Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AA/Stable’ rating on the long-term bank facility of Sumitomo Chemical India Limited (SCIL).

 

Revenue stood at Rs.1628 crore for the first half of fiscal 2024 registering a decline of 23% year-on-year (y-o-y) owing to subdued demand in domestic market due to erratic monsoon leading to low insect infestation and delayed sowing; price erosion due to dumping by Chinese manufacturers and elevated inventory levels leading to destocking by global manufacturers. Domestic business in the first half of fiscal 2024 witnessed a degrowth of 15% y-o-y, driven by decline in price by 12% and volume impact of 3% whereas exports reduced by 54% y-o-y with degrowth of 45% in volumes and 9% in prices. The impact of inadequate rainfall coupled with low reservoir levels on sowing rabi crops across India, leading to limited volume offtake for agrochemicals like pesticides will remain a key monitorable. CRISIL Ratings expects revenue to drop during fiscal 2024 and is expected to grow gradually from fiscal 2025 onwards; however, the pace of growth shall be subject to global demand dynamics.

 

Operating profitability moderated by 560 basis points to 16.60% in the first half of fiscal 2024 owing to carryforward of high-cost inventory during the first quarter coupled with lower absorption of fixed costs and decline in volumes. Despite industry headwinds, operating margins improved to 20.80% in the second quarter of fiscal 2024, from 11.10% in the first quarter, due to several cost-corrective measures opted by the company along with liquidation of high cost inventory. CRISIL Ratings expect the margins to moderate in fiscal 2024 over fiscal 2023 owing to ongoing macro-economic factors.

 

Post a temporary setback during fiscal 2024, business risk profile should steadily improve over the medium term, supported by the rising demand for crop-protection products, and as the company leverages its balanced presence across key sub segments of crop protection along with the strong brand and chemistry skills of its parent, strengthening its agrochemicals business in India and abroad.

 

Healthy business risk profile is complemented by strong financial and liquidity risk profile. Networth stood strong at Rs.2360 crore and total outside liabilities to tangible networth ratio at 0.42 times as on March 31, 2023. The company continues to be debt free as on September 30, 2023. Owing to the subdued business environment, capital expenditure (capex) plans may be deferred to the next fiscal. Reliance on external debt is expected to remain nil as annual cash accrual should be sufficient to meet modest annual capex of Rs.130-230 crore and incremental working capital requirements. Normalisation of the business environment translating into better operational performance and debt protection metrics will remain a key rating monitorable in the near to medium term.

 

The ratings continue to reflect  established market position of SCIL in the domestic crop protection business supported by its diversified product portfolio including insecticides, weedicides, fungicides, fumigants and rodenticides as well as plant growth nutrition products, bio-rationals and plant growth regulators, and access to the proprietary products of its Japanese parent, Sumitomo Chemical Company Ltd (SCCL). These strengths are partially offset by large working capital requirement, exposure to regulatory risks, and susceptibility to vagaries of the monsoon.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of SCIL and its wholly owned subsidiaries as all these companies are in similar line of business, and have common management and business and financial linkages.

 

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:

• Established presence in the crop protection segment:

Diversified product portfolio, including insecticides, weedicides, fungicides, fumigants and rodenticides as well as plant growth nutrition products, biorationals and plant growth regulators; well-balanced technical and formulations manufacturing capabilities and access to proprietary products of SCCL helped the company to become one of the major players in this segment.

 

• Well-diversified product portfolio, with agrochemical products covering multiple crop segments

The product portfolio is well-diversified, with the company’s agrochemical products covering multiple crop segments in both kharif and rabi seasons and non-agrochemical products for animal nutrition and environment health. With over 15,000 distributors, the distribution network covers close to 85% of India, providing geographic diversity. Furthermore, around 25% of the revenue in fiscal 2023 came from exports, partially offsetting risks related to demand cyclicality in the domestic market.

 

• Healthy financial risk profile:

Financial risk profile should remain supported by nil debt levels, continued healthy cash generation and prudent capital spending. Tangible networth was comfortable at Rs 2,526 crore as on September 30, 2023 while continuing to be debt free. Healthy annual cash accrual has enabled robust debt protection metrics with interest cover at 115.8 times during fiscal 2023.

 

Weaknesses:

• Large working capital requirement:

Operations remain working capital-intensive owing to large inventory, seasonality in demand and extensive credit to dealers and distributors. While sales occur at the start of the season, payments are realised post-harvest, resulting in large receivables. Furthermore, the company must maintain sizeable inventory owing to the large number of products to ensure that  requirement of dealers are met on time.

 

• Susceptibility to risks inherent in the agrochemicals sector, including irregular monsoon:

The crop-protection sector remains susceptible to specific and separate registration processes in different countries, and various environmental rules and regulations. Changes in regulatory requirements, such as export and import policies, and environmental and safety requirements in countries where the company has significant exposure, could weaken growth prospects. Also, with 75% of revenue coming from the domestic agricultural inputs business, SCIL remains exposed to cyclicality in the agrochemicals industry, which is highly dependent on monsoon and level of farm income.

Liquidity: Strong

SCIL enjoys strong liquidity. In the absence of any maturing debt over the medium term, the entire cash accrual  projected at Rs 300-450 crore per annum and cash surplus of more than Rs 1,380 crore as on September 30, 2023, should comfortably cover yearly capex of Rs 130-230 crore for regular maintenance and upgradation of facilities and incremental working capital requirement. There is nil utilization of fund based bank lines in the past 12 months ended October 31, 2023.

Outlook: Stable

CRISIL Ratings believes SCIL’s business risk profile will continue to benefit from its established market position in the domestic market with demand expected to reinstate for crop-protection products, and as the company leverages its balanced presence across key sub segments of crop protection and the strong brand and chemistry skills of its parent. Improving business risk profile will be complemented by its strong financial and liquidity risk profiles

Rating Sensitivity factors

Upward factors:

• Significant improvement in revenue growth and operating margin at above 20% on sustained basis leading to strong annual cash accrual
• Sustenance of healthy financial risk profile and strong liquidity in the absence of any large debt funded capex

 

Downward factors:

• Sharp decline in revenue and fall in operating margin below 10%, leading to lower cash accruals
• Large, debt-funded capex or acquisition or stretched working capital cycle weakening the financial risk profile, liquidity position

About the Company

SCIL is a subsidiary of Japanese chemical major, Sumitomo Chemical Company Limited Japan (SCCL). It is engaged in the manufacturing and marketing of crop protection formulations based on the active ingredients procured from SCCL and third parties. It has manufacturing plants in Gujarat and Maharashtra and Dadar & Nagar Haveli. SCCL holds 75% stake in SCIL.

 

SCCL had established Sumitomo Chemical India Pvt Ltd (SCIPL) in 2000 as its manufacturing and marketing base for crop protection products, household insecticides, public health insecticides and animal nutrition products in India. The company was reconstituted as a public limited company with effect from November 24, 2018. To further fortify its business in India, SCCL acquired a majority stake in Excel Crop care Limited (ECCL) in fiscal 2016. ECCL, engaged in the manufacture of agrochemical formulations, was promoted by the Shroff family members.

 

On August 31, 2019, the entire business and undertaking of ECCL was transferred to SCIL after the National Company Law Tribunal approved the Scheme of Amalgamation

Key Financial Indicators (CRISIL Ratings adjusted Numbers)

Particulars	Unit	2023	2022
Revenue	Rs crore	3511	3064
Adjusted profit after tax (PAT)	Rs crore	502	424
PAT margin	%	14.3	13.8
Adjusted debt/adjusted networth	Times	0.00	0.00
Adjusted interest coverage	Times	115.8	77.8

 

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs cr.)	Complexity level	Rating assigned with outlook
NA	Proposed Working Capital Facility	NA	NA	NA	200.0	NA	CRISIL AA/Stable

 

Annexure – List of entities consolidated

Names of Entities Consolidated	Extent of Consolidation	Rationale for Consolidation
Excel Crop Care (Africa) Ltd	Full	Common management, similar line of business, and business and financial linkages