Rating Rationale
March 26, 2018 | Mumbai
Thirumalai Chemicals Limited
Rating Action
Total Bank Loan Facilities Rated Rs.581.54 Crore
Long Term Rating CRISIL A/Stable
Short Term Rating CRISIL A1
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL's ratings on the bank facilities of Thirumalai Chemicals Limited's (TCL) continue to reflect the TCL group's established market position in the domestic PAN segment, moderate diversity in product profile, and a comfortable financial risk profile. The ratings also factor in expected improvement in the performance of subsidiary, OOSB, and low working capital intensity of operations. These strengths are partially offset by TCL group's limited pricing flexibility due to the competitive nature of the industry, susceptibility to volatility in raw material prices and exposure to risks arising from changes in regulatory policies on imports.

Earlier on March 05, 2018, CRISIL had upgraded its ratings on TCL's long term bank facilities to 'CRISIL A/Stable' from 'CRISIL A-/Positive'. The rating on the short-term bank facilities had been reaffirmed at 'CRISIL A1'.

The rating action reflects CRISIL's belief that TCL's credit risk profile will sustain the improvement over the near to medium term supported by healthy cash generation and prudent funding of proposed expansions, while incremental working capital remains moderate.

Steady demand, favourable Pan-Ox prices and higher cash flows from Malaysian subsidiary, Optimistic Organic SDN BHD (OOSB) are likely to help TCL clock 11% compound annual growth rate (CAGR) revenue growth over the near to medium term, while maintaining operating profitability of at least 12%. The group will be spending Rs 200-250 crore between fiscals 2018 and 2020 towards setting up a new phthalic anhydride (PAN) facility at Dahej, and increasing its maleic anhydride (MAN) capacity in Malaysia. While expansion at OOSB will be partly debt-funded, healthy cash generation and liquid surplus of about Rs 70 crore as on December 31, 2017 will be used to fund the Dahej expansion, and thus, keep TCL (standalone) free of long-term debt. Further, given the prudent working capital management, gearing is expected to remain healthy at less than 0.5 time and debt protection metrics too will be comfortable over the medium term.

Analytical Approach

For arriving at the ratings, CRISIL has combined the financial and business risk profiles of TCL and its subsidiaries. This is because these entities, collectively referred to as the TCL group, have a common management, are in similar lines of business, and have financial fungibility.  

Key Rating Drivers & Detailed Description
* Established market position in the domestic PAN segment and moderate diversity in product profile
The TCL group is the second-largest player in the domestic PAN industry, after IG Petrochemicals Ltd, with a market share of about 33%, and has a track record of over three decades. Furthermore, it has a longstanding relationship of nearly two decades with its main supplier, Reliance Industries Ltd. While PAN contributes 69% to revenue, the group also manufactures value-added derivatives such as MAN, diethyl phthalate (DEP), and food acids. CRISIL believes TCL group's business risk profile will continue to benefit from above mentioned factors leading to steady revenue growth and profitability over the medium term.

* Comfortable financial risk profile with healthy gearing and debt protection metrics
Conservative capacity expansion plans in the past and efficient working capital management as led to an improvement in the financial risk profile over the past five fiscals. Gearing, which had peaked at 1.83 times as on March 31, 2011, due to consolidation of OOSB and meeting working capital requirement, had improved substantially to 0.73 times as on March 31, 2015 and further to an estimated 0.14 time as on March 31, 2018. Going forward, albeit the proposed expansion plans, credit metrics are expected to remain comfortable for the rating category.

* Limited pricing flexibility due to competitive nature of industry
The group operates in a commoditized industry where there is limited differentiation in product profile. There is also competition with imports; due to excess capacity and a slowdown in global markets, especially China, global players have increased their presence in the Indian market where demand is growing. PAN realisation in the domestic market is hence influenced by competition from both domestic and global suppliers. To mitigate this, the group has optimized its sales mix and focuses more on contractual sales where prices are pre-determined and less exposed to competitive pressures. Nevertheless, despite a healthy market position, the group's pricing flexibility will continue to be partly constrained by intense competition.

* Susceptibility to volatility in raw material prices
Raw materials, which account for nearly 80% of total operating cost are predominantly crude derivatives, the prices of which are volatile and could have an impact on profitability. To mitigate the same TCL has taken various measures in the last three years, including significantly streamlining its inventory. This will enable the company to partly withstand cyclicality and volatility. Nevertheless, CRISIL believes that the company will remain partly vulnerable to any adverse movement in input costs and thus sustenance of the process improvement measures will be critical.

* Exposure to risks arising from changes to regulatory policies on imports
Imports, which surged more than 2.2 times in fiscal 2011, declined sharply post introduction of anti-dumping duties on certain countries in September 2012 which had in turn benefitted TCL. However, steady growth in imports from alternative sources over 2013-15, along with increasing competition from IGPL, had constrained TCL's operating profitability during that period. Thus, any change in regulatory policies on imports will be a key rating sensitivity factor.
Outlook: Stable

CRISIL believes the TCL group's credit risk profile will continue to benefit from steady cash flows from the domestic PAN and its derivatives business, and MAN business in OOSB. Further, gearing and debt protection metrics are also expected to remain comfortable supported by prudent capex-funding and working capital management.

Upside Scenario:
* Sustained healthy cash generation notwithstanding any adverse changes in PAN-OX prices or impact of new capacities in market and maintaining comfortable financial risk profile.

Downside Scenario:
* Steep decline in sales volumes or sustained decline in profitability, adversely impacting cash flow or in case of higher than expected debt funded capex or stretch in working capital cycle adversely affecting credit metrics.

About the Company

TCL was set up in 1972 by Mr N S Iyengar and Mr N R Swamy. The company is part of the Thirumalai group, which has interests in commodity chemicals, pigments, surfactants, education and healthcare. TCL and its subsidiaries manufacture and sell commodity chemicals.

TCL commenced commercial production of PAN in 1976, and currently has a capacity of 145,000 tonnes per annum. It also manufactures derivatives of PAN such as food acids and esters. The group manufactures MAN through OOSB, which has an annual capacity of 42,000 tonnes. 

For the nine months ended December 2017, on a consolidated basis, TCL reported a PAT of Rs 130 crore on net sales of Rs 981 crore against a PAT of Rs 52 crore on net sales of Rs 723 crore during the previous corresponding period..

Key Financial Indicators
Particulars Unit 2017 2016
Revenue Rs. Cr. 1,033 943
Profit After Tax (PAT) Rs. Cr. 68 32
PAT Margins % 6.6 3.4
Adjusted Debt/ Adjusted Net worth Times 0.21 0.42
Interest coverage Times 10.06 4.55

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 Fund based facilities NA NA NA 70.6 CRISIL A/Stable
NA Fund based facilities* NA NA NA 104.4 CRISIL A/Stable
NA Non-Fund Based Limit* NA NA NA 206.6 CRISIL A/Stable
NA Non-Fund Based Limit NA NA NA 138.2 CRISIL A1
NA Proposed Fund-Based Bank Limits NA NA NA 61.74 CRISIL A/Stable
*Of which Rs. 311 Cr are interchangeable between non-fund based and fund based limits
Annexure - Rating History for last 3 Years
  Current 2018 (History) 2017  2016  2015  Start of 2015
Instrument Type Quantum Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund-based Bank Facilities  LT/ST  236.74  CRISIL A/Stable  05-03-18  CRISIL A/Stable  26-10-17  CRISIL A-/Positive  17-11-16  CRISIL BBB+/Positive    --  -- 
            14-03-17  CRISIL A-/Stable  28-01-16  CRISIL BBB+/Stable       
Non Fund-based Bank Facilities  LT/ST  344.8  CRISIL A/Stable/ CRISIL A1    No Rating Change  26-10-17  CRISIL A1  28-01-16  CRISIL A2    --  -- 
            14-03-17  CRISIL A2+           
Table reflects instances where rating is changed or freshly assigned. 'No Rating Change' implies that there was no rating change under the release.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Fund-Based Facilities* 104.4 CRISIL A/Stable Cash Credit 175 CRISIL A/Stable
Non-Fund Based Limit* 206.6 CRISIL A/Stable Letter of Credit 313.8 CRISIL A1
Non-Fund Based Limit 138.2 CRISIL A1 Proposed Fund-Based Bank Limits 92.74 CRISIL A/Stable
Proposed Fund-Based Bank Limits 61.74 CRISIL A/Stable -- 0 --
Fund-Based Facilities 70.6 CRISIL A/Stable      
Total 581.54 -- Total 581.54 --
*Of which Rs. 311 Cr are interchangeable between non-fund based and fund based limits
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 Petrochemical Industry
CRISILs Criteria for Consolidation

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