| Solar Industries India Limited | ||||||
| Long-term rating upgraded to 'CRISIL AA+/Stable'; short-term rating reaffirmed | ||||||
| Rating Action | ||||||
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| 1 crore = 10 million | ||||||
| Refer to annexure for Details of Instruments & Bank Facilities |
| Detailed Rationale |
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CRISIL has upgraded its ratings on the long-term bank facilities of Solar Industries India Limited (SIIL; a part of the Solar group) to 'CRISIL AA+/Stable' from 'CRISIL AA/Positive', and reaffirmed its rating on short-term bank facilities and commercial paper at CRISIL A1+. |
| Analytical Approach |
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For arriving at its ratings, CRISIL has combined the financial and business risk profiles of SIIL, its subsidiary, Economic Explosives Ltd (EEL; rated 'CRISIL AA+/Stable/CRISIL A1+'), and other subsidiaries and step-down subsidiaries. This is because all the entities, collectively referred to as Solar group, have a common management and significant business and financial linkages. |
| Key Rating Drivers & Detailed Description |
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Strengths: * Robust market position With a market share of 24% in the domestic explosives segment, the group is one of the largest manufacturer and exporter of explosives and initiating systems in India. The group's manufacturing unit in Nagpur is world's largest cartridge plant at a single location. Solar group is one of the few players with a complete product range and capability to develop and supply customized products on demand. Along with healthy growth in domestic market, Solar group has also expanded significantly in the overseas market over the last few years. Furthermore, the group is also the largest supplier of explosives to Coal India Limited (CIL, rated 'CRISIL AAA/CCR AAA/Stable/CRISIL A1+'). With diversified revenue profile the group has been able to reduce its dependence on CIL which contributed 17% of total sales in fiscal 19 as against 58% in fiscal 07. Further, the group forayed into defence business in 2011 and has gained advantage by setting up high energy explosives, delivery system, ammunition, rocket/missile integration, pyros, igniters and fuses manufacturing facilities. Limited shelf life of the explosives, regular consumption requirement of the Armed Forces, Make in India focus and typical long term tenure of defence supply contracts provide steady medium-term revenue visibility. With a healthy order book of Rs.1645 crore as on September 30, 2019 in the domestic market and continued growth in international business over the medium term, the group is expected to maintain its robust market position. * Strong operating efficiencies with significant backward integration Majority of raw materials (apart from ammonium nitrate) such as detonator components, emulsifiers, sodium nitrate, and calcium nitrate are manufactured internally, leading to cost savings, quality control and a stable operating margin of 20% over the five fiscals through fiscal 2019. Also, all of the group's 25 bulk explosive manufacturing units are located in a 50-60 kilometre radius from major mining regions. Solar group is able to pass on the variations in raw material prices to its customers through the price escalation clause in the contracts thus maintaining margin even in volatile raw material price movements. * Strong financial risk profile Capital structure is healthy with strong networth of Rs.1237 crore and moderate gearing at 0.46 time as on March 31, 2019. Furthermore, cash accrual is expected to remain healthy, backed by strong growth in revenue and profitability, which will be sufficient to repay upcoming debt obligations and partly meet annual capital expenditure (capex) of about Rs 250-300 crore over the medium term. Hence, incremental borrowing would be modest. Interest coverage and net cash accrual to total debt ratios remained healthy at 9 times and 0.46 time, respectively, in fiscal 2019. Weaknesses: * Exposure to regulatory risks The explosives industry has high entry barriers as it requires industrial licensing, and various clearances from government, chief controller of explosives, and directorate general of mines safety. Furthermore, as per the Ammonium Nitrate Rules 2012, ammonium nitrate, key raw material (comprises 70% of the group's total raw material cost), has been classified as an explosive. Hence, its production, distribution, sale, and stocking require a licence. Sale of explosives is regulated by Petroleum and Explosives Safety Organization and Chief Controller of Explosives to prevent misuse of end products. Though the Solar group takes precautions at all stages of the manufacturing process, and is also a member of SAFEX (an international apex body that promotes global best practices on safety standards in the explosives industry), it will remain susceptible to regulatory risks. * Volatility in forex rates Partial imports of raw material and operations in Nigeria, Zambia, South Africa, and Turkey exposes Solar group to adverse currency fluctuations. For instance, during first half of fiscal 20, the group incurred a translation loss of Rs.42.5 crore due to currency devaluation. In order to safeguard itself from volatility in forex rates, Solar group has begun borrowing debt in local currency in overseas markets. This reduces the forex rate risk considerably. Also, sale price in overseas markets is linked to dollar. The group has a policy of hedging all imports and keeping exports open. However, CRISIL believes, due to overseas presence, forex risk shall remain. |
| Liquidity Superior |
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Cash accrual is expected to be more than Rs 250 crore per annum against yearly debt obligation of Rs 100-150 crore in fiscals 2020 and 2021. Cash and cash equivalents stood at Rs 107 crore as on March 31, 2019. On a standalone basis, SIIL has access to fund-based limit of Rs 355 crore which is marginally utilised. Capex of Rs 250-300 crore per annum will be partly met through internal accrual, leading to low incremental borrowing. Bank limit is expected to be sufficient to meet incremental working capital requirement, which are assessed to be minimal. SIIL has a policy of paying 30% of its profit as dividend. |
| Outlook: Stable |
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CRISIL believes the Solar group will maintain its robust position in the domestic explosives industry and report healthy revenue growth in the export & overseas and defence businesses, over the medium term. Also, financial risk profile will remain steady. |
| About the Group |
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Solar group is one of the largest domestic manufacturer and supplier of bulk and cartridge explosives, detonators, detonating cords, and components. It has manufacturing facilities in 25 locations in India, and plants in Nigeria, Zambia, South Africa, and Turkey. In fiscal 2011, the group entered the defence sector to manufacture high energy explosives, delivery system, ammunition filling and pyros fuses. |
| Key Financial Indicators | ||||||||||||||||||||||||
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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) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Annexure - List of entities consolidated | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Annexure - Rating History for last 3 Years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| All amounts are in Rs.Cr. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annexure - Details of various bank facilities | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
^Interchangeable with non-fund based facilities %Interchangeable with other non-fund based facilities #Interchangeable with fund based facilities | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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