Rating Rationale
December 24, 2020 | Mumbai
Sudarshan Chemical Industries Limited
Rating Reaffirmed 
 
Rating Action
Rs.50 Crore Commercial Paper CRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has reaffirmed its 'CRISIL A1+' rating on the commercial paper programme of Sudarshan Chemical Industries Limited (Sudarshan).
 
Operating revenue for fiscal 2021 is expected to show a marginal growth despite the impact of CoVID-19 pandemic, due to healthy demand recovery seen from July onwards aided by higher exports as well as buoyant domestic demand. Prudent cost cutting and lower material prices are expected to help sustain operating profitability at current levels for fiscal 2021. Going forward, Sudarshan's turnover is expected to see moderate growth over fiscals 2022 ' 2023 due to increasing market share and healthy export demand, operating margin and return on capital employed are expected to improve marginally in the medium term. The contribution from specialty segments has been increasing over past few years and the trend is expected to continue.
 
Sudarshan's financial risk profile  is expected to remain strong with interest cover and net cash accrual to adjusted debt (NCA/AD) of 13-14 times and 30-35% respectively in fiscal 2021, supported by healthy cash flow and moderate capex of Rs 250 crore in 2021. Healthy cash accruals of around Rs 150-200 crore expected in fiscals 2021 and 2022 to support capital expenditure (capex) of around Rs 350-400 crore over fiscals 2021-2023 to be funded prudently through internal accruals and external debt. Despite this capex, Sudarshan's financial risk profile is expected to remain healthy with adjusted gearing remaining below 0.9 times in the medium term.
 
The ratings reflect a healthy business risk profile marked by established market position in pigments industry, wide product range, diversified end user industries and strong distribution network with marquee clientele base as well as healthy operating efficiency marked by healthy operating profitability and increasing contribution of higher margin specialty pigments as well as longstanding experience of promoters in the pigments industry. The ratings are further supported by comfortable financial risk profile marked by healthy debt protection metrics. These strengths are partially offset by large working capital requirements, risk related to volatility in commodity prices as well as risks related to large capital expenditure over medium term.

Analytical Approach

For arriving at the ratings, CRISIL has combined the business and financial risk profiles of Sudarshan and its subsidiaries, Sudarshan Europe B.V., Sudarshan North America, Inc., Sudarshan (Shanghai Trading Company Limited, Sudarshan Mexico S de R.L.de CV, Sudarshan Japan K.K.. This is because all the companies collectively are referred to as 'Sudarshan group'Â? and have significant managerial, operational, and financial linkages. CRISIL has also consolidated the business and financial risk profiles of RIECO Industries Limited and Sudarshan CSR Foundation as both are wholly owned subsidiaries of Sudarshan and because of commitment of support from the group and past demonstrated track record. 

Please refer Annexure - List of entities consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description
Strengths
* Healthy market position
Sudarshan is the largest pigment manufacturer in India and as per company estimates, is the fourth largest pigment manufacturer in the world with overall market share of about 35% in India and 3% in the globe. The company's products are used in diverse end user industries such as decorative and automotive coatings, plastics, inks and cosmetics. The company has a wide product base comparable to global leaders and it aims to adds more products to its portfolio  . The company has strong distribution network consisting of 60 channel partners and overseas subsidiaries in USA, Netherlands, China, Mexico and Japan for distribution of pigments across globe. The global market position of Sudarshan is expected to improve further over medium term given the ongoing consolidation in the industry. Exports comprised of 56% of sales in the 1st half of fiscal 2021 as against 48% of overall sales in fiscal 2020. The consolidation in the industry is expected to have a positive impact on the market share of Sudarshan. The growth is also expected to be supported by new product launches as well as planned capacity expansion over medium term.
 
 * Healthy operating efficiency
The operating margin of the company has, over past five years consistently improved from around 11% in 2015 to 16% in first half of fiscal 2021, driven by increasing contribution of higher margin specialty pigments, benefits of operating leverage as well as focus on pigments business demonstrated by divestment by other businesses.
 
Over past two years, divestment of its non-core businesses, has resulted in improvement in the operating efficiency of the company as pigments is relatively higher margin/higher RoCE business compared to others. RoCE is expected to remain over 15% over medium term. The company's planned capacity expansion is mainly into high margin specialty segments, with increasing operating leverage, the operating margin profile of Sudarshan is expected to remain strong. 
 
* Strong financial risk profile marked by comfortable capital structure and healthy debt protection metrics
Sudarshan's capital structure is comfortable with expected adjusted net worth, at around Rs. 670 crore, gearing of 0.8-0.9 times and total outside liabilities to tangible net worth ratio of 1.55 times as on March 31, 2021. Cash accruals of Rs 150-200 crore are sufficient as against repayment obligations of Rs 70-90 crore in the medium term. The debt protection metrics remained comfortable with interest coverage of 15 times and ratio of net cash accrual to total debt of 23% in 2020 respectively.
 
Over 2021-2023, the company is expected to carry out capital expenditure (capex) to the tune of around Rs 400 crore to be funded from debt as well as internal accrual. The net debt levels are expected to remain at around Rs 550-600 crore over medium term. In spite of the capex, the capital structure is expected to remain healthy with gearing remaining below 0.9 times owing to healthy cash accruals being reinvested in the company. TOL/TNW is expected to remain below 1.5 times in medium term and expected to improve in future.
 
Weaknesses
* Large working capital requirements as well as risks related to volatility in commodity prices.
Gross current assets (GCA) days stood at 176 for fiscal 2020 mainly owing to inventory and debtors of around 3 months each. The inventory requirements are high as there are multiple SKUs of pigments (over 400+) as well as multiple distribution centres of company in overseas as well as in India. The company has been able to manage the working capital requirements well by matching its receivable days with payable days over last few years, which reduces the dependence on large working capital borrowings. With strong ramp up expected in the revenue over medium term, the working capital requirements are expected to increase.
 
Prices of the chemicals required to manufacture pigments have been volatile in the past. The company imports around 35% of its overall raw material requirement, mainly from China, where environmental-led restrictions have caused prices to rise. While Sudarshan revises the pricing of its sale contracts on quarterly basis, the timing difference in passing on volatility may impact the margins for a particular period. The company's revenue from specialty pigments has been increasing leading to increasing ability to pass on increases in input costs. Nonetheless, margins are still susceptible to risk related to volatility in raw material prices.

* Risks related to large capital expenditure over medium term.
The company is carrying out a large capital expenditure of around Rs 400 crore over fiscals 2021-2023. Although the capex is in similar product segments, ensuring the projects are completed in stipulated time and within stipulated costs will be critical. The entire capex consists of multiple small projects which are also modular in nature providing significant financial flexibility to the company to manage the same in a better manner.  The funding risk is lower as the company has already tied up a low cost foreign currency loan amounting to around Rs 280 crore for funding of the capex. Also while the offtake risk is relatively lower due to strong market position of company and the expansion will be mainly to increase the wallet share of existing customers, overall ramping up of capacities as planned, will remain a key monitoring factor.
Liquidity Strong

Sudarshan has healthy liquidity marked by healthy cash accruals as against maturing repayments and sufficient availability of bank limits. The accrual are estimated at Rs 150-200 crore each year from fiscal 2021 to fiscal 2023, as against the maturing repayments of around Rs 70-90 crore each year over fiscal 2021 to fiscal 2023. Current ratio stood at 1.2 times as on 31st March 2020.

Rating Sensitivity factors
Downward factors:
* Operating performance worsens, leading to lower-than-expected cash accrual
* Debt protection
* metrics weaken, because of substantial working capital requirement, higher-than-expected debt-funded capex, or acquisition expenditure leading to gearing increasing to 1.5 times or debt/EBIDTA ratio increasing to above 2.2 times on sustained basis
About the Company

Sudarshan Chemical Industries Limited is a globally renowned pigment player, largest in India, manufacturing a wide range of Organic and Inorganic Pigments and mica based effect Pigments. The company was established in 1952 and remained domestic focused till 2006. The company entered into a JV with Dainippon Ink Corporation (DIC) in 1990 which lasted till 2006 after which Sudarshan went global, establishing footprint in North America and Europe. The company has two manufacturing facilities in Roha and Mahad.
 
During six months ended 30th September 2020, the company posted net profit of Rs 48.5 crore (Rs 89 crore for similar period of previous fiscal) on net sales of Rs 781 crore (Rs 837 crore).

Key Financial Indicators - CRISIL adjusted numbers
As on / for the period ended March 31   2020 2019
Revenue Rs crore 1708 1477
Profit after tax (PAT) Rs crore 145 135
PAT margin % 8.5 9.1
Adjusted debt/Adjusted networth Times 0.87 0.67
Adjusted interest coverage Times 15.4 13.0

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. Crs.) Complexity Level Rating Assigned with Outlook
NA Commercial Paper NA NA NA 50 Simple CRISIL A1+
 
Annexure - List of entities consolidated
Company name Extent of consolidation Rationale for consolidation
Sudarshan Europe B.V. Full Wholly owned subsidiaries, Same business and significant managerial, operational, and financial linkages
Sudarshan North America, Inc. Full
Sudarshan (Shanghai) Trading Company Ltd Full
Sudarshan Mexico S de R.L.de CV Full
Sudarshan Japan K.K Full
RIECO Industries Ltd Full Wholly owned subsidiaries, Commitment of support and past demonstrated track record of support
Sudarshan CSR Foundation Full
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
Commercial Paper  ST  50.00  CRISIL A1+  03-02-20  CRISIL A1+    --    --    --  -- 
All amounts are in Rs.Cr.
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 Consolidation
CRISILs Criteria for rating short term debt

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