| Solvay Specialities India Private Limited | ||||
| Rating continues on 'Watch Negative’ | ||||
| Rating Action | ||||
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| Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings. | ||||
| 1 crore = 10 million | ||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings’ rating on the long-term bank facilities of Solvay Specialities India Private Limited (SSIPL) continues on 'Rating Watch with Negative Implications'
The rating remains on watch as further clarity on the demerger of parent Solvay S.A. is still awaited. Permission of demerger from European Works Council has been received and demerger process will commence effective from July 01,2023 and is expected to be completed by December 2023 post which clarity on the likely capital structure of the demerged entities will emerge. The ratings were placed on watch negative on March 28, 2022. The rating action was on the back of announcement made by the current parent entity, Solvay S.A, on March 15, 2022, that it is reviewing plans to split into two independent publicly traded companies as follows:
Pursuant to the aforementioned announcement, S&P changed the rating outlook of the current parent i.e Solvay S.A (rated S&P BBB/A-2) to “Negative” from “Stable”. The negative outlook reflects S&P’s view that after the demerger, the rating of Solvay (EssentialCo) could be lowered owing to weaker business risk profile if the same is not offset by stronger credit metrics. As per S&P, Solvay has not provided details on its capital structure after the split. It might be noted that the current rating action by S&P reflects the likely action on rating of EssentialCo.
Business risk profile of SpecialtyCo is also expected to moderate due to reduction in diversification and increase in revenue concentration. SpecialtyCo's business would include exposure to cyclicality in some end markets, such as auto, aerospace, and construction. Furthermore, SpecialtyCo will have somewhat higher concentration than peers in the auto and aerospace sectors, which could increase profit volatility. Also, currently there is no clarity on the likely capital structure of the de-merged entities. In the event the moderation in business risk profile is not offset by stronger credit metrics, the ratings of SpecialtyCo might be lower than the current rating on Solvay S.A. As reflected in the current rating action, this may in turn impact the credit profile of SSIPL as CRISIL Ratings has applied its parent notch-up framework to arrive at the final rating of SSIPL. CRISIL Ratings would resolve the watch once there is adequate clarity on the capital structure and credit profile of SpecialtyCo.
SSIPL is estimated to have recorded revenues of Rs.1,490 crore during fiscal 2023 (Fiscal 2022: Rs.1294 crore). Operating margin improved to 9.4% in fiscal 2023 as against 8.13% in fiscal 2022. Operating margins are expected to be sustained at ~8-9% over the medium term.
Financial risk profile remains stable with healthy capital structure and debt protection metrics. Following an equity infusion of Rs. 122 crore by the parent in October 2022, net worth has improved to over ~Rs.685 crores in fiscal 2023 from Rs. 529 crore in fiscal 2022. Total debt as of 31 Mar 2023 reduced to ~Rs.200 crore (31 Mar 2022: Rs. 279 crore) owing to scheduled repayment on term debt and reduction in working capital utilization. Interest coverage and NCATD improved to ~ 5.6 times and 0.5 times respectively in fiscal 2023 as against 5.01 times and 0.29 times respectively The same is expected to expected to sustain at 6 times and 0.5 times respectively over the near to medium term.
The rating continues to reflect the strong technological, managerial and financial support from parent, Solvay SA which is expected to continue post the de-merger also. SSIPL is Solvay SA's wholly owned subsidiary and the flagship company of the Solvay group in India. The rating also factors in SSIPL's established position in the ultra-performance polymers business, strong research and development (R&D) prowess and comfortable financial risk profile. These strengths are partially offset by exposure to risk from lower sales to the Solvay group entities, intense competition in the surfactants segment and moderately working capital intensive operations. |
Analytical Approach For arriving at the rating, CRISIL Ratings has applied its parent notch-up framework to factor in support from Solvay SA. |
Key Rating Drivers & Detailed Description Strengths: Strong managerial, technical and financial support from parent SSIPL is strategically important to Solvay group as it is focusing on India as a manufacturing destination and growth market. SSIPL has strong operational linkages with the Solvay group, as more than 50% of revenue in fiscal 2022 came from sales to other Solvay group companies. It is the flagship company of the group in India, and the group uses this entity to distribute its products. It has full access to the technological capability of the parent, while the latter has significant control over SSIPL's management and operations. The parent had infused sizeable equity (Rs 332 crore as on March 31, 2021 and Rs. 122 crore in October 2022) in SSIPL and will continue to provide need-based support.
Established position in specialty polymers and strong R&D SSIPL has a strong position in the ultra-performance polymers business and strong R&D capability. The company manufactures polyether ether ketones (PEEK) and sulfones, which are used in diverse sectors. The PESU project commissioned in the previous fiscal is expected to drive growth in the medium term, with healthy orders expected in the segment. The plant in Panoli is the group's largest plant globally for manufacturing PEEK. The company houses the group's global R&D centre at Vadodara, Gujarat, focusing on product innovation.
Comfortable financial risk profile Financial risk profile remains stable with healthy capital structure and debt protection metrics. With the equity infusion of Rs. 122 crores by the parent in October 2022, net worth has improved to over ~Rs.685 crores in fiscal 2023 from Rs. 529 crore in crore in fiscal 2022 and gearing has improved to improve to 0.29x (31 Mar2022: 0.53x). Debt protection metrics were also comfortable Interest coverage and NCATD improved to ~ 5.6 times and 0.5 times respectively in fiscal 2023 as against 5.01 times and 0.29 times respectively in fiscal 2022
Weaknesses: Exposure to risk from lower sales to Solvay group entities and intense competition in the surfactants segment SSIPL has strong operational linkages with the Solvay group as over 50% of revenue comes from sales to other Solvay group companies. In fiscal 2020, sales to Solvay group's US (United States of America) entity recovered to previous levels after temporary dip in 2019 which affected the performance of SSIPL. Also, the surfactant segment of Rhodia which broke even at operational level in fiscal 2021 is exposed to intense competition in India.
Moderately working capital intensive operations Operations are moderately working capital intensive keeping in line with the nature of the business, as indicated by high gross current assets of over 200 days. However, it is largely mitigated as SSPIL receives credit period of 350-400 days from its group companies which accounts for 40- 50% of its purchases.
Susceptible to forex fluctuations and international supply chain disruptions Exports contribute around 50% of overall revenue for SSIPL making it susceptible to any fluctuations in forex prices. However, there is natural hedge in the form of imports of around 40-50% which largely mitigates the risk of forex fluctuation. SSIPL is also vulnerable to disruptions in the global supply chain with exports contributing around ~75-80% to the specialty polymer division. Disruptions in global supply chains and logistic issues negatively impacted the specialty polymer division during fiscal 2021. |
Liquidity: Strong Liquidity is adequate with cash balances of ~ Rs 34 crore (FY21: Rs 142 crore) in FY22 and sufficient cushion in WC limits. Avg. utilization in FY22 was ~60-80% which has come down sharply post equity infusion. Current utilization level is ~25%. WC utilization increased in March end as company stocked up on inventory anticipating further price rise and supply chain disruption. Further, cash accruals expected at over Rs. 90-100 crore per annum should be sufficient to meet scheduled term debt repayments of Rs. 69 crore and Rs. 34 crores due in fiscal 2023 and fiscal 2024 respectively. |
Rating Sensitivity factors Upward factors * Stronger credit profile of SpecialtyCo post de-merger compared to the current rating on Solvay SA * Upgrade in the rating on parent by one notch in case the de-merger does not go through, and significant and steady increase in scale of operations of SSIPL with operating profitability above 15%
Downward factors * Weaker credit profile of SpecialtyCo post de-merger compared to the current rating on Solvay SA * Downgrade in rating of the parent by one or more notches or continuance of negative outlook in case the de-merger does not go through. * Change in stance of support from Solvay group. * Significant deterioration in operating performance with operating profitability falling below 5% impacting cash generation |
About the Company SSIPL, incorporated in 2005, is a wholly owned subsidiary of Solvay SA, and manufactures specialty polymers. The plant in Panoli is an integrated facility for manufacturing monomers and polymers. It is the Solvay group's largest plant globally for PEEK polymers. SSIPL also houses the group's global R&D centre in Vadodara.
About Solvay SA Incorporated in 1863 in Belgium, Solvay SA is an international chemicals company with presence in 62 countries. It is one of the largest chemical companies of Europe. The group reported net sales of EUR 13.4 billion with earnings before interest, tax, depreciation and amortisation (EBIDTA) margin of 24.0% for the year 2022. It has 22,000 + employees across the world, and manufacturing facilities at 98 locations and 21 R&D centres. The group derives 90% of its revenue from the businesses in which it is among the top three global players. |
Key Financial Indicators
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Any other information: Not applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
*Interchangeable with other fund-based and non-fund based facilities |
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| Annexure - Details of Bank Lenders & Facilities | ||||||||||||
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Criteria Details
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