Detailed Rationale

CRISIL Ratings has reaffirmed its ratings on the bank facilities of Sanman Trade Impex Limited (Sanman; part of Groupe Veritas) at ‘CRISIL A-/Stable/CRISIL A2+’.

 

The ratings continue to reflect the established global presence of Groupe Veritas, its sound distribution network, strong relationships with several key suppliers and customers, and the extensive experience of the promoter in the trading business, and their commitment to bring in additional equity. These strengths are partially offset by average financial risk profile and susceptibility of operating performance to volatility in commodity prices and foreign exchange (forex) rates despite the effective risk management practices adopted by the group.

 

Operating income of the group grew 9.7% on-year in fiscal 2023 to Rs 9,662 crore, on account of increased volumes as prices of crude oil and its derivatives fell, albeit, operating margin moderated slightly to 1.9% from 2.2% in fiscal 2022.  The revenue is expected to grow 4- 5% over the medium term, driven by steady demand for traded products and established presence of the group. The operating margin should sustain at ~2.0%, driven by sustained profitability in the trading business. Financial risk profile continued to be average with interest coverage ratio stood moderating to 2.61 times for fiscal 2023 from 4.67 times last year owing to increase in interest costs and charges while total outside liabilities to adjusted networth ratio remained adequate at 0.77 time as on March 31, 2023 (0.84 times last year), with liabilities primarily comprising working capital debt and payables. 

 

Operating income of Sanman grew ~19% on-year in fiscal 2023 to Rs 690 crore while operating margin remained steady at 2.1% in fiscal 2023 as well. Over the medium term, company’s operating performance is expected to be in-line with the group.

Analytical Approach

• CRISIL Ratings has applied its criteria for rating entities belonging to homogenous corporate groups. Accordingly, Hazel Mercantile Limited (HML) and its wholly owned subsidiaries (including Hazel Middle East FZE,), Sanman and other group entities are considered a part of Groupe Veritas, in view of common promoter holding and significant operational, financial, and managerial linkages.
• CRISIL Ratings has treated unsecured loan from the promoter (Rs 37 crore as on March 31, 2023) as neither debt nor equity, as the loan is interest-free, has no fixed repayment schedule, is subordinated to external debt, and expected to remain in the business over the medium term.
• CRISIL Ratings has included letter of credit backed creditors (amounting Rs 652 crore as on March 31, 2023) as short-term debt, as these are interest bearing and have a fixed maturity.

 

Please refer Annexure - List of a Consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths

• Established global presence with a wide distribution network: Groupe Veritas has been trading in chemicals and petrochemicals for over two decades and has a strong presence in the domestic and overseas markets. It has a vast product portfolio and derives 50-55% of its revenue from the international markets. Although naptha, palmolein, and toluene are major traded commodities, company does not have dependence on any single products. Growing volumes and adding profitable products to the basket has aided growth in topline and margin. The group follows a prudent risk management policy, with full order backed procurement, thus ensuring negligible forex and price risk, while managing its cost to sustain and improve margin. The group has a strong network with adequate storage capacity in 12 locations and is present in 10 countries through 8 international offices.

 

• Strong relationships with several key customers and suppliers: Over the years, Groupe Veritas has maintained strong relationships with several large suppliers and customers worldwide, thereby ensuring stability in terms of sourcing and credit. Its clientele includes large corporates such as Reliance Industries Ltd (‘CRISIL AAA/Stable/CRISIL A1+’), Indian Oil Corporation Ltd (‘CRISIL AAA/Stable/CRISIL A1+’), Asian Paints Ltd (‘CRISIL AAA/Stable/CRISIL A1+’), Kansai Nerolac Paints Ltd (‘CRISIL AAA/Stable/CRISIL A1+’), Chemtrade Overseas Pvt Ltd, IOL Chemicals & Pharmaceuticals Ltd, Pon Pure Chemical India Pvt Ltd ('CRISIL A-/Stable/CRISIL A2+') and Walambia Plastics Pvt Ltd.

 

• Promoter’s extensive experience: The promoter has extensive experience and has demonstrated high proficiency in managing the commodity trading and distribution business, as reflected in the significant scaling up of operations. He has set up a team of highly qualified professionals and developed robust and effective risk-mitigating strategies in-house. Groupe Veritas has managed sharp fluctuations in prices as well as forex rates, and maintained cost control over these years. The operations have been divided according to commodity and functions. Of the employee base of over 800, around 150 are engaged in international operations.

 

Weaknesses

• Average financial risk profile: Adjusted networth of the group stood at Rs 2,588 crore and total outside liabilities to adjusted networth ratio remained adequate at 0.77 time as on March 31, 2023 as compared to 0.84 times last year, with liabilities primarily comprising working capital debt and payables. The interest coverage ratio has moderated to 2.61 times for fiscal 2023 from 4.67 times last year as interest costs and charges grew.

 

Total debt of the group has reduced to Rs 826 crore as of March 31, 2023 from Rs 845 crore last year with reduction in bank funded debt to Rs 136 crore as of March 31, 2023 from Rs 241 crore last year while short term working capital payables in the form of Letter of credit backed creditors increased to Rs 652 crore as of march 31, 2023 (from Rs 568 crore last year). Unsecured loans from the promoter has remained at Rs 37 crore in the last two fiscals.

 

Sanman’s total external debt (excluding promoter loan) has remained steady in Rs 34-36 crore over the past few fiscal despite the increase in size with the company re-investing income generated into the company and the group. Adjusted interest cover remains healthy at 1.48 times in fiscal 2023 as compared to 1.59 times in fiscal 2022 while total outside liabilities to adjusted networth ratio remained adequate at 1.23 time as on March 31, 2023 as compared to 1.81 times last year

 

• Highly competitive industry characterised by low margins: Commodity trading owing to very low value addition remains highly competitive with very low barriers to entry and low margins. Group’s margins has fluctuated between 1.5-2% in the past and is expected to hover in similar range given the high competitive pressures. However, the group benefits from its large scale and strong relationships with large and key customers built over the years.

 

• Exposure to volatility in crude and petrochemical prices and fluctuations in forex rates: Groupe Veritas trades in chemicals and polymer products whose prices are directly linked to crude prices, which are highly volatile. Although Groupe Veritas has adequate risk mitigating strategies, operating performance remains susceptible to volatility in commodity prices. The group also deals in imported chemicals, and hence, faces forex risk. However, it benefits from a natural hedge as 50-55% of its sales are through exports and procurement is fully order backed. Any significant movement in commodity prices and forex rates could adversely impact operating performance and will be closely monitored.

Liquidity: Adequate

Cash and cash equivalent of the group was Rs 2 crore as on March 31, 2023 with Sanman having ~Rs 1 crore. Annual cash accrual of about Rs 130-150 crore will allow the group to comfortably meet the nominal capital expenditures, in the absence of any term debt obligation and dividend outgo. Fund-based limits in each group company were utilised ~84% on average over the 6k months through November 2023, and non-fund-based limits at ~96% on average. Availability of unsecured loans from the promoter, whenever required, enhances financial flexibility.

Outlook: Stable

Groupe Veritas will continue to maintain its established market position over the medium term, supported by its promoter's extensive experience and strong relationships with customers and suppliers. The financial risk profile of the group is likely to remain stable in absence of any large, debt-funded capex, dividend or cash outflows. Sanman, too is expected to maintain its relative position in the group as well as its financial risk profile.

Rating Sensitivity Factors

Upward Factors

• Sustained and significant increase in operating profitability to more than 4%, backed by improvement in the trading operations
• Steady increase in scale of trading operations, leading to better profitability
• Prudent working capital management resulting in improved key debt metrics

 

Downward Factors

• Substantial decline in operating profitability to less than 2% on a sustained basis
• Weakening of the financial risk profile and debt metrics on account of working capital stretch, or cash outflows
• Delay in financial support from the promoter during financial exigencies

About the Company

Incorporated in 1996 and promoted by Mr Nitin Kumar Didwania, Sanman Trade Impex trades in bulk chemicals, solvents, polymers, paints and varnishing chemicals. Sanman’s distribution network is spread across New Delhi, Ahmedabad, Kolkata, Hyderabad and Kochi. It also has tank terminals at Kandla, Mundra, Kakinada, Mumbai, and Kochi for the export and import of traded goods. The company got its present name in August 2015.

About the Group

Groupe Veritas, owned by Mr Nitin Kumar Didwania, primarily trades in petrochemicals, polymers, rubber, agri-products, paper, heavy distillates, minerals and metals. HML is the flagship company of the group. The other group companies are Aspen and Sanman with VIL moving out post 55% stake purchase by Swan Energy. The promoter’s extensive experience in the petrochemical trading business and established relationships with customers and suppliers enabled the group to significantly scale up revenue to around Rs 9,000 crore in fiscal 2022. The group has set up several entities for effective management of various business verticals. In the domestic market, it has a network covering 12 locations with adequate storage capacity. It has presence in 10 countries with 8 international offices.

Any other information: Not Applicable

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	Cash credit*	NA	NA	NA	21	NA	CRISIL A-/Stable
NA	Cash credit	NA	NA	NA	15	NA	CRISIL A-/Stable
NA	Letter of credit**	NA	NA	NA	76	NA	CRISIL A2+
NA	Letter of credit^	NA	NA	NA	62	NA	CRISIL A2+
NA	Proposed short-term bank loan facility	NA	NA	NA	6	NA	CRISIL A2+

*Includes Rs 1 crore FB Standby Line of Credit

**Includes Rs 4 crore of NFB standby LC and Rs 2 crore of CEL/LER limits

^Includes Rs 2 crore of CEL/LER limits