Detailed Rationale

CRISIL Ratings has revised its outlook on the long-term bank facilities of Supreme Petrochem Ltd (SPL) to ‘Positive’ from ‘Stable’, while reaffirming the rating at ‘CRISIL AA-’. The rating on the short-term facilities has been reaffirmed at ‘CRISIL A1+’.

 

The outlook revision factors in expectation of sustenance of healthy operating performance of SPL, going forward, on the back of forthcoming commissioning of acrylonitrile butadiene styrene (ABS) capacity in last quarter of current fiscal, steady growth in sales volume for its key products and benefits from economies of scale which will sustain operating profit at a level much higher than pre-pandemic levels. While operating margin could fluctuate, which is an inherent risk in this business, the company is well placed to absorb these fluctuations given its debt-free balance sheet and strong liquidity position.

 

Combined sales volume of polystyrene (PS) and expandable polystyrene (EPS) grew 13% on-year in fiscal 2024, driven by double-digit growth in EPS led by high demand from the cold storage, appliance and packaging segments. Higher PS sales volume was driven by export demand. While total sales volume of manufactured products in the first half of fiscal 2025 increased ~10% on-year, driven by improved demand across key product segments, particularly from original equipment manufacturers (OEMs) such as consumer durables, non-OEM sectors such as packaging exhibited some slowdown. The company completed the expansion of its PS and EPS capacities in January 2023, and the second phase of expansion of EPS is underway. It is expected to be completed by the last quarter of the current fiscal. Higher available capacity coupled with continued healthy demand should support expected volume growth of 6-8% annually over the medium term.

 

The price spread between PS and its key raw material, styrene monomer, continued to normalise in 2024, building on similar trend observed in fiscal 2023. This normalisation follows a period of elevated spreads seen in fiscals 2021 and 2022. In the first half of the current fiscal, the spreads have remained relatively flat. This has resulted in SPL’s operating margin normalising to 9.0% in fiscal 2024 (12.5% in fiscal 2023). On a steady-state basis, the operating margin is expected to average 9-10% over the medium term.

 

The financial risk profile is backed by nil debt, strong liquidity and healthy cash accrual. The company is planning capital expenditure (capex) of Rs 350-400 crore annually over fiscals 2025-2027 for setting up a 140,000-tonne capacity for ABS in a phased manner (Phase 1 with 70,000 tonne capacity expected to be commissioned by last quarter of current fiscal), a greenfield project in Haryana and capacity expansions in existing product segments. These expansions will be entirely funded through available liquid surplus and internal accrual. SPL is likely to maintain liquid surplus of Rs 400-500 crore and a debt-free balance sheet over the medium term.

 

The ratings continue to reflect SPL’s market leadership in the domestic PS and EPS industry, and sound financial risk profile. SPL has a healthy track record of over 25 years in the PS industry and a diversified customer base. The company has a wide product portfolio, with increasing revenue share from value-added products. These strengths are partially offset by susceptibility to volatility in raw material prices.

Analytical Approach

CRISIL Ratings has considered the standalone credit risk profile of SPL.

Key Rating Drivers & Detailed Description

Strengths:

• Market leadership in the PS market: SPL has over 50% market share in the PS and EPS segments combined, with effective capacity of 300,000 tonne for PS and capacity of 118,000 tonne for EPS as on date. The company has the largest installed capacity in India, after the plant of the second-largest player shut down in fiscal 2021. The company benefits mainly due to the high quality of its product offerings and engaging in continual improvement programmes, with certain grades developed specially to counter low-priced imports.

 

SPL has established healthy relationships with customers and suppliers, given its longstanding presence in the industry. The company imports styrene from multiple suppliers in the Middle East, Singapore and East Asia and enjoys favourable credit period because of its long-term relationships with the suppliers.

 

• Diversified product mix: Manufactured products contributed 76% in fiscal 2024, with the balance contributed by traded goods (24%). SPL has customer base in over 100 countries and is recognized as a Three Star Export House by the Ministry of Commerce and Industry (DGFT), which is valid till March 31, 2028.  Traded goods mainly consist of styrene monomer, which is in deficient supply in India.

 

In terms of end-product sales, the company offers a variety of styrenics, including PS and EPS 69% of revenue in fiscal 2024,  and balance from speciality polymers & compounds and extruded polystyrene  7%.. It is also setting up capacity for ABS, which will further diversify revenue profile over the medium term.

 

In terms of customers, SPL’s revenue is well balanced between OEMs and non-OEMs, which shields it from slowdown in any one end-use segment.

 

• Strong financial risk profile: SPL continues to maintain a strong financial risk profile, as reflected in healthy networth (Rs 2,019 crore as on March 31, 2024), nil debt and strong debt protection metrics. Healthy cash-generating ability and prudent working capital management led to substantial liquid surplus of Rs 907 crore as on September 30, 2024. This, along with healthy cash accrual, will be adequate to meet incremental working capital requirement and planned annual capex of Rs 350-400 crore. While the cash surplus will moderate but remain healthy, SPL is expected to remain debt-free over the medium term.

 

Weaknesses:

• Susceptibility of operating margin to volatility in raw material prices: Operating performance is susceptible to fluctuations in the prices of styrene, which is affected both by movement in crude oil prices and overall demand-supply dynamics. Operating margin fluctuated 3-10% till fiscal 2020, after which it spiked to 18-21% over fiscals 2021-2022. As SPL maintains raw material inventory of 30-40 days, volatility in input prices impacts profitability. With demand stability from downstream sectors and supply-demand normalisation in China, volatility is expected to be lesser going forward. While the operating margin could fluctuate over the medium term, absolute operating profit should sustain at levels higher than pre-pandemic levels, benefiting from improving economies of scale and growing sales volume.

 

• Threat of product substitution, imports and domestic competition: SPL derives majority of its revenues from PS and PS-derived products, and hence is susceptible to cyclical downturns in the PS industry. The industry faces threat of foreign competition, with manufacturers from countries such as Iran, Thailand, and Singapore engaging in dumping practices, which may lead to oversupply and price erosion in domestic markets (though mitigated by the government via Anti-dumping duties). Furthermore, SPL is also vulnerable to new domestic players entering the EPS industry, intensifying competition, potentially reducing market share and profit margins. However, these risks are partially mitigated, with the company focusing on improving its product mix towards value-added grades from PS and EPS basket and products like speciality polymers & compounds (SPC) XPS and ABS. 

Liquidity: Strong

Liquidity is supported by a sizeable liquid surplus of Rs 907 crore as on September 30, 2024, and expected annual net cash accrual of Rs 300-400 crore over the medium term. This will be adequate to meet planned annual capex of Rs 350-400 crore going forward. While dividend payout could average 40-50% of net profit, SPL is expected to maintain liquid surplus of Rs 400-500 crore on steady-state basis. Bank limit of Rs 1,870 crore (including fund- and non-fund-based limits) was moderately utilised at ~54% on average of non-fund-based limits during the 12 months through October 2024.

Outlook: Positive

The company will benefit from its strong market position in the domestic PS and EPS markets and planned capacity additions over the medium term. The financial risk profile will remain healthy in the absence of any material debt raised, with planned capex to be funded through internal accrual.

Rating sensitivity factors

Upward factors:

• Better-than-anticipated volume growth, improved diversification through addition of new products and steady operating margin of over 8-10% also benefitting cash accruals
• Efficient working capital management supporting sustenance of strong financial risk profile and robust debt protection metrics

 

Downward factors:

• Steep decline in sales volume or spreads leading to sustained decline in operating margin to below 6-7%
• Sizeable stretch in working capital cycle or large, debt-funded capex or acquisition resulting in weakening debt protection metrics
• Steeper-than-anticipated moderation in liquid surplus due to large dividend payouts, capital reduction or share buyback

About the Company

SPL was incorporated in 1989 and is promoted by Supreme Industries Ltd and the Rajan Raheja group, which hold 30.78% stake each as on September 30, 2024. The company manufactures PS, EPS, compounds of polymers and XPS. It has a state-of-the-art manufacturing plant at Nagothane in Raigad, Maharashtra, set up in technical collaboration with ABB Lumus Crest (USA). It also has a manufacturing plant at New Manali Town in Chennai. Furthermore, SPL imports styrene monomer and trades in the domestic market.

 

For the first half of fiscal 2024, the company reported profit after tax (PAT) of Rs 212 crore (Rs 147 crore in the corresponding period of the previous fiscal) on revenue of Rs 3,079 crore (Rs 2,503 crore in the previous fiscal).

Any other information: Not Applicable