment (TTB). However the chemicals segment (CB) posted healthy revenue growth of 17%, limiting the impact on total operating revenue. The operating margin was healthy despite the drop in operating income driven by significantly higher profits in the packaging films segment where the Earnings before interest and tax (EBIT) grew by more than 50% on an absolute basis.

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, which captures the list of entities considered and their analytical treatment of 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 Speciality chemical 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 TTB segment, the company is the largest nylon tyre cord fabric manufacturer in India. The market position in the packaging films business (PFB) is supported by large capacities and high volume of value-added products. The company has enhanced 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 R&D capability focused on Value added products.
 
* Diversified revenue and high operating efficiency: Revenue is diversified across TTB (19% of revenue in fiscal 2020), CB (41%), and PFB (36%) segments. The management has successfully diversified its geographical presence through investments in the PFB segment in South Africa, Thailand and Hungary, among other countries. The diversified revenue profile protects against downswing in any one business and keeps the operating margin steady. Furthermore, growing contribution from value added products in the PFB segments, strong R&D capability in Chemical Segment, and market leadership in most of its products have helped keep the margin higher than that of peers.
 
In the first three months of fiscal 2021, operating income declined to Rs 1545 crore from Rs 1763 crore in the corresponding period of the previous fiscal. The operating margin, however, improved to 24.1% from 18.6%, despite a subdued performance in the TTB segment on account of a slowdown in the automotive sector. The improvement in margin was primarily driven by healthy returns from the CB and PFB segments.
 
* Healthy financial risk profile: A robust tangible networth led to a comfortable gearing of 0.86 time as on March 31, 2020. Cash accrual was healthy at Rs 1,311 core in fiscal 2020, resulting in comfortable debt protection metrics, indicated by the interest coverage ratio of 7.46 times (6.83 times for the previous fiscal).
 
The company also has capex plan of Rs 1200-1500 crore per annum over next two fiscals, largely to increase its capacities in the CB segment. Despite the capex, debt to EBITDA (earnings before interest, tax, depreciation and amortisation) ratio is expected to improve to below 2.75 time for fiscal 2021. Any deviation in the same will remain a key monitorable.
 
SRF has proposed a QIP issue of upto Rs 750 crore to be completed within fiscal 2021, any development with respect to the proposed QIP will remain a key monitorable.
 
The financial risk profile is therefore expected to 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: Operations are expected to remain capital intensive. Capex was around Rs 1,738 crore during fiscal 2020. The company is continuously incurring capex mostly towards specialty chemicals in the CB segment while also expanding manufacturing facilities in the PFB segment abroad. During the period from fiscals 2018 to 2020, capital employed in the CB and PFB segments increased at a compound annual 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 equivalents/liquid investments stood at around Rs 324 crore at March 31, 2020. Liquidity is further supported by drawable unutilised bank lines of about Rs 400 crore as of March 2020. Cash accrual are expected at Rs 1000-1100 crore in fiscal 2021. The capex for fiscals 2021 and 2022 is expected at Rs 1200 ' 1500 crore per annum, 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 780 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 factors
* 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, Tamil Nadu. It is currently present in the CB, PFB and TTB business verticals.. In the CB segment, it manufactures fluoro-chemicals, fluoro-speciality chemicals, and chloromethane. SRF has 11 manufacturing units in India, one each in South Africa and Thailand, and an upcoming unit for PFB in Hungary and Thailand. Under the TTB segment, the company manufactures nylon tyre cord fabrics, belting fabrics, and industrial yarn. Its sales are spread across more than 75 countries, and it has a workforce of about 7,000 employees.
 
For the three months ended June 30, 2020, operating income and profit after tax (PAT) were Rs 1545 crore and Rs 177 crore, respectively, against Rs 1763 crore and Rs 189 crore, respectively, for the corresponding period of the previous fiscal.

Key Financial Indicators
As on / for the period ended March 31 Unit 2020 2019
Revenue Rs crore 7209 7693
PAT Rs crore 1019 642
PAT margin % 14.1 8.3
Adjusted debt/adjusted networth Times 0.86 0.93
Interest coverage Times 7.46 6.83

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments and are included (where applicable) in the Annexure -- Details of Instrument in this Rating Rationale. For more details on the CRISIL complexity levels, please visit www.crisil.com/complexity-levels.
Annexure - Details of Instrument(s)
ISIN Name of instrument Date of allotment Coupon rate (%) Maturity date Issue size (Rs crore) Complexity Level Rating assigned
with outlook
NA Working Capital Facility NA NA NA 173.0 NA CRISIL AA+/Stable
NA Working Capital Facility^ NA NA NA 150.0 NA CRISIL A1+
NA Proposed Working Capital Facility NA NA NA 428.0 NA CRISIL AA+/Stable
NA External Commercial Borrowings NA NA NA 173.0 NA CRISIL AA+/Stable
NA External Commercial Borrowings NA NA NA 76.0 NA CRISIL AA+/Stable
NA Non-convertible debentures* NA NA NA 250 Simple CRISIL AA+/Stable
NA Commercial paper NA NA 7-365 days 600.0 Simple 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
*Not yet issued
 
Annexure - Details of Rating Withdrawn
ISIN Name of instrument Date of allotment Coupon rate (%) Maturity date Issue size (Rs.Cr) Complexity Level
INE647A07033 Non-convertible debentures 30-Jun-2017 7.33% 30-Jun-2020 300 Simple
 
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+  21-04-20  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  0.00
09-09-20  		CRISIL AA+/Stable  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+  21-04-20  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 249 CRISIL AA+/Stable External Commercial Borrowings 173 CRISIL AA+/Stable
Proposed Working Capital Facility 428 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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