Rating Rationale
February 21, 2019 | Mumbai
Sharda Cropchem Limited
Rated amount enhanced
 
Rating Action
Total Bank Loan Facilities Rated Rs.375 Crore (Enhanced from Rs.234.1 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 Ltd (SCL; part of the Sharda group).

The rating continues to reflect the expectation of sustained growth in the Sharda group's revenue and operating profitability, resulting in strong cash accrual over the medium term. The financial risk profile should remain healthy backed by healthy capital structure and strong cash generation. Working capital requirement reduced in the first three quarters of fiscal 2019, after peaking in the fourth quarter of fiscal 2018, resulting in adequate build-up of liquid surplus to manage the requirement in the fourth quarter of fiscal 2019. Liquidity was supported by infusion of funds by the promoters when working capital requirement increased in the fourth quarter of fiscal 2018.

Revenue has grown 31% year-on-year in fiscal 2019 so far, led by an increase in volume and product mix, though partially offset by adverse movements in foreign exchange (forex) rates. The proportion of sales of agricultural chemicals (agrochemicals) to the North American Free Trade Agreement (NAFTA) region grew 36%, and accounted for 39% of total sales during the 9 months ended December 31, 2018. The operating margin reduced to 12.4% mainly due to adverse movements in forex rates and write-off of registrations of Rs 42 crore. Revenue is expected to rise 15-17% over the medium term, backed by increase in registrations and steady demand. Improving scale and stronger product portfolio should keep the operating margin at 18-19% over the medium term.

Working capital requirement generally peaks in the fourth quarter of the fiscal in line with seasonality in the geographies in which the group operates. Given the high growth in revenue, working capital requirement has been increasing. However, in fiscal 2019, the Sharda group managed working capital better by reducing inventory and receivables. Capital expenditure (capex) also reduced in the 9 months ended December 31, 2018, as compared with the corresponding period of the previous fiscal. Given the expectation of moderate capex and continued healthy growth in cash accrual, the group should be able to manage working capital more comfortably over the medium term.

The rating continues to reflect the Sharda group's strong market position, driven by increasing product registrations and growing presence in regulated markets. The rating also factors in the group's robust financial risk profile. These strengths are partially offset by working capital-intensive operations especially during the peak season, susceptibility to monsoon and to regulatory changes inherent in the agrochemicals industry, and average liquidity.

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, 2018, the group had 2,412 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 increased from Rs 51 crore as on March 31, 2018, to about Rs 140 crore as on January 31, 2019. Low debt has kept the gearing comfortable at close to nil, which, along with high profitability, led to healthy debt protection metrics.

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. Additionally, there are substantial receivables from certain overseas markets, especially Latin America. Inventory was at 108 days and receivables were at 123 days as on December 31, 2018, but reduced from 140 and 208 days, respectively, as on March 31, 2018. 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.
Liquidity

SCL had cash and marketable securities of about Rs 250 crore as on January 31, 2019. The company recently enhanced its letter of credit facility by Rs 125 crore, which should release cash stuck in the 100% margin facilities. Though the company does not have a sizeable cash credit facility, it generally maintains at least Rs 100 crore of unencumbered liquid surplus. The cash credit facility of Rs 7 crore was utilised at an average of less than 30% in the past year. Moreover, during fiscal 2018, the promoters contributed when the company required additional working capital to fund excess inventory.

About the Company

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, 2018, the group had 2,412 agrochemical registrations, a marketing network spread over 80 countries, and around 400 clients around the world.

Key Financial Indicators
Particulars Unit 2018 2017
Revenue Rs crore 1713 1395
Profit after tax (PAT) Rs crore 191 190
PAT margin % 11.1 13.6
Adjusted debt/adjusted networth Times NA NA
Interest coverage Times 74.61 34.54
 
Particulars Unit 9M-FY19 9M-FY18
Revenue Rs crore 1239 945
Profit after tax (PAT) Rs crore 71 78
PAT margin % 5.7 8.2
Interest coverage Times 21.92 628.69
 

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 - Details of consolidation
Direct Subsidiaries

1 Axis Crop Science Private Limited
2 Nihon Agro Service Kabushiki Kaisha
3 Sharda Agrochem Dooel Skopje
4 Sharda Balkan Agrochemicals Limited
5 Sharda Costa Rica SA
6 Sharda Cropchem Espana, S.L.
7 Sharda Cropchem Israel Limited
8 Sharda Cropchem Tunisia SARL
9 Sharda De Guatemala S.A.
10 Sharda Del Ecuador CIA. LTDA.
11 Sharda Do Brasil Comercio De Produtos Quimicos E Agroquimicos LTDA
12 Sharda Dominicana, S.R.L.
13 Sharda EL Salvador S. A. DE CV
14 Sharda Hellas Agrochemicals Limited
15 Sharda Hungary Kft
16 Sharda International DMCC
17 Sharda Italia SRL
18 Sharda Morocco SARL
19 Sharda Peru SAC
20 Sharda Poland SP. ZO.O
21 Sharda Polska SP. ZO.O
22 Sharda Spain, S.L.
23 Sharda Swiss SARL
24 Sharda Taiwan Limited
25 Sharda Private (Thailand) Limited
26 Sharda Ukraine LLC
27 Sharda USA LLC
28 Shardacan Limited
29 Shardaserb DO.O
30 Sharzam Limited
 
Indirect Subsidiaries

1 Euroazijski Pesticidi D.O.O.
2 Sharda Benelux BVBA
3 Sharda Bolivia SRL
4 Sharda Colombia S.A.
5 Sharda De Mexico S De RL DE CV
6 Sharda Europe BVBA
7 Sharda International Africa (Pty) Ltd
8 Sharda Malaysia SDN. BHD.
9 Sharda Uruguay S.A.
10 Sharpar S.A.
11 Siddhivinayak International Limited

 
Annexure - Rating History for last 3 Years
  Current 2019 (History) 2018  2017  2016  Start of 2016
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund-based Bank Facilities  LT/ST  24.50  CRISIL A1+      24-07-18  CRISIL A1+  27-10-17  CRISIL A1+  03-08-16  CRISIL A1  CRISIL A1 
                13-10-17  CRISIL A1+  05-01-16  CRISIL A1   
Non Fund-based Bank Facilities  LT/ST  350.50  CRISIL A1+      24-07-18  CRISIL A1+  27-10-17  CRISIL A1+  03-08-16  CRISIL A1  CRISIL A1 
                13-10-17  CRISIL A1+  05-01-16  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 2.1 CRISIL A1+
Bill Purchase-Discounting Facility 20 CRISIL A1+ Bill Purchase-Discounting Facility 5 CRISIL A1+
Foreign Exchange Forward 2.5 CRISIL A1+ Letter of Credit 225 CRISIL A1+
Letter of Credit 350 CRISIL A1+ Overdraft 2 CRISIL A1+
Overdraft 2 CRISIL A1+ -- 0 --
Total 375 -- Total 234.1 --
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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