Rating Rationale
October 27, 2017 | Mumbai
Sharda Cropchem Limited
Rated amount enhanced
 
Rating Action
Total Bank Loan Facilities Rated Rs.234.1 Crore (Enhanced from Rs.210 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 rating on the short-term bank facilities of Sharda Cropchem Limited (SCL; part of the Sharda group) at 'CRISIL A1+'.
 
On October 13, 2017, CRISIL had upgraded the rating on the short-term bank facilities to 'CRISIL A1+' from 'CRISIL A1'.
 
The upgrade reflects CRISIL's expectation of sustained growth in revenue and operating profitability, resulting in strong annual cash accrual in the medium term. Financial risk profile will remain healthy on the back of a healthy capital structure and debt protection metrics. Despite operations being working capital intensive, liquidity is cushioned by sufficient accrual, healthy unencumbered liquid surplus and zero term debt.
 
Revenue grew 15% year-on-year in fiscal 2017, led by increase in volume and product registrations, by around 16% and 23%, respectively. Sales to the North American Free Trade Agreement (NAFTA) region, which accounted for 26.5% of revenue, grew 43% during the year. Operating margin remained stable around 23%, backed by healthy product and geographic mix. Revenue is expected to record a compound annual growth rate of around 15% in the medium term, backed by increase in registrations and presence in highly regulated markets. Improving scale and stronger product portfolio should keep operating margin around 20%.
 
The rating continues to reflect a strong market position driven by increasing product registrations and a greater presence in regulated markets, as well as healthy risk management policies. The rating also factors in a robust financial risk profile because of a large net worth, comfortable debt protection metrics, and healthy liquidity. These rating strengths are partially offset by working capital intensive operations, especially during peak season, and susceptibility to monsoon vagaries and regulatory changes inherent in the agrochemical industry.

Analytical Approach
For arriving at the rating, CRISIL has combined the business and financial risk profiles of SCL and its subsidiaries, collectively referred to as the Sharda group. This is because these companies are in the same line of business, and managed by the same promoters.

Key Rating Drivers & Detailed Description
Strengths
* Strong market position, driven by product registrations and presence in highly regulated markets: Business risk profile is marked by a large product base and network, and geographically diversified clientele. Increased investment, mainly in North America and Europe, should help expand the customer base in the medium term. As on June 30, 2017, SCL had 2,069 agrochemical registrations, with a marketing network across 78 countries.
 
* Healthy financial risk profile: Financial risk profile is marked by a large networth, low gearing, and healthy interest coverage ratio, and derived strong support from growth in revenue and profitability, and low reliance on debt. Networth stood at Rs 960 crore as on March 31, 2017, against Rs 806 crore in the previous fiscal. Negligible debt has kept gearing comfortable, which coupled with healthy profitability, led to healthy debt protection metrics.
 
* Healthy risk management policies: The company adopts robust risk management practices to minimise exposure to inventory, price, and credit risks. Prices of agrochemicals are usually stable, but have been volatile over the past two fiscals, as they are also linked to crude oil prices. Though SCL is exposed to inventory losses, given the price fluctuations, the risk is largely offset as bulk of orders are hedged back-to-back, and the group maintains minimal base inventory. SCL does not enter into price speculation, and maintains inventory primarily to meet the immediate requirement of regular customers. The diversified clientele, comprising over 400 customers, also prevents revenue concentration. With exports accounting for bulk of revenue, there is significant exposure to fluctuation in foreign exchange rates. However, given the prudent hedging policy, forex losses have been minimal over the years.
 
Weakness
* High working capital intensity: SCL's working capital requirement is typically higher than other domestic agrochemical players, owing to the wide product portfolio and geographic reach. Overseas markets, especially Latin America, operate on large receivables, and the group thus has average receivables of 180-240 days (over 175 days, as on March 31, 2017). CRISIL believes the large receivables can pose challenges, especially in case of a major crop failure. However, the risk has not manifested till date, as the group has not witnessed large write-offs.
 
* Susceptibility to risks inherent in agrochemical industry: The agrochemical industry, particularly exports, 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.

About SCL
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 September 30, 2017, SCL has around 2087 agrochemical registrations, a marketing network spread over 78 countries, and around 400 clients around the world.For the half-year ended September 30, 2017, profit after tax was Rs 68 crore on operating income of Rs 619 crore, against Rs.74 crore and Rs.561 crore, respectively for the corresponding period in the previous fiscal.
Key Financial Indicators
Particulars Unit 2017 2016
Revenue Rs crore 1,395 1,221
Profit after  tax (PAT) Rs crore 190 175
PAT margin % 13.7 14.4
Adjusted debt/adjusted networth Times NA NA
Interest coverage Times 34.54 36.80

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 2.1 CRISIL A1+
NA Bill purchase-discounting facility NA NA NA 5.0 CRISIL A1+
NA Letter of credit NA NA NA 225 CRISIL A1+
NA Overdraft NA NA NA 2.0 CRISIL A1+
Annexure - Rating History for last 3 Years
  Current 2017 (History) 2016  2015  2014  Start of 2014
Instrument Type Quantum Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund-based Bank Facilities  LT/ST  CRISIL A1+  13-10-17  CRISIL A1+    No Rating Change    No Rating Change    No Rating Change  CRISIL A1 
Non Fund-based Bank Facilities  LT/ST  227.1  CRISIL A1+  13-10-17  CRISIL A1+    No Rating Change    No Rating Change    No Rating Change  CRISIL A1 
Table reflects instances where rating is changed or freshly assigned. 'No Rating Change' implies that there was no rating change under the release.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Bank Guarantee 2.1 CRISIL A1+ Bank Guarantee 2.1 CRISIL A1+
Bill Purchase-Discounting Facility 5 CRISIL A1+ Bill Purchase-Discounting Facility 5 CRISIL A1+
Letter of Credit 225 CRISIL A1+ Letter of Credit 200 CRISIL A1+
Overdraft 2 CRISIL A1+ Overdraft 2 CRISIL A1+
-- 0 -- Proposed Short Term Bank Loan Facility .9 CRISIL A1+
Total 234.1 -- Total 210 --
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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