Rating Rationale
July 30, 2020 | Mumbai
Savita Oil Technologies Limited
Ratings Reaffirmed
 
Rating Action
Total Bank Loan Facilities Rated Rs.917.9 Crore
Long Term Rating CRISIL AA-/Stable (Reaffirmed)
Short Term Rating 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 of Savita Oil Technologies Limited (SOTL).
 
Performance is likely to be adversely impacted in fiscal 2021, owing to the slowdown in end-user industry demand, following the Covid-19 pandemic. End-user industries such as transformers and automobiles will be significantly impacted by the nationwide lockdown. However, players in the fast moving consumer goods (FMCG) industry, to whom the company supplies white oils, may not see much of an impact, given the essential nature of their products. CRISIL expects SOTL's operating margin to remain below 7% in fiscal 2021. Liquidity should be comfortable, aided by a healthy cash surplus and no external debt.
 
In fiscal 2020, revenue declined 10% year-on-year, owing to a marginal drop in volume and realisations, caused by  moderation in end-user demand. Though volatility in crude oil prices and foreign exchange (forex) rates did affect revenue performance, it also led to moderation in average blended EBIDTA (earnings before interest, depreciation, tax and amortization) per kilo litre to around Rs 4600 in fiscal 2020, from around Rs 5,400 in fiscal 2019. As a result, operating margin fell by 70 bps yoy, to 7.6% in fiscal 2020.
 
Going forward, operating margin should be in the range of 8'9% in fiscal 2022, aided by relatively stable crude prices and forex rates. Also, healthy product diversity across all segments, comprising transformer oils (revenue contribution of 34%), white oils (35%) and lubricating oils (27%), along with longstanding client relationships, should support recovery in demand.
 
Financial risk profile remains comfortable, marked by ratio of total outside liabilities to total networth at 0.65 time as on March 31, 2020, and net cash accrual to total debt of 37% in fiscal 2020. Liquidity is robust with cash & equivalents of Rs 166 crore as on June 30, 2020, and nil utilisation of the fund-based limit. Negligible long-term debt and absence of any large capital expenditure (capex) plan should support the financial risk profile over the medium term.
 
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.

Key Rating Drivers & Detailed Description
Strengths:
* Established market position in the base oil industry
With a market share of 35-40% in the 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 Ltd (rated 'CRISIL AAA/Stable/CRISIL A1+'), ABB India Ltd (rated 'CRISIL AAA/Stable/CRISIL A1+'), on addition to various state electricity boards (SEBs).
 
* Diversified revenue profile across end-user industries and geographies
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 37 crore as revenue in fiscal 2020, from sale to SEBs and others.
 
* Healthy financial risk profile
Capital structure is expected to remain comfortable, marked by low total outside liabilities to tangible networth ratio of 0.48 time and gearing of 0.16 time, respectively, expected as on March 31, 2021. Debt protection metrics should also be healthy, as reflected in expected interest coverage of 9.66 times for fiscal 2021 against 8.35 times in fiscal 2020. Debt/EBITDA is expected to be 1.42 times in fiscal 2021, compared to 1.38 times in fiscal 2020.
 
Weaknesses:
* Susceptibility to volatility in forex rates and prices of base oil
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 adverse fluctuations in forex rates. Against this, exports comprise only around 22% of total imports. For instance, operating margin dropped by 320 bps and 200 bps, respectively, in fiscals 2015 and 2019, as base oil prices declined significantly, resulting in high inventory losses. However, SOTL covers 50-60% of forex exposure through forward contracts, options, and a natural hedge.
 
* Working capital-intensive operations
Gross current assets have been in the range of 150-200 days over the five years ending March 31, 2020, led by large inventory of 80-100 days. The company has to maintain large stock of 4-6 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.
 
* Exposure to intense competition
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 166 crore as on June 30, 2020. Cash accrual of over Rs 80 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 June 2020.

Outlook: Stable

CRISIL believes SOTL will maintain its healthy financial risk profile over the medium term, supported by a comfortable capital structure, moderate debt obligation and adequate liquidity.

Rating Sensitivity factors
Upward factors:
* Sustained increase in operating margin to over 10%, resulting in sustained improvement in cash accruals
* Significant and steady improvement in business and financial risk profiles over the medium term
 
Downward factors:
* Larger-than-expected debt-funded capex, resulting in debt/EBIDTA of above 2.5 times. 
* Substantial weakening in business performance, with decline in operating margin to below 5-6% and lower cash accrual
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.

Key Financial Indicators - CRISIL-adjusted numbers
Particulars Unit 2020 2019
Revenue Rs crore 2046 2266
Profit after tax (PAT) Rs crore 96 114
PAT margin % 4.7 5.0
Adjusted debt/adjusted networth Times 0.25 0.34
Interest coverage Times 8.35 12.27

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 Cash Credit NA NA NA 60.00 NA CRISIL AA-/Stable
NA Letter of credit & Bank Guarantee NA NA NA 857.90 NA CRISIL A1+
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
Fund-based Bank Facilities  LT/ST  60.00  CRISIL AA-/Stable      19-11-19  CRISIL AA-/Stable  03-09-18  CRISIL AA-/Stable  05-07-17  CRISIL AA-/Stable  CRISIL AA-/Stable 
            17-10-19  CRISIL AA-/Stable           
Non Fund-based Bank Facilities  LT/ST  857.90  CRISIL A1+      19-11-19  CRISIL A1+  03-09-18  CRISIL A1+  05-07-17  CRISIL A1+  CRISIL A1+ 
            17-10-19  CRISIL A1+           
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
Cash Credit 60 CRISIL AA-/Stable Cash Credit 60 CRISIL AA-/Stable
Letter of credit & Bank Guarantee 857.9 CRISIL A1+ Letter of credit & Bank Guarantee 857.9 CRISIL A1+
Total 917.9 -- Total 917.9 --
Links to related criteria
CRISILs Approach to Financial Ratios
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating criteria for manufaturing and service sector companies
Rating Criteria for Chemical Industry
CRISILs Criteria for rating short term debt

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