Rating Rationale
August 28, 2020 | Mumbai
Sonkamal Enterprises Private Limited
Ratings Reaffirmed
 
Rating Action
Total Bank Loan Facilities Rated Rs.200 Crore
Long Term Rating CRISIL BBB-/Stable (Reaffirmed)
Short Term Rating CRISIL A3 (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has reaffirmed its 'CRISIL BBB-/Stable/CRISIL A3' ratings on the bank facilities of Sonkamal Enterprises Private Limited (SEPL).
 
The rating factors company's recent business updates. In fiscal 2020 the company's revenue declined to Rs 746.8 crore as against Rs 819.1 crore in fiscal 2019. Although there was limited impact in the volume traded in Q4 of fiscal 2020 on account of the covid 19 pandemic, continuous decline in the phenol prices led to lower realisations. Further, revenues were impacted by Covid related issues in the first quarter of fiscal 2021, leading to weaker demand, coupled with further decline in prices, hence overall revenues for fiscal 2021 are expected to decline from fiscal 2020 levels. Profitability is however expected to be sustained at similar levels supported by the limited inventory, mitigating the risk of fluctuations in the price of traded chemicals. 
 
The ratings continue to reflect the extensive experience of the promoters in the chemicals trading business, the company's diversified customer base and pan-India presence and steady relationships with suppliers, limited exposure to price risk, and moderate financial risk profile. These strengths are partly offset by susceptibility to volatility in foreign exchange (forex) rates and large working capital requirement.

Analytical Approach

Unsecured Loans of Rs.10.4 crores as on 31st March 2020 has been treated as Neither Debt Nor Equity (NDNE) as the same is from the promoters and is expected to be retained in business

Key Rating Drivers & Detailed Description
Strengths 
* Extensive experience of the promoters, diverse clientele, and steady demand
The promoters have experience of more than three decades in trading in chemicals, particularly phenol. Their experience has helped them gain understanding of demand-supply patterns, both domestic and global. The company has a diversified clientele across India. It derives a majority of its revenue from trading in phenol, which has stable demand from various industries such as plywood and laminate, paint and coatings, pharmaceuticals, textile, plastics, food packaging, soap and detergent, and agrochemicals.
 
The company is also a distributor of a large domestic player, Deepak Phenolic Ltd (100% subsidiary of Deepak Nitrite Limited; rated CRISIL AA-/Positive/CRISIL A1+), which will help increase revenue and mitigate the key risk of fluctuations in forex rates.
 
* Moderate financial risk profile
The financial risk profile is supported by moderate capital structure and debt protection metrics. Networth and gearing are estimated at Rs 52.5 crore and 0.64 time, respectively, as on March 31, 2020 (Rs 45.2 crore and 1.22 time, respectively, as on March 31, 2019). Interest coverage and net cash accrual to adjusted debt ratios were 5.15 times and 0.3 time, respectively, for fiscal 2020 (3.23 times and 0.29 time, respectively, in fiscal 2019).
 
* Low price risk
The company does not stock chemicals and inventory averaged less than 5 days over the past 5 fiscals through fiscal 2020, mitigating the risk of fluctuations in the price of traded chemicals.
 
Weaknesses
* Vulnerability to forex risk leading to volatile operating margin
The company imports 50% of its traded goods, and hence, faces forex risk. As it does not hedge its entire forex exposure, adverse fluctuations in forex rates have hit its profitability in the past. Though import is expected to decline over the medium term with increased domestic purchase, a track record of stable domestic trade and sustained profitability remains a key monitorable.
 
* Large working capital requirement
Gross current assets are estimated at 98 ' 120 days over the three fiscals through 2020, driven by stretched receivables of 90 - 110 days. Receivables have been sizeable as significant credit is offered to customers to combat competition. The company provides credit of up to 90 days to customers and receives similar credit from its suppliers. The working capital cycle is expected to remain at similar level over the medium term.
Liquidity Adequate

Liquidity is adequate as the company is expected to generate sufficient cash accruals of Rs 4.9 crore in fiscal 2021 and Rs 8 crore in fiscal 2022 against debt repayment obligation of Rs.1.69 crore per annum in fiscals 2021 and 2022. The liquidity of the company is further supported by cushion in the bank lines as the average bank limit utilization is 62% in the past 12 months ending June 2020.

Outlook: Stable

CRISIL believes SEPL will continue to benefit from its diversified customer base and strong relationships with suppliers.

Rating Sensitivity factors
Upward Factors
* Substantial and sustainable increase in revenue and profitability, leading to cash accrual above Rs 8 crore
* Significant improvement in the working capital cycle

Downward Factors
* Steep decline in revenue or operating profits, resulting in cash accrual below Rs 3 crore
* Large, debt-funded capital expenditure
* Sizeable stretch in the working capital cycle.
About the Company

SEPL was set up in 1980 as a proprietary concern by Mr Janak Ladhani and was reconstituted as a partnership firm, and later as a private limited company. SEPL trades in petrochemicals and mainly trades in chemicals such as phenol, di-acetone, and acrylate monomers. It also has a repackaging unit for drumming of chemicals at Panvel, Maharashtra.

Key Financial Indicators
Particulars Unit 2020* 2019
Revenue Rs crore 746.83 819.12
Profit after tax (PAT) Rs crore 7.22 4.62
PAT margin % 1.0 0.6
Adjusted debt/ adjusted networth Times 0.64 1.22
Interest coverage Times 2.68 1.90
*Provisional Data

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments and are included (where applicable) in the Annexure -- Details of Instrument in this Rating Rationale. For more details on the CRISIL complexity levels, please visit www.crisil.com/complexity-levels.
Annexure - Details of Instrument(s)
ISIN Name of instrument Date of allotment Coupon
rate (%)		 Maturity date Issue size
(Rs cr)		 Complexity levels Rating assigned
with outlook
NA Bank Guarantee NA NA NA 7 NA CRISIL A3
NA Cash Credit NA NA NA 30.5 NA CRISIL BBB-/Stable
NA Letter of Credit NA NA NA 97.5 NA CRISIL A3
NA Proposed Working Capital Facility NA NA NA 20 NA CRISIL BBB-/Stable
NA Standby Line of Credit NA NA NA 3 NA CRISIL BBB-/Stable
NA Working Capital Facility NA NA NA 42 NA CRISIL BBB-/Stable
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  95.50  CRISIL BBB-/Stable      30-05-19  CRISIL BBB-/Stable/ CRISIL A3          CRISIL BB-/Stable 
Non Fund-based Bank Facilities  LT/ST  104.50  CRISIL A3      30-05-19  CRISIL A3          CRISIL A4+ 
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 7 CRISIL A3 Bank Guarantee 7 CRISIL A3
Cash Credit 30.5 CRISIL BBB-/Stable Cash Credit 30.5 CRISIL BBB-/Stable
Letter of Credit 97.5 CRISIL A3 Letter of Credit 132 CRISIL A3
Proposed Working Capital Facility 20 CRISIL BBB-/Stable Overdraft 10 CRISIL A3
Standby Line of Credit 3 CRISIL BBB-/Stable Overdraft 3 CRISIL BBB-/Stable
Working Capital Facility 42 CRISIL BBB-/Stable Proposed Working Capital Facility 17.5 CRISIL BBB-/Stable
Total 200 -- Total 200 --
Links to related criteria
Assessing Information Adequacy Risk
CRISILs Approach to Financial Ratios
Criteria for rating trading companies
Rating Criteria for Chemical Industry
CRISILs Approach to Recognising Default
CRISILs Bank Loan Ratings

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