Detailed Rationale

CRISIL Ratings has upgraded its rating on the long-term bank facilities of Tagros Chemicals India Pvt Ltd (Tagros) to ‘CRISIL AA/Stable’ from ‘CRISIL AA-/Positive’. The short-term rating on the company’s bank facilities have been reaffirmed at ‘CRISIL A1+’.

 

The rating action follows sustained improvement in Tagros’ business risk profile with strong business performance continuing in fiscal 2022, supported by healthy off-take for key products, resulting in estimated revenue growth of 13-15%. Strong market position in products such as synthetic pyrethroids, good process chemistry skills and new product pipeline will ensure almost similar revenue growth over the medium term. Besides, operating profitability, while moderating from high levels of ~30% in fiscal 2021 due to rising power and logistics costs amidst supply chain disruptions, will still remain above 25%, in fiscal 2022, and range bound over the medium term. Healthy revenue growth and operating profitability will ensure improved cash generation of over Rs.400 crores annually (~Rs.330 crores in fiscal 2021).

 

Complementing Tagros’ strong business risk profile is its comfortable and improving financial risk profile. Strong demand for its products and diversification of product basket through creation of a new pipeline has necessitated continuous capital spend. Also, its facilities are operating at over 90%, backed by increased off-take from key multinational corporations (MNCs), including top 10 large global agrochemical companies. The company incurred spend of ~Rs.500 crores between fiscals 2019-2021 and is incurring ~Rs 300-325 crore in fiscals 2022 and 2023, to expand capacity at its Gujarat plants, which will come on stream in January 2022, and for a new pyrethroid plant at Ankleshwar, which will be operational by September 2022.

 

While debt was availed for earlier capex, current expansion is largely being funded from accruals. This along with progressive long term debt repayment will ensure debt protection metrics remain strong (gearing will range between 0.6-0.7 times, while the ratio of total outside liabilities/tangible net worth (TOL/TNW) is estimated at 1.2-1.3 times at March 31, 2022 from over 1.6 times a year earlier), despite new working capital debt proposed to be raised for supporting enhanced business levels. Hence, Tagros is also expected to maintain its comfortable financial risk profile over the medium term. Liquidity also remains healthy with cash and cash equivalents of ~Rs 345 crore as on November 30, 2021.

 

The ratings continue to reflect Tagros’s healthy market presence and product offerings, presence across geographies, steady increase in product registrations and tie-ups with leading agrochemical MNCs, and healthy operating efficiency due to backward integrated operations and strong in-house research and development (R&D) capability. The ratings are also supported by the company’s comfortable and improving financial risk profile, and healthy liquidity. These strengths are partially offset by product concentration, exposure to inherent risks in the agrochemical industry and large working capital requirement.

Analytical Approach

For arriving at the ratings, CRISIL Ratings has combined the business and financial risk profiles of Tagros and its subsidiaries, South Africa Natagros PTY Ltd, Cropchem PTY Ltd, Calchem PTY Ltd, Tagros Chemicals Andiana SAS, Tagros Argentina SRL, Tagros Brazil Comerico de produtos Quimicos Ltda, Tagros Chemical Corporation De Mexico, S.DE R. L. DE C.V, Tagros Chemicals (Bangladesh) Pvt Ltd and M/S Tagros Mena FZE (Dubai). All these entities have been together referred to herein as Tagros.

 

CRISIL Ratings has also treated intangible assets pertaining to product registrations as capital assets and amortised them in line with the company’s accounting practice. That is because product registrations are key to business growth and have steady revenue potential.

 

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 presence and product offerings

Tagros is one of the leading players in the Indian agrochemical industry with healthy market position in pyrethroids range of insecticides (it is among the leading players globally, besides India, in synthetic pyrethroids) and improving presence in herbicides. The company derives about  ~90%. of revenues from manufacture and sale of technicals, while balance comes from formulations. The company has been diversifying its product portfolio in last the 3-4 years by increasing focus on herbicides and enhancing capacities towards the same. Tagros’s market position is supported by its capability to synthesise molecules with high purity and also at low cost. This is reflected in the company’s ability to secure supply contracts with leading MNCs.

 

Steady increase in product registrations across the globe

In terms of geographic spread, more than 85% of revenue is derived from exports and ~15% from domestic market. Within exports, the company sells to over 90 countries spread across Asia, Europe, North America, Latin America, and Africa. The presence in the global market is supported by an extensive portfolio of product registrations. There are over 500 registrations across North America, Latin America, Europe, Asia, and the Middle East. The company continues to focus on expanding its geographic reach through steady increase in registrations.

 

Tie-up with leading global agrochemical companies

Tagros has strong tie-ups with leading global players. Strong registration portfolio and process chemistry skills have enabled it to strengthen these relationships. Recently, it also secured another long-term supply contract with significant offtake potential for its new capacity. Given their superior chemistry skills, the company has got repeat orders from customers, resulting in the revenue increasing at a healthy compound annual growth rate of 25% between fiscals 2017 and 2021 and also a commands a premium pricing for products which is reflected in the healthy margins of over 25%. The company is expected to leverage these relationships while introducing new products as well.

 

Healthy operating efficiency supported by backward integration, strong in-house R&D capability and process patents

Operations are almost fully backward integrated. The company has the capability to manufacture a series of key active intermediates in-house and, hence, is one of the low-cost producers of synthetic pyrethroids. There is still part dependence on China for some of the new products introduced. Overall, the company’s import dependence is low at about 25-30%. Further, the company has a strong in-house R&D team which focuses on new product launches and process improvement. Strong process chemistry skills and backward integration should result in sustenance of healthy operating profitability of over 25% in the medium term as well. 

 

Comfortable and improving financial risk profile

The company’s net worth is healthy at Rs 927 crore and the gearing at around 0.7 times as on March 31, 2021. Accretion to profits has been lower despite high profits due to periodic dividend and share buybacks in recent years. Debt protection metrics are also strong, with interest coverage ratio estimated at around 11 times for fiscal 2022, gearing at 0.6-0.7 times, and TOL/TNW at 1.2-1.3 times. However, prior to fiscal 2016, debt metrics were moderate, due to debt funding expansions in the past. Thereafter, improving cash generation driven by healthy profitability and prudent working capital management has enabled an improvement in the debt metrics.

 

Capex is expected to sustain at Rs 150-200 crore annually over the medium term necessitated by high capacity utilization at existing plants, and new product pipeline. No long term debt is expected to be availed, though increasing business levels may necessitate higher working capital borrowings. Company is also expected to continue to do share buybacks over the medium term as well. Notwithstanding these payouts and capex, healthy cash generation from operations and progressive repayment of existing long term debt should result in key debt protection metrics; gearing is expected below 0.5 times and TOL/TNW ~1 time by fiscal 2023. 

 

Weaknesses

Product Concentration

Product and customer concentration does exist. Revenue contribution from select product has increased significantly in recent times and accounts for about 45-50% of revenues. However, this is partly offset by sound supply terms, and some degree of diversity through end markets and crop applications for this product.  Also, to some extent risk is mitigated by the fact that sizeable share of the customer’s requirements are met by supplies from Tagros, and the customer is among the top 5 agrochemical firms globally, besides being the largest seller of the particular product. Company’s plans to launch new molecules every year, with strong underlying chemistry and foray into new segments should help improve diversity and also increase contribution from other products as well over the medium term. Tagros has already taken steps to reduce client concentration by on boarding other large global agrochemical players in the current fiscal. These will be key to enhancing the business diversity.

 

Exposure to inherent risks in the agrochemical sector

The agrochemical industry is highly regulated by specific and separate registration processes in different countries, and is subject to various environmental rules and regulations both in domestic and overseas markets. Tagros is mainly an exporter and remains sensitive to changes in government policies and regulations in end-user countries.  Any change in export and import policies of these countries will also have an impact on Indian agrochemical manufacturers. Further, any ban on key products will pose a threat to business levels of these players.

 

The company’s products are off-patent molecules and the competitive advantage lies in process chemistry. Therefore, it is at risk of addition of newer products to the generics portfolio as molecules go off-patent and also to introduction of newer molecules in the market as substitutes for existing products by innovators.

 

Working capital-intensive operations

Operations of companies in the agrochemical sector are typically working capital intensive due to high inventory requirements given seasonal nature of operations and extended credit cycles. Tagros’s gross current assets (GCA) days were also high at 170-180 days in the last three years through fiscal 2021. However, company has been taking measures to reduce the same by way of availing bill discounting facility for receivables from key clients. Nevertheless, considering the steady growth prospects, incremental working capital requirements will remain large and any material elongation in the working capital cycle will be a monitorable.

Liquidity: Strong

Liquidity is strong, driven by expected cash accrual of above Rs 400 crore per fiscal in fiscals 2022 and 2023, and cash surplus of over Rs 345 crore as on November 30, 2021. Average utilisation of the fund-based bank limit was 65% for the 12 months through November 2021. Increasing scale of operations has resulted in higher utilization of working capital limits in recent months, however, company is in the process of getting incremental limits sanctioned which will further provide cushion. Long term repayment obligations of Rs 115 crore and Rs 123 crore in fiscals 2022 and 2023, and annual capex of Rs 150-200 crore respectively, can be adequately serviced from the cash accruals. 

Outlook: Stable

Tagros’s business risk profile will improve further over the medium term supported its new capacities, new product launches, strong existing product and registration portfolio, tie-ups with leading agrochemical MNCs, and healthy operating efficiency. The company is also expected to sustain its comfortable financial risk profile, supported by healthy cash generation and prudent funding of capacity addition.

Rating Sensitivity factors

Upward factors

• Higher than anticipated revenue growth and better product diversity, including from new products
• Sustaining operating margins at ~24-25%, ensuring healthy cash generation
• Sustenance of comfortable financial risk profile and debt metrics through prudent funding of capex and working capital management; TOL/TNW of ~0.8-1 times
• Maintenance of healthy liquid surpluses

 

Downward factors

• Lower-than-expected offtake in business levels, also impacting operating margins (below 18-20%), and cash generation
• Higher-than-expected debt-funded capex or acquisitions, or any undue stretch in the working capital cycle, moderating debt metrics; for instance, TOL/TNW > 1.5-1.7 times
• Material decline in cash surpluses due to high dividend payout, share buyback or capital reduction.

About the Company

Tagros is part of the Jhaver group based in Chennai. The group was started in 1894 by Mr R Srikrishna Jhaver as a trading and distribution company. Over time, it expanded into diverse fields such as drugs, pharmaceuticals, agrochemicals, zippers, textile chemicals, coated fabrics, pesticide formulations, and information technology.

 

The company is a leading manufacturer of sulfentrazone and synthetic pyrethroids (such as alphamethrin, cypermethrin, permethrin, and deltamethrin); the former is used in various formulations and find application in industries such as agriculture, public health, veterinary drugs, and household insecticides.

 

The company is fully integrated, with most intermediates being produced in house and limited external sourcing. Its erstwhile wholly owned subsidiary, Gujarat Agrochemical Pvt Ltd (GAPL), acquired in fiscal 2010, is primarily a captive supplier of cyperthmethric acid and meta-phenoxy benzaldehyde. GAPL was merged into Tagros in 2019. Other foreign subsidiaries mainly hold product registrations in their respective geographies.

 

Tagros has plants in three locations: one each in Cuddalore in Tamil Nadu; and Panoli and Dahej in Gujarat. Additionally. it has an R&D centre in Maraimalai Nagar, near Chennai. Tagros is also in the process of setting up new pyrethroid plant at Ankleshwar, Gujarat which is expected to be commissioned by September, 2022.

Key Financial Indicators

As on/for the period ended March 31	Unit	2021	2020
Operating Income	Rs Crore	1,990	1,744
Reported profit after tax (PAT)*	Rs Crore	445	360
PAT margin	%	22.4	20.6
Adjusted debt/adjusted net worth	Times	0.71	0.67
Interest coverage	Times	15.36	11.13

*Adjusted for goodwill amortisation

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs.Crore)	Complexity Levels	Rating assigned with outlook
NA	Term Loan	NA	NA	Mar-2024	324.71	NA	CRISIL AA/Stable
NA	Term Loan	NA	NA	Mar-2023	106.30	NA	CRISIL AA/Stable
NA	Cash Credit	NA	NA	NA	3.0	NA	CRISIL AA/Stable
NA	Export Packing Credit#	NA	NA	NA	797	NA	CRISIL AA/Stable
NA	Letter of Credit	NA	NA	NA	300	NA	CRISIL A1+
NA	Bank Guarantee	NA	NA	NA	11	NA	CRISIL A1+
NA	Proposed Short Term Bank Loan Facility	NA	NA	NA	107.99	NA	CRISIL A1+

#Completely interchangeable with Foreign bill discounting, Pre-Shipment credit in foreign Currency, Export bills discounting