Rating Rationale
January 31, 2020 | Mumbai
Sumitomo Chemical India Limited
'CRISIL AA/Stable' assigned to bank debt
 
Rating Action
Total Bank Loan Facilities Rated Rs.200 Crore
Long Term Rating CRISIL AA/Stable (Assigned)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

 CRISIL has assigned its 'CRISIL AA/Stable' rating to the bank loan facilities of Sumitomo Chemical India Limited (SCIL).
 
The rating reflects SCIL's established market position 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 Limited (SCCL). Business risk profile should steadily improve over the medium term, supported by the healthy demand 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, strengthening its agrochemicals business in India and abroad. Revenue growth and operating profitability should remain healthy at 7-8% and 12-12.5%, respectively over the medium term. The company is likely to maintain healthy return on capital employed of over 20%.

SCIL's improving business risk profile will be complemented by its strong financial risk profile and liquidity. Reliance on external debt is expected to remain negligible as company's annual cash accrual should be sufficient to meet modest capex and incremental working capital requirements.

These rating strengths are partially offset by company's large working capital requirement and risks associated with the crop protection industry.

Analytical Approach

For arriving at the ratings, CRISIL has combined the business and financial risk profiles of SCIL and its wholly-owned subsidiaries. That's because all these companies are in similar line of business, have the common management, and business and financial linkages.

Key Rating Drivers & Detailed Description
Strengths:
* Established presence in the crop protection segment: A diversified product portfolio including insecticides, weedicides, fungicides, fumigants and rodenticides as well as plant growth nutrition products, bio-rationals and plant growth regulators, well-balanced technical and formulations manufacturing capabilities and access to SCCL's proprietary products has helped SCIL establish itself as one of major players in this space.

Product portfolio is well diversified with company's agro chemical products covering multiple crop segments in both Kharif and Rabi season and non-agrochemical including animal nutrition and environment health products. With over 13,000 distributors, SCIL's distribution network covers close to 85% of mainland India, providing geographic diversity. Further, close to 20% of the revenue is generated from export markets, partially offsetting the risk related to demand cyclicality in the domestic market.

* Healthy financial risk profile: Financial risk profile is healthy, marked by comfortable gearing and debt protection metrics. Tangible networth was healthy at Rs 1,041 crore as on March 31, 2019, and debt has been negligible. Healthy annual cash accrual has enabled robust debt protection metrics: interest coverage and net cash accrual to total debt ratios were 57.4 times and 6.18 times, respectively, in fiscal 2019. Continued healthy cash generation, and prudent capital spending should lead to further improvement in business risk profile over the medium term.

Weaknesses:
* Large working capital requirement: The agrochemical industry is characterised by working capital-intensive operations, due to large inventory requirement, seasonality in demand, and extended credit to dealers and distributors. While sales occur at the start of the season, payment is realised post-harvest, thus resulting in large receivables. Further, company has to maintain sizeable inventory given the large number of products at various price points, to ensure that dealers' requirements are met on time. Additionally, distributors require large credit period leading to high working capital requirement.

* Susceptibility to risks inherent in the agrochemicals sector: The crop-protection sector remains susceptible to specific and separate registration processes in different countries, and various environmental rules and regulations. Change 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. Further with about 80% 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 incomes.
Liquidity Strong

SCIL enjoys strong liquidity. Expected annual cash accruals of Rs 200-210 crore in fiscals 2021 and 2022 and cash and cash equivalents of Rs 150 crore as on September 30, 2019 should comfortably cover moderate capex plan of Rs. 35-40 crore per annum for regular maintenance and up gradation of facilities and incremental working capital requirements. Utilisation of fund based bank lines has also remained sparse in the past 12 months ended October 2019.  With a gearing of 0.02 times as on March 31, 2019, the company has sufficient gearing headroom, to raise additional debt if required.

Outlook: Stable

CRISIL believes SCIL's business risk profile will improve steadily over the medium term, supported by the healthy demand 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 risk profile and liquidity.

Rating Sensitivity factors
Upward Factors:
* Sustained growth of around 8-10% in earnings before interest tax depreciation and amortisation (EBITDA), leading to significantly higher than expected cash accruals.
* Significant improvement in working capital cycle (gross current assets less than 200 days) leading to material improvement in liquid surplus.
* Sustenance of healthy credit metrics - gearing below 0.5 time
 
Downward Factors:
* Significant decline in revenues by over 15% and deterioration of operating margin to below 10%, adversely affecting the company's cash flows
* Large debt-funded capex or acquisition or elongation of working capital cycle leading to deterioration in key credit metrics ' gearing above 1.0 time

About SCIL
SCIL is a wholly owned subsidiary of Japanese chemical major, SCCL, 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 had established Sumitomo Chemical India Pvt Ltd (SCIPL) in the year 2000 as its manufacturing and marketing base for crop protection products in India. Further, in order to fortify its business in India, SCCL had acquired a majority stake in ECCL in fiscal 2016.

ECCL, engaged in the manufacture of agrochemical formulations, was promoted by the Shroff family. The family held 24.72% in the company before it was taken over by Sumitomo group. Post the take-over, Sumitomo group held 65% stake in ECCL, with 20% stake held by SCIPL and 45% stake held by SCCL.

On August 31, 2019, the entire business and the undertaking of ECCL was transferred to SCIPL after the National Company Law Tribunal approved the Scheme of Amalgamation and the combined entity was renamed as SCIL.
Key Financial Indicators
Particulars Unit 2019 2018
Revenue Rs crore 2212 1932
Adjusted profit after tax (PAT) Rs crore 166 145
PAT margin % 7.5 7.5
Adjusted debt/Adjusted networth Times 0.02 0.01
Adjusted interest coverage Times 57.40 42.45
 

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 cr.)		 Rating assigned with outlook
NA Proposed Working Capital Facility NA NA NA 200.00 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
Excel Crop Care (Europe) NV Full Common management, similar line of business, and business and financial linkages
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  200.00  CRISIL AA/Stable    --    --    --    --  -- 
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
Proposed Working Capital Facility 200 CRISIL AA/Stable -- 0 --
Total 200 -- Total 0 --
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
The Rating Process

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