Rating Rationale
February 03, 2020 | Mumbai
Sudarshan Chemical Industries Limited
'CRISIL A1+' assigned to CP 
 
Rating Action
Rs.50 Crore Commercial Paper CRISIL A1+ (Assigned)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has assigned its 'CRISIL A1+' rating to the commercial paper programme of Sudarshan Chemical Industries Limited (Sudarshan).

The rating reflects a healthy business risk profile marked by established market position in the pigments industry, wide product range, diversified end-user industries, and strong distribution network with marquee client base. Company's strong operating efficiency is driven by healthy operating profitability and increasing contribution of high-margin specialty pigments. The rating is further supported by comfortable financial risk profile driven by healthy debt protection metrics. These strengths are partially offset by large working capital requirement, risk related to volatility in commodity prices, as well as risks related to large capital expenditure (capex) over the medium term.

Sudarshan's strong market position is reinforced by market leadership in the pigments industry in India and wide product range comparable to its global peers. The company is present in organic, inorganic, and effect pigments. Sudarshan's revenue from pigments has grown at a healthy compound annual growth rate (CAGR) of 12% over the past six fiscals till fiscal 2019 and is expected to increase by 15% per annum over medium term. The revenue growth over the medium term will be supported by expected benefits from the consolidation in the global pigments industry, as well as new product launches, and planned capacity expansion by the company over the medium term. The exports have increased by 15% CAGR over the past six fiscals and formed 45% of overall revenue in fiscal 2019.

Company's operating margin has been on the improving trend over past few fiscals and is expected to remain above 15% over the medium term owing to increasing contribution from specialty segments. In fiscals 2019 and 2020, the company exited some of the non-core businesses with relatively lower margin, which will also support improvement in the margin over the medium term.

Sudarshan's financial risk profile remains strong, supported by healthy cash flow from operations and moderate capex, mainly funded through internal accrual over the last five fiscals. Healthy cash accrual and repayment of debt through divestment of other businesses have resulted in gearing of 0.7 time as on March 31, 2019, as against 1.5 times as on March 31, 2016. Over the medium term, the company plans to carry out capex of around Rs 600 crore, to be prudently funded from internal accrual and debt, resulting in gearing remaining below 0.9 time. Despite the capex, Sudarshan's financial risk profile is expected to remain healthy with ratio of debt to earnings before interest, taxes, depreciation, and amortisation (EBITDA) remaining around 2 times over the 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 Ltd; Sudarshan Mexico S de R.L.de CV; and Sudarshan Japan K.K.. This is because these companies are in the same business and have significant managerial, operational, and financial linkages.. CRISIL has also combined the business and financial risk profiles of RIECO Industries Ltd and Sudarshan CSR Foundation as both are wholly owned subsidiaries of Sudarshan and because of commitment and past demonstrated track record of support.

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
The current chairman of the company, Mr Pradeep Rathi, and the managing director, Mr. Rajesh Rathi have over three and two decades of experience in the pigments industry respectively. Over the years, the promoters have demonstrated a strong understanding of the nuances of the industry and have been successful in scaling up the business. It is expected that Sudarshan will continue to benefit in the future from the long-standing experience of the promoters.

Sudarshan is the largest pigment manufacturer in India and the fourth largest pigment manufacturer in the world with overall market share of about 35% in India and 3% (estimated) in the global market. 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 adds 20-25 products to its portfolio every year. Sudarshan has strong distribution network consisting of 60 channel partners and overseas subsidiaries in USA, Netherlands, China, Mexico, and Japan for the distribution of pigments worldwide. The company's exports have grown at a CAGR of 15% from 2013 to 2019, demonstrating its high global competitiveness. The global market position of Sudarshan is expected to improve further, over the medium term, on the back of the acquisition of BASF's pigment business by DIC Corporation. 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 the medium term.

 * Healthy operating efficiency
The operating margin of the company has consistently improved from 11% in 2015 to 16% in the first half of fiscal 2020, driven by increasing contribution of high-margin specialty pigments, benefits of operating leverage, as well as increasing focus on the pigments business by divesting other businesses.

Over the past two years, the company has successfully divested two of its divisions: agri-business and industrial mixing solutions. It has also divested the master batches business (housed under a wholly owned subsidiary of Sudarshan, Prescient Colours Ltd.). This has resulted in improvement in the operating efficiency of the company as pigments are relatively higher margin with higher RoCE, compared to others. The RoCE is expected to remain over 15%, over the medium term.

The company's planned capacity expansion is into high-margin specialty segments. Therefore, with increasing operating leverage, the operating margin is expected to remain strong. 

* Healthy financial risk profile driven by comfortable capital structure and healthy debt protection metrics
Sudarshan's capital structure is comfortable with a healthy adjusted networth at Rs 551 crore, gearing of 0.67 time, and ratio of total outside liabilities to tangible networth (TOLTNW) of 1.43 times as on March 31, 2019. The debt protection metrics remained above average with interest coverage ratio of 13.0 times, and net cash accrual to total debt ratio was 52% in fiscal 2019. During 2020-2022, the company is expected to carry out capex of Rs 600 crore, to be funded from debt and internal accrual. The debt level is expected to remain at Rs 500-700 crore over the medium term. In spite of the capex, the capital structure is expected to remain healthy with gearing remaining below 0.9 time because of cash accrual being reinvested in the company. The TOLTNW ratio is expected to remain below 1.5 times, over the medium term, and is expected to improve thereafter.

Weaknesses:
* Large working capital requirement, as well as risks related to volatility in commodity prices
Gross current assets (GCA) stood at 181 days as on March 31, 2019, because of inventory and debtors of 3 months each. The inventory requirement is high as there are multiple stock keeping units (SKUs) of pigments (over 400+), as well as multiple distribution centres of the company overseas and in India. The company has been able to manage the working capital requirement well by matching its receivables with payables days over the last few years, which reduces the dependence on large working capital borrowing. With strong ramp-up expected in revenue over the medium term, the working capital requirement is expected to increase.

The prices of 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 restrictions have caused prices to rise. While Sudarshan revises the pricing of its sales contracts on quarterly basis, the timing difference in passing on volatility may impact the margin for a particular period. The company's revenue from specialty pigments has been improving, leading to increasing ability to pass on escalations in input costs. Nonetheless, the margin is still susceptible to risk related to volatility in raw material prices.

* Risks related to large capex over the medium term
The company is carrying out large capex of Rs 600 crore during 2020-2022, to be funded partially through internal accrual and debt. A large part (65-70%) of the overall capex will be for increasing capacities in multiple pigment classes and adding new capacities for some specialty products, in order to increase the market share. The remaining capex will be for backward integration (to manufacture some key raw materials in-house) and in-house production of power through co-generation and renewable projects to lower cost of production.

Although the capex is for similar product segments, ensuring that the projects are completed within stipulated time and cost will be critical. The entire capex consists of multiple small projects that are modular in nature, providing significant financial flexibility to the company to manage it in a better manner. The funding risk is lower as the company has already availed a low-cost foreign currency loan, amounting to Rs 157 crore, for funding the capex and is in the process of tying up the remaining funds.  

While offtake risk is relatively lower because of strong market position of the company, the expansion will be mainly to increase the wallet share of existing customers. Overall ramping up of capacities, as per plan, will remain a key monitoring factor.
Liquidity Strong

Sudarshan has healthy liquidity marked by healthy cash accruals as against maturing debt repayments and sufficient availability of bank limits. The accrual is estimated to be Rs 200-250 crore each year from fiscals 2020 to 2022, against maturing debt of Rs 60-120 crore each year for the same period. Current ratio stood at 1.4 times as on March 31, 2019. The company has utilised 55% of its working capital limit of Rs 249 crore during the 12 months through November 2019. The company has access to additional fund-based limits of Rs 170 crore, which are sparingly used at around Rs 70-80 crore. The company is expected to carry out capex of Rs 600 crore during 2020-2022, to be funded out of internal accrual and debt.

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

Established in 1951, Sudarshan is promoted by the Rathi family. The company is a globally renowned pigments player (largest in India), manufacturing a wide range of organic and inorganic pigments and mica-based effect pigments. The company has two manufacturing facilities in Roha and Mahad in Maharashtra and a research and development facility at Pune, Maharashtra. Sudarshan exports to over 85 countries. Exports comprised 45% of the overall revenue of the company in fiscal 2019. The company has subsidiaries in USA, China, Netherlands, Mexico, and Japan for marketing and distribution.

During the six months ended September 30, 2019, the company posted net profit of Rs 89 crore (Rs 92 crore for the corresponding period in the previous fiscal) on net sales of Rs 796 crore (Rs 723 crore in the previous fiscal).

Key Financial Indicators - CRISIL adjusted numbers
As on / for the period ended March 31   2019 2018
Revenue Rs crore 1477 1462
Profit after tax (PAT) Rs crore 135 85
PAT margin % 9.1 5.8
Adjusted debt/adjusted networth Times 0.67 1.03
Adjusted interest coverage Times 13.0 6.7
 

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)
ISIN Name of Instrument Date of
Allotment		 Coupon
Rate (%)		 Maturity Date Issue Size
(Rs crore)		 Rating Assigned
with Outlook
NA Commercial Paper NA NA 7-365 days 50 CRISIL A1+
 
Annexure - List of entities consolidated
Sr. No. Company name Extent of consolidation Rationale for consolidation
1 Sudarshan Europe B.V. Full Wholly owned subsidiaries, Same business and significant managerial, operational, and financial linkages
2 Sudarshan North America, Inc. Full
3 Sudarshan (Shanghai) Trading Company Ltd Full
4 Sudarshan Mexico S de R.L.de CV Full
5 Sudarshan Japan K.K Full
6 RIECO Industries Ltd Full Wholly owned subsidiaries, Commitment of support and past demonstrated track record of support
7 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+    --    --    --    --  -- 
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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