Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AA/Stable/CRISIL A1+’ ratings on the bank facilities of Sud-Chemie India Pvt Ltd (SCIPL).

 

Revenue from operations has grown 6% on-year to Rs 2,269 crore in fiscal 2024, driven by volume growth of 10-15% across segments. Overall revenue growth was driven by growth of 20% in the catalyst segment, which was partly offset by 10% degrowth in the catalyst convertor segment. In the catalyst segment, export revenue increased ~20% to Rs 952 crore (Rs 797 crore in fiscal 2023) and domestic revenue increased ~19% to Rs 553 crore (Rs 464 crore in fiscal 2023) driven by growing demand with robust exports to group companies and capacity expansions in key end-user industries such as petroleum, refineries and fertilisers. However, performance in the catalytic converter segment moderated in fiscal 2024 with revenue degrowth of ~10% to Rs 677 crore (Rs 752 crore in fiscal 2023) on account of decline in realisations of precious metals. Also, the company plans to strategically focus on high-margin products (catalysts) while maintaining stable performance in low-margin products (catalytic converters). With continued moderation in key raw material prices, realisations are expected to fall majorly in the catalyst convertor segment which will lead to moderation in overall revenue to Rs 2,100-2,200 crore despite growth in volume in fiscal 2025.

 

Operating margin improved to 29.49% in fiscal 2024 from 24.49% in fiscal 2023, driven by softening of key raw material prices and improved product mix with increasing share of high-margin catalyst segment where gross margins range between 45% and 50% while for catalytic converters it ranges between 15% and 25%. Realisations are expected to decline on account of declining metal prices, so fixed cost absorption will be lower, but cost-saving initiatives and focus on improving the product mix will lead to operating margin sustaining above 25% over the medium term.

 

The financial risk profile is expected to remain strong with healthy networth of Rs 1,345 crore, nil debt and strong liquid surplus estimated at Rs 617 crore as on March 31, 2024. Steady internal accrual, estimated at Rs 100-120 crore over the medium term, healthy liquid surplus and unutilised bank lines are more than sufficient to support incremental working capital requirement and capital expenditure (capex) of Rs 100 crore over the medium term. The company paid nearly 70% of profit after tax (PAT) as dividend payout in the past and expects to continue paying dividend at similar levels over the medium term.

 

The ratings continue to reflect the company’s established position in the catalyst segment, strong research and development (R&D) and new catalyst development in India. The ratings also factor in the company's diversified customer profile and comfortable financial risk profile. These rating strengths are partially offset by the company’s large working capital requirement and its susceptibility to decline in demand from end-user industries.

Analytical Approach

For arriving at its ratings, CRISIL Ratings has considered the standalone business and financial risk profiles of SCIPL.

Key Rating Drivers & Detailed Description

Strengths:

• Established position in the catalyst segment: SCIPL is India’s leading manufacturer of catalysts and has a strong customer base including some of the leading petrochemical and fertiliser manufacturers in India. CRISIL Ratings believes the company will continue to witness steady growth in demand on account of cost competitiveness, the superior quality of products and steady replacement demand. Given the technical intensity and strong internal R&D, the operating margin should remain healthy.

 

• Strong product profile and diversified revenue stream: SCIPL has a strong product profile across the catalyst and catalytic converter segments, which has enabled it to sustain its revenue growth despite cyclical demand in end-user industries. SCIPL caters to diverse industries and geographies. Export revenue is spread across multiple geographies in Asia, Europe and the US, and is sizeable, while domestic revenue constitutes the rest. The company’s strategy is to maintain a stable revenue profile from catalytic converters while improving revenue share from the catalyst segment which are typically high-margin products. Major customers in catalytic converters include TVS, Munjal Auto, Mahindra & Mahindra and Royal Enfield. SCIPL’s healthy product range and geographical diversity mitigate the risks related to a downturn in any particular industry.

 

• Strong financial risk profile: SCIPL has a strong financial risk profile, as indicated by comfortable networth estimated at Rs 1,345 crore and nil debt as on March 31, 2024. The liquidity profile is supported by a sizeable liquid surplus estimated at Rs 617 crore. The company is expected to remain largely debt free with internal accrual of Rs 100-120 crore each fiscal, which is more than adequate to meet capex and working capital requirement.

 

Weaknesses:

• Large working capital requirement: Operations are moderately working capital intensive, though prudently managed, as indicated by high gross current assets. SCIPL mitigates the impact of high inventory levels and higher credit extended to some overseas customers by minimising the credit period for certain supplies and, in some cases, even selling on advance payment basis. However, as the company predominantly deals with commodities, it receives only nominal credit from suppliers and, thus, incremental working capital will continue to be moderate. Nevertheless, the working capital requirement is expected to be funded through internal accrual.

 

• Susceptibility to decline in demand from end-user industries: Demand for SCIPL’s products follows the general economic cycle, mainly because its products are used in industries such as fertilisers, petrochemicals, sponge iron and automobiles. Thus, revenue is susceptible to downturns in these industries. While the geographical diversity in revenue helps sustain growth even when some markets experience a slowdown, any steep business moderation in multiple markets or segments will impact its growth.

Liquidity: Strong

Liquidity is supported inter-alia by steady profit accrual, nil debt and available drawing power. Over the medium term, capex and incremental working capital requirement are expected to be funded out of internal accrual. SCIPL has cash surplus estimated at Rs 617 crore as of March 31, 2024. Additionally, cash accrual of Rs 100-120 crore and unutilised fund-based bank lines of Rs 57 crore support liquidity which is more than enough to fund incremental working capital requirement and moderate capex of Rs 100 crore in fiscal 2025.

Outlook: Stable

CRISIL Ratings believes SCIPL’s business risk profile will continue to benefit from its strong product offerings, R&D capabilities and diversified market presence. The financial risk profile should remain strong because of steady cash accrual, nil debt and healthy liquidity.

Rating sensitivity factors

Upward factors

• Increase in scale of operations while maintaining healthy operating margin over 27%
• Sustenance of strong financial risk profile and surplus liquidity
• Diversification into new product segments

 

Downward factors

• Significant de-growth in revenue along with steep decline in operating profitability to below 15% impacting cash generation
• Large, debt-funded capex or acquisition, or a significant stretch in the working capital cycle, weakening the debt protection metrics
• Earlier-than-expected electric vehicle (EV) adoption adversely impacting the business risk profile

About the Company

SCIPL was incorporated in 1969 as Catalysts and Chemicals India (West Asia) Pvt Ltd, with its registered office in Kochi, Kerala. It was renamed Sud-Chemie India Ltd in 1999, when it became a 50:50 joint venture (JV) of Sud-Chemie AG, Germany (SCAG) and the Lalljee Group of India as its 50% JV partner. It was reconstituted as a private limited company and got its present name in 2001. In September 2012, Clariant Germany became a 50% JV partner of SCIPL, pursuant to SCAG’s merger with Clariant Germany in June 2012, while the Lalljee Group continues as 50% JV partner. SCIPL manufactures catalysts used in the fertiliser, petrochemical, refinery and sponge iron industries. It also manufactures catalytic converters used by the automotive industry.

Any other information: Not Applicable