Rating Rationale
April 29, 2020 | Mumbai
Sharda Cropchem Limited
Rating Reaffirmed
 
Rating Action
Total Bank Loan Facilities Rated Rs.375 Crore
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 A1+' rating on the short-term bank facilities of Sharda Cropchem Limited (SCL).

The rating continues to reflect the healthy business risk profile of SCL driven by high level of product registrations and presence in highly regulated markets.

Operating performance, which was steady in fiscal 2020, is expected to improve in fiscal 2021 despite the lockdowns situation in its key markets, Europe and NAFTA regions, as agrochemicals are classified as essential commodities in most countries due to the need to maintain food security. The company has not shut down its operations, though logistical difficulties remain a challenge. In fiscal 2020, performance was impacted by higher taxes levied by the US government on China originated imported goods. SCL sources its products from China. Medium term performance is expected to improve with expected steady demand growth for agrochemicals across geographies.

The financial risk profile should remain healthy, despite the possible increase in working capital requirement in near term, backed by steady cash generation and healthy capital structure. Liquidity profile is expected to be healthy given the estimated cash surpluses of about Rs 200 cr in March 2020 and absence of debt.

These strengths are partially offset by inherent working capital-intensive nature of operations, which  typically peaks significantly during January-March, and susceptibility of operations to monsoon vagaries and regulatory changes inherent in the agrochemicals industry.

Analytical Approach

For arriving at the rating, CRISIL has combined the business and financial risk profiles of SCL and its subsidiaries as all the companies, collectively referred to as the Sharda group, are in the same business and are managed by common promoters.

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
* Strong market position, driven by increasing product registrations and growing presence in highly regulated markets: The product base is large and the marketing network is wide with a geographically diversified clientele. Increased investment, mainly in North America and Europe, should help expand the customer base over the medium term. As on December 31, 2019, the group had 2,384 agrochemical registrations, with a marketing network across 80 countries.

* Healthy financial risk profile: Networth is large, gearing low, and interest coverage ratio healthy, driven by growth in revenue and profitability, and low debt. Unencumbered cash is estimated at about Rs 160 cr in March 2020. Low debt has kept the gearing comfortable at nil, which, along with high profitability, led to healthy debt protection metrics. Moreover, the company enjoys full headroom for raising additional funds. However, future investments into registrations are expected to be funded through internal accruals.
 
Weaknesses
* Working capital-intensive operations: The Sharda group's working capital requirement is typically higher than that of its peers because of wide product portfolio and geographic reach. Inventory is large due to numerous stock-keeping units and seasonality in the geographies that the group operates in. The working capital management though improved in fiscal 2019 due to prudent inventory and receivable management, the same is expected to increase due to lockdowns and slow movement of inventory and delay from receivables on account of slowdown. Additionally, there are substantial receivables from certain overseas markets, especially Latin America. While it maintains liquid surplus to manage working capital requirement, any significant stretch in the working capital cycle may impact cash flow, though temporarily (for one quarter).
 
* Susceptibility to risks inherent in the agrochemicals industry: The agrochemicals industry, particularly export, is sensitive to changes in government policies and the regulatory environment in end-user countries. Every country imposes stringent regulatory requirements on companies offering a new product. Changes in regulations could increase the variety of tests and data required, and make it more difficult for exporters to obtain registrations. Recently in USA, higher import duties were imposed on goods originated from China. Since SCL imports about 97% of the goods from China, the gross margins were impacted by 200 basis points; this is expected to be continue over the medium term.

The agrochemical sector is also sensitive to monsoons vagaries across the globe. In Q2 and Q3 of fiscal 2020, due to the elongated heat wave in Europe and NAFTA regions. Consequently SCL could not pass on the entire increase in higher raw material in various geographies.
Liquidity Strong

SCL's annual cash accrual is expected to be about Rs 200-250 cr in fiscal 2021-22. Cash and marketable securities remained healthy at about Rs 200 crore in March 2020. Though the company does not have a sizeable cash credit facility, it generally maintains at least Rs 150 crore of unencumbered liquid surplus even during times of peak working capital requirement. The cash accruals and liquid surplus should be comfortable to meet the annual capex of Rs 170 cr and incremental additional working capital investments.

Rating Sensitivity Factors
Downward Factors
* Increase in gearing above 0.7 times due to extensive stretch in working capital or higher than expected capex
* Sustained reduction in EBITDA below 13% or revenue degrowth more than 10%.

About the Group

SCL was formed in 2004 through a merger of two proprietorship firms, Sharda International and Bubna Enterprises, founded in 1987 and 1988, respectively. The company deals in generic agrochemicals, dyes and dye intermediates, and conveyor belts. In 2004, SCL set up Sharda International FZE (SI), a wholly-owned subsidiary, in Dubai. In fiscal 2012, SI was merged with SCL. A new entity, Sharda International DMCC, was formed in fiscal 2013.

As on December 31, 2019, the group had 2,384 agrochemical registrations, a marketing network spread over 80 countries, and around 400 clients around the world.

Key Financial Indicators
Particulars Unit 2019 2018
Revenue Rs.Crore 2007 1713
Profit After Tax (PAT) Rs.Crore 176 191
PAT Margin % 8.8 11.1
Adjusted debt/adjusted networth Times 0.01 0.15
Interest coverage Times 17.58 27.21
 
Particulars Unit 9M-FY20 9M-FY19
Revenue Rs.Crore 1127 1239
Profit after tax (PAT) Rs.Crore 23 71
PAT margin % 2.0 5.7
Interest coverage Times 100.29 21.92

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL 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)
ISIN Name of instrument Date of allotment Coupon rate (%) Maturity date Issue size (Rs.Crore) Rating assigned with outlook
NA Bank Guarantee NA NA NA 0.5 CRISIL A1+
NA Bill Purchase-Discounting Facility NA NA NA 20.0 CRISIL A1+
NA Letter of Credit NA NA NA 350.0 CRISIL A1+
NA Overdraft NA NA NA 2.0 CRISIL A1+
NA Foreign Exchange Forward NA NA NA 2.5 CRISIL A1+
 
Annexure - List of Entities Consolidated
Direct Subsidiaries
  Name of Companies Consolidated Extent of Consolidation Rationale for Consolis=dation
1 Axis Crop Science Private Limited 100% Wholly owned subsidiary
2 Nihon Agro Service Kabushiki Kaisha 100% Wholly owned subsidiary
3 Sharda Agrochem Dooel Skopje 100% Wholly owned subsidiary
4 Sharda Balkan Agrochemicals Limited 100% Wholly owned subsidiary
5 Sharda Costa Rica SA 99% Wholly owned subsidiary
6 Sharda Cropchem Espana, S.L. 100% Wholly owned subsidiary
7 Sharda Cropchem Israel Limited 100% Wholly owned subsidiary
8 Sharda Cropchem Tunisia SARL 99% Wholly owned subsidiary
9 Sharda De Guatemala S.A. 98% Wholly owned subsidiary
10 Sharda Del Ecuador CIA. LTDA. 99.5% Wholly owned subsidiary
11 Sharda Do Brasil Comercio De Produtos Quimicos E Agroquimicos LTDA 99% Wholly owned subsidiary
12 Sharda Dominicana, S.R.L. 99% Wholly owned subsidiary
13 Sharda EL Salvador S. A. DE CV 99% Wholly owned subsidiary
14 Sharda Hellas Agrochemicals Limited 100% Wholly owned subsidiary
15 Sharda Hungary Kft 100% Wholly owned subsidiary
16 Sharda International DMCC 100% Wholly owned subsidiary
17 Sharda Italia SRL 99% Wholly owned subsidiary
18 Sharda Morocco SARL 100% Wholly owned subsidiary
19 Sharda Peru SAC 99.95% Wholly owned subsidiary
20 Sharda Poland SP. ZO.O 100% Wholly owned subsidiary
21 Sharda Polska SP. ZO.O 100% Wholly owned subsidiary
22 Sharda Spain, S.L. 100% Wholly owned subsidiary
23 Sharda Swiss SARL 100% Wholly owned subsidiary
24 Sharda Taiwan Limited 100% Wholly owned subsidiary
25 Sharda Private (Thailand) Limited 100% Wholly owned subsidiary
26 Sharda Ukraine LLC 100% Wholly owned subsidiary
27 Sharda USA LLC 100% Wholly owned subsidiary
28 Shardacan Limited 100% Wholly owned subsidiary
29 Shardaserb DO.O 100% Wholly owned subsidiary
30 Sharzam Limited 99.99% Wholly owned subsidiary
 
Indirect Subsidiaries
  Name of Companies Consolidated Extent of Consolidation Rationale for Consolis=dation
1 Euroazijski Pesticidi D.O.O. 100% Step down subsidiary
2 Sharda Benelux BVBA 100% Step down subsidiary
3 Sharda Bolivia SRL 99% Step down subsidiary
4 Sharda Colombia S.A. 99.48% Step down subsidiary
5 Sharda De Mexico S De RL DE CV 99.99% Step down subsidiary
6 Sharda Europe BVBA 100% Step down subsidiary
7 Sharda International Africa (Pty) Ltd 100% Step down subsidiary
8 Sharda Malaysia SDN. BHD. 100% Step down subsidiary
9 Sharpar S.A. 90% Step down subsidiary
10 Siddhivinayak International Limited 100% Step down subsidiary
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  24.50  CRISIL A1+      21-02-19  CRISIL A1+  24-07-18  CRISIL A1+  27-10-17  CRISIL A1+  CRISIL A1 
                    13-10-17  CRISIL A1+   
Non Fund-based Bank Facilities  LT/ST  350.50  CRISIL A1+      21-02-19  CRISIL A1+  24-07-18  CRISIL A1+  27-10-17  CRISIL A1+  CRISIL A1 
                    13-10-17  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
Bank Guarantee .5 CRISIL A1+ Bank Guarantee .5 CRISIL A1+
Bill Purchase-Discounting Facility 20 CRISIL A1+ Bill Purchase-Discounting Facility 20 CRISIL A1+
Foreign Exchange Forward 2.5 CRISIL A1+ Foreign Exchange Forward 2.5 CRISIL A1+
Letter of Credit 350 CRISIL A1+ Letter of Credit 350 CRISIL A1+
Overdraft 2 CRISIL A1+ Overdraft 2 CRISIL A1+
Total 375 -- Total 375 --
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 Consolidation
CRISILs Criteria for rating short term debt

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