| Savita Oil Technologies Limited | ||||||
| Rating outlook revised to ‘Positive’; Ratings reaffirmed | ||||||
| Rating Action | ||||||
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| 1 crore = 10 million | ||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has revised its rating outlook on the long term bank facilities of Savita Oil Technologies Limited (SOTL) to ‘Positive’ from 'Stable' while reaffirming the long term rating at ‘CRISIL AA-'. The rating on the short-term bank facilities has been reaffirmed at ‘CRISIL A1+’.
The outlook revision takes into account the expected improvement in business risk profile supported by better product diversity through increasing proportion of its white oils and lubricating oils business, as well as sustained growth in performance of its key business segment of transformer oils. Further, its operating profitability has also registered healthy improvement to ~16.3% in fiscal 2021, and is expected to remain at 9-10% over the medium term Financial risk profile will continue to remain comfortable, characterised by improving cash accruals expected to be in the range of Rs. 170-180 crores, no external debt and healthy cash surplus of Rs 250-300 crore and of Rs. 130-150 crore post acquisition of equity shares of Savita Polymers Limited.
Revenue is expected to grow by 10-11% in fiscal 2022 aided by a low base of FY21 and improvement in both volumes and realisations on account of recovery in auto industry, benefits accruing from global base oil shortage and potential of increased market share due to consumer shift towards organised sector. Also, healthy product diversity across all segments, comprising transformer oils (revenue contribution of 31%), white oils (39%) and lubricating oils (26%), along with longstanding client relationships, should support recovery in demand.
Volatility in crude oil prices and foreign exchange (forex) rates during the fiscal had a positive effect on the revenue performance, and also led to improvement in operating margin by 850 bps yoy, to 16.3% in fiscal 2021. Going forward, operating margin to remain at 9-10% from fiscal 2022 onwards on account of ability to pass on raw material price volatility and efficient procurement of raw materials at optimal prices amidst crude volatility and demand-supply mismatch situations.
On 20 July, 2021, SOTL has announced a scheme of arrangement, wherein they would acquire entire shares of Savita Polymers Ltd (SPL), thereby making SPL a wholly owned subsidiary of SOTL with cash consideration of around Rs. 80 crores plus cash and cash equivalents and fair vale of investments on the closing date.
The ratings continue to reflect the company’s established market position, diversified revenue profile, and healthy financial risk profile. These strengths are partially offset by vulnerability of operating margin to sharp volatility in forex rates and commidity prices, working-capital-intensive operations, and exposure to intense competition. |
Analytical Approach Team has combined the business and financial risk profiles of SOTL and SPL. |
Key Rating Drivers & Detailed Description Strengths:
With a market share of one-third in the domestic transformer oil and white oil segments, the company has a strong market position. While market share is relatively lower in the lubricant industry, SOTL caters to an established clientele, including Hindustan Unilever Ltd (rated ‘CRISIL AAA/Stable’), Dabur India Limited (rated ‘CRISIL AAA/Stable/CRISIL A1+’), ABB India Ltd (rated ‘CRISIL AAA/Stable/CRISIL A1+’), in addition to various state electricity boards (SEBs). Demand for white oils continues to remain stable and steady with strong ability to pass on increase in material costs.
Diversity in end-user base and geographical reach lends stability to SOTL’s revenue profile. The company’s products (transformer oil, white oil, and lubricants) primarily cater to three different end-user segments: power and distribution transformers, cosmetics and healthcare, and automotive and industrial lubricants, respectively. Exports, which contribute around 16-20% to overall revenue, also enhance geographical outreach. Furthermore, SOTL’s wind power plants, aggregating 53.80 megawatt (MW), generated Rs 33 crore as revenue in fiscal 2021, from sale to SEBs and others.
Capital structure is expected to remain comfortable, marked by low total outside liabilities to tangible net worth (TOL/TNW) ratio of 0.58 time and gearing of 0.2 time, respectively, as on March 31, 2021. Going forward, TOL/TNW and adjusted gearing is expected to remain below 0.5 times and 0.2 time respectively supported by healthy net cash accruals of Rs 150-200 crore per annum, low capex requirement and efficient working capital management.
Debt protection metrics should also be healthy, as reflected in expected interest coverage of over 15 times for fiscal 2022 and fiscal 2023. CRISIL believes SOTL will continue to maintain healthy cash and equivalent of over Rs 200 crore in the medium term.
Weaknesses:
Base oil, the key raw material (constituting 85-90% of total input cost), is a crude derivative. Hence, its prices remain susceptible to any sharp volatility in crude prices. Moreover, as the company imports over 80% of base oil requirement, owing to limited availability in the domestic market, it remains exposed to sharp adverse fluctuations in forex rates. Against this, exports comprise only around 22% of total imports. However, SOTL covers 50-60% of forex exposure through forward contracts, options, and a natural hedge.
Gross current assets have been in the range of 180-240 days over the five years ending March 31, 2021, led by large inventory of 45-95 days. The company has to maintain large stock of 6-12 weeks, for receiving base oil at its site, from suppliers, and to insulate itself from price volatility arising from supply-side concerns in spot markets.
Low entry barriers and limited product differentiation have led to intense competition in the base oil processing industry. Players mostly focus on volume, which leads to competitive pricing, and hence, inability to fully pass on hike in base oil prices to customers. However, SOTL benefits from technical approvals provided by key customers. This acts as an entry barrier, as new entrants find it time consuming to obtain such approvals. |
Liquidity: Strong SOTL has adequate liquidity, with cash & equivalents of Rs 360 crore as on March 31, 2021. Cash accrual of over Rs 150 crore is expected over the medium term, against negligible long-term debt and no major capex plan. Fund-based bank limit of Rs 60 crore has been unutilised over the 12 months through September 2021. |
Outlook: Positive CRISIL believes that SOTL will benefit from its market leadership position, healthy product diversity and sound risk management practices. The company will continue to maintain its healthy financial risk profile over the medium term, supported by its comfortable capital structure and adequate liquidity over the medium term. |
Rating Sensitivity factors Upward factors:
Downward factors:
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About the Company Established in 1961, SOTL is a leading player in the transformer oil, white oil, and industrial and automotive lubricants industries. These products are essentially obtained through refining base oil, and topped with additives to derive the required characteristics. Facilities in Turbhe, Maharashtra; and Kharadpada and Silli in Silvassa have refining capacities of 450,000 kilolitres per annum. The company also has wind power capacity of 53.80 MW; this power is sold to SEBs and other users, under long-term agreements.
For the three months ended June 30, 2021, the company reported revenue of Rs. 606 crore (Rs. 263 crore for the corresponding period last fiscal ended June 30, 2020) and net profit of Rs. 78 crore (Rs. 11 crore). |
Key Financial Indicators CRISIL-adjusted numbers
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Any other information: Not applicable |
| Note on complexity levels of the rated instrument: CRISIL Ratings' complexity levels are assigned to various types of financial instruments. The CRISIL Ratings' complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL Ratings' 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)
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Annexure – List of entities consolidated
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| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Annexure - Details of Bank Lenders & Facilities | ||||||||||||||||||||||||||||||||||||||||||
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Criteria Details
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