Detailed Rationale

CRISIL Ratings has placed its ratings on the bank facilities of Sanman Trade Impex Limited (Sanman; part of Groupe Veritas (GV)) on ‘Rating Watch with Developing Implication’.

 

The rating action follows announcement by Veritas India Ltd (VIL, rated ‘CRISIL BBB+/CRISIL A2/Watch Developing’) on October 19, 2020 regarding the proposed sale of 74% stake in its wholly-owned subsidiary, Veritas Polychem Pvt Ltd (VPPL, rated ‘CRISIL BBB-/Watch Developing’) and Veritas Infra and Logistics Pvt Ltd  (VILPL) to Swan Energy Limited (SEL). The transaction is subject to shareholder’s approval and will be concluded in 2-3 months. With 74% stake sale in VPPL, which is undertaking large polymer project, the group is not expected to make further investments in this project and debt for this project is not expected to come on group’s balance sheet. This could reduce pressure on the group’s financial risk profile. CRISIL Ratings will continue to monitor the developments regarding this transaction and get clarity on management’s strategy and stance towards funding for this project. CRISIL will resolve the Ratings Watch on receipt of requisite approvals and clarity on the above mentioned aspects.

 

Operating income of the group declined by 14% on-year, in the first nine months of fiscal 2021, on account of the pandemic related lockdown and its impact on various end-user industries. However, operating margin improved to 3.9% in the same period, from 2.8% in fiscal 2020, driven by better utilisation and rental rates at the tank terminal operations, and improvement in HML’s trading margin, backed by an increase in prices of crude and crude-linked commodities.

 

Operating performance benefits from ramp-up at the Hamriyah tank terminal operations at Veritas India Ltd (VIL), with 45% increase in average rental rates to USD 8.14/CBM (cubic metres) in the nine months through December 2020, as compared to fiscal 2020, and capacity utilisation exceeding 100% for two fiscals. This was supported by increased throughput of terminals, higher rental rates in the region, and addition of clients, apart from assured offtake by the group. Ramp-up in the distillation business, which started from the fourth quarter of fiscal 2021, should support healthy cash accrual, making the project self-sustaining to meet its debt obligation in the near term. Sustenance of rental rates, capacity utilisation and ramp-up in the distillation business are key rating monitorables.

 

GV’s revenue is expected to grow by almost 5% over the medium term, driven by sustained performance in tank terminal operations, steady demand for traded products and established presence of the group. The operating margin should be stable at 3-3.5%, driven by healthy operating performance at Hamriyah tank terminal and sustained profitability in the trading business.

 

VPPL is setting up manufacturing-storage-bottling facilities at Dighi port at a cost of Rs 2,050 crore in phases, expected funded through debt and promoters’ funds in a ratio of 2:1. Phase 1 of the project comprises a polyvinyl chloride (PVC) plant with capacity of 1.75 lakh metric tons per annum [MTPA], a polymer modified bitumen (PMB) plant with 3.6 lakh MTPA, six gas storage terminals, and a captive power plant, entailing total cost of Rs 1,400 crore. Phase II will involve setting up 26 additional gas storage terminals and a LPG bottling plant at a cost of Rs 650 crore. Enhancement of the scope and addition of phase II in fiscal 2019 has led to the project obtaining Ultra Mega Project (UMP) approval from the government of Maharashtra, which makes it eligible for various benefits, including industrial promotion subsidy, and tax and duty concessions. The project got delayed by over three years, due to insolvency proceedings under the bankruptcy law at the Dighi port. Further, environmental clearance for the project was also delayed due to the Covid-19 pandemic and was received in March-2021 with funding tie-up being in progress

 

The ratings continue to reflect the group's established global presence, sound distribution network, strong relationships with several key suppliers and customers, and the extensive experience of the promoters in the trading business, and their commitment to bring in additional equity, for funding any cost overrun. These strengths are partially offset by an average financial risk profile marked by a moderate capital structure, and susceptibility of operating performance to volatility in commodity prices and foreign exchange (forex) rates. The effective risk management practices adopted by the group mitigate the impact of volatility in forex rates and crude prices, and credit risk. The ratings are also constrained by exposure to risks related to project implementation at VPPL, funding and stabilisation of operations.

Analytical Approach

• For arriving at the ratings, CRISIL Ratings has applied its criteria for rating entities belonging to homogenous corporate groups. Accordingly, HML and its wholly owned subsidiaries (including Hazel Middle East FZE, Hazel Europe BV), and other group entities are considered a part of GV, in view of common promoter holding and significant operational, financial, and managerial linkages. The other group entities comprise Aspen International Pvt Ltd (Aspen), Sanman and VIL and its wholly owned subsidiaries (including VPPL and Veritas Agro Ventures Pvt Ltd).
• CRISIL Ratings has treated unsecured loans from the promoter (Rs 75 crore as on March 31, 2021) as neither debt nor equity, as the loans are interest-free, have no fixed repayment schedule, are 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 923 crore as on March 31, 2020) as short-term debt in its analysis, as these are interest bearing and have a fixed maturity.

 

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

• Established global presence with a wide distribution network: GV 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 gas oil, a major traded commodity forming 20% of revenue, no other product brings in over 3% of the group’s revenue. Adding more profitable products to the overall 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 via 8 international offices across the globe.

 

• Strong relationships with several key customers and suppliers: Over the years, GV 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/A2+), and Walambia Plastics Pvt Ltd.

 

• Promoter’s extensive experience: The promoter has long-standing experience and demonstrated high level of 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. GV 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 current employee base of over 800 people, around 150 are engaged in international operations.

 

Weaknesses

• Average financial risk profile: While adjusted networth is estimated at more than Rs 3,000 crore as on March 31, 2021, total outside liabilities to adjusted networth ratio remained adequate at 0.71 times, with liabilities primarily comprising of large working capital debt and creditors. The interest coverage ratio is expected at about 5 times for fiscal 2021.

 

Debt had reached almost Rs 2800 crore in fiscal 2018, due to high working capital intensity and has improved to Rs 1,759 crore by fiscal 2020 with consistent repayment of term debt and negligible dividend outflow. With consistent repayment in term debt, share of working capital debt is expected to increase from ~70-75% levels currently. With 74% stake sale in VPPL, the group’s future investment requirement in the project and additional debt related to project is not expected, thereby reducing pressure on the group’s financial risk profile

 

• Risks related to timely project implementation and funding tie-up at VPPL: VPPL is implementing a debt-funded project entailing cost of Rs 2,050 crore for setting up a manufacturing facility with phase-wise implementation at Dighi port in Maharashtra. The project has also received the UMP approval from the government of Maharashtra, and is therefore eligible to receive various benefits, including industrial promotion subsidy, and tax and duty concessions. The project will be funded through debt and promoter funds in a ratio of 2:1 and the group is yet to achieve financial closure. While the plant has been on site since 2018, the project has been delayed by about three years, due to insolvency proceedings under the bankruptcy law at the debt-laden Dighi port and delay in receipt of environmental clearance. The final NCLT order in favour of APSEZ and environmental clearance was received only in March 2021.

 

APSEZ has taken charge of the port and GV has commenced pre-commissioning surveys. The group has roped in a marquee player, Technip India Ltd (Technip) as its Engineering, Procurement, Construction Management (EPCM) contractor. The latter was involved in dismantling the plant at Malaysia, and its shipment to Dighi port in fiscal 2018. The project faces implementation risk, given its scale and scope, uncertainty over technical output and efficiency, and its idle status for almost three years. Funding risk continues as the group is yet to achieve financial closure. Any significant cost or time overrun may significantly affect cash flow and debt protection metrics, and therefore, remains a key rating sensitivity factor.

 

• Exposure to volatility in crude and petrochemical prices and fluctuations in forex rates: GV trades in chemicals and polymer products whose prices are directly linked to crude prices, which are highly volatile. Although GV 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 too. However, it benefits from a natural hedge as 50-55% of its sales are via exports, and procurement is fully order backed. Any significant movement in commodity prices and forex rates could adversely impact the operating performance and will be closely monitored.

Liquidity: Adequate

Cash and cash equivalent was around Rs 45 crore as on March 31, 2021. Annual cash accrual of Rs 300-400 crore will allow the group to comfortably meet debt obligation of Rs 110-120 crore in fiscals 2022 and 2023. Also, a significant portion of long term debt relating to the tank terminal project will be repaid by then. Utilisation of fund-based limits in each group company averaged 83% over the 12 months through March 2021, and that of the non-fund-based limits averaged 80-90%. Availability of unsecured loans from the promoter, whenever required, also enhances the financial flexibility.

Rating Sensitivity Factors

Upward Factors

• Sustained and significant increase in operating profitability to more than 4%, backed by improvement in tank terminal and trading operations
• Prudent working capital management resulting in improved key debt  metrics
• Timely completion of project at VPPL, as per stipulated costs and funding mix
• Receipt of regulatory approvals and 74% stake sale in VPPL project, thereby reducing future investment requirement and additional debt thereby improving the group’s financial risk profile

 

Downward Factors

• Substantial decline in operating profitability to less than 2%
• Weakening of the financial risk profile and debt metrics on account of lower-than-expected performance of the tank terminal, or more-than expected debt for funding VPPL’s project, including due to any material time or cost over-runs 
• Delay in financial support from the promoter during financial exigencies

About the Company

Sanman was incorporated in 1996, promoted by Mr Nitin Kumar Didwania. The company trades in chemicals, petrochemicals, solvents, metals, polymers, and paper products, with petrochemicals and chemicals being the major contributor to its revenue. 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’s name was changed to the present one on August 5, 2015.

About the Group

GV, 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 VIL, Aspen, and Sanman. 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 12,600 crore in fiscal 2020. The group has set up various entities for effective management of various business verticals. In the domestic market, it has a network covering 12 locations with adequate storage capacity. Globally, it has a presence in 10 countries with 8 international offices.

Any other information: Not applicable