Rating Rationale
September 10, 2018 | Mumbai
Thirumalai Chemicals Limited
Rating outlook revised to 'Positive'; ratings reaffirmed
 
Rating Action
Total Bank Loan Facilities Rated Rs.581.54 Crore
Long Term Rating CRISIL A/Positive (Outlook revised from 'Stable' and rating reaffirmed)
Short Term Rating CRISIL A1 (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has revised its outlook on the long-term bank facilities of Thirumalai Chemicals Limited (TCL, part of the TCL group) to 'Positive' from 'Stable,' while reaffirming the rating at 'CRISIL A'. The rating on the short-term bank facilities has been reaffirmed at 'CRISIL A1'.

The rating action reflects CRISIL's belief that TCL's credit risk profile will improve further over the medium term as favourable demand will support steady off-take, process improvement measures will help sustain profit contribution and healthy financial risk profile will help absorb any volatility in phthalic anhydride (PAN) and orthoxylene (OX) prices.
 
Business risk profile will benefit from improved operating efficiencies and healthy cash generation from existing capacities, and steady cash flows in the Malaysian subsidiary, Optimistic Organic SDN BHD (OOSB). Besides, the group is establishing a new phthalic anhydride (PAN) facility in Dahej. This capacity is expected to become operational between fiscal 2019 and 2020. Various process improvement measures to control costs and improve realisations have rendered a certain degree of stability to the margins. However given the new PAN capacity additions in the market and ensuing impact on realisations, and stabilization risks, margins could come under moderate pressure over the medium term, but nevertheless remain healthy, while PAN volume growth remains steady at 5-7%.
 
Despite sizeable capex of Rs 150 Cr in fiscal 2019 and increase in working capital requirements following higher inventory holdings, gearing is expected to remain healthy at less than 0.5 time and debt protection metrics too will be comfortable over the medium term.
 
The ratings reflect 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 sustenance in the performance of subsidiary, OOSB, and moderate 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.

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, are in similar lines of business, and have operational linkages and financial fungibility.
Key Rating Drivers & Detailed Description
Strengths
* 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 about 60% 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 has 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, has remained below 0.50 times since March 31, 2016.  Going forward, albeit the proposed expansion plans, credit metrics are expected to remain comfortable for the rating category.
 
Weaknesses
* 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: Positive

CRISIL believes the TCL group's business risk profile will improve over the medium term benefitting from steady cash flows from the domestic PAN and its derivatives business, and MAN business in OOSB and the proposed increase in capacity. Credit metrics will remain comfortable despite the partly debt-funded capex and expected increase in working capital requirements.
 
Upside Scenario:
* Sustained healthy cash generation notwithstanding any adverse changes in PAN-OX prices or impact of new capacities in market
* Prudent capital spending and management of working capital resulting in continued healthy gearing and strengthening of debt protection metrics
 
Downside Scenario:
* sustained decline in operating profitability margins to less than 10% and lower than expected cash accruals, adversely impacting cash flow
* 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 first three months of fiscal 2019, on a consolidated basis, TCL reported a PAT of Rs 31 crore on net sales of Rs 258 crore against a PAT of Rs 33 crore on net sales of Rs 323 crore during the previous corresponding period.

Key Financial Indicators
Particulars Unit 2018 2017
Revenue Rs. Cr. 1,310 1,026
Profit After Tax (PAT) Rs. Cr. 170 71
PAT Margins % 13.0 6.9
Adjusted Debt/ Adjusted Networth Times 0.1 0.15
Interest coverage Times 23 10

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/Positive
NA Fund based facilities* NA NA NA 104.4 CRISIL A/Positive
NA Non-fund based limit* NA NA NA 206.6 CRISIL A/Positive
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/Positive
*Of which Rs.311 Cr are interchangeable between fund based and non-fund based limits
Annexure - Rating History for last 3 Years
  Current 2018 (History) 2017  2016  2015  Start of 2015
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund-based Bank Facilities  LT/ST  236.74  CRISIL A/Positive  26-03-18  CRISIL A/Stable  26-10-17  CRISIL A-/Positive  17-11-16  CRISIL BBB+/Positive    --  -- 
        05-03-18  CRISIL A/Stable  14-03-17  CRISIL A-/Stable  28-01-16  CRISIL BBB+/Stable       
            21-02-17  CRISIL BBB+/Positive           
Non Fund-based Bank Facilities  LT/ST  344.80  CRISIL A/Positive/ CRISIL A1  26-03-18  CRISIL A/Stable/ CRISIL A1  26-10-17  CRISIL A1  17-11-16  CRISIL A2    --  -- 
        05-03-18  CRISIL A1  14-03-17  CRISIL A2+  28-01-16  CRISIL A2       
            21-02-17  CRISIL A2           
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
Fund-Based Facilities 70.6 CRISIL A/Positive Fund-Based Facilities 70.6 CRISIL A/Stable
Fund-Based Facilities* 104.4 CRISIL A/Positive Fund-Based Facilities* 104.4 CRISIL A/Stable
Non-Fund Based Limit* 206.6 CRISIL A/Positive Non-Fund Based Limit* 206.6 CRISIL A/Stable
Non-Fund Based Limit 138.2 CRISIL A1 Non-Fund Based Limit 138.2 CRISIL A1
Proposed Fund-Based Bank Limits 61.74 CRISIL A/Positive Proposed Fund-Based Bank Limits 61.74 CRISIL A/Stable
Total 581.54 -- Total 581.54 --
*Of which Rs.311 Cr are interchangeable between fund based and non-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

For further information contact:
Media Relations
Analytical Contacts
Customer Service Helpdesk
Saman Khan
Media Relations
CRISIL Limited
D: +91 22 3342 3895
B: +91 22 3342 3000
saman.khan@crisil.com

Naireen Ahmed
Media Relations
CRISIL Limited
D: +91 22 3342 1818
B: +91 22 3342 3000
naireen.ahmed@crisil.com

Anuj Sethi
Senior Director - CRISIL Ratings
CRISIL Limited
B:+91 44 6656 3100
anuj.sethi@crisil.com


Sameer Charania
Director - CRISIL Ratings
CRISIL Limited
D:+91 22 4097 8025
sameer.charania@crisil.com


Sidhaarth MS
Rating Analyst - CRISIL Ratings
CRISIL Limited
D:+91 44 6656 3138
Sidhaarth.MS@crisil.com
Timings: 10.00 am to 7.00 pm
Toll free Number:1800 267 1301

For a copy of Rationales / Rating Reports:
CRISILratingdesk@crisil.com
 
For Analytical queries:
ratingsinvestordesk@crisil.com


 

Note for Media:
This rating rationale is transmitted to you for the sole purpose of dissemination through your newspaper / magazine / agency. The rating rationale may be used by you in full or in part without changing the meaning or context thereof but with due credit to CRISIL. However, CRISIL alone has the sole right of distribution (whether directly or indirectly) of its rationales for consideration or otherwise through any media including websites, portals etc.


About CRISIL Limited

CRISIL is a leading agile and innovative, global analytics company driven by its mission of making markets function better. We are India’s foremost provider of ratings, data, research, analytics and solutions. A strong track record of growth, culture of innovation and global footprint sets us apart. We have delivered independent opinions, actionable insights, and efficient solutions to over 1,00,000 customers.
 
We are majority owned by S&P Global Inc., a leading provider of transparent and independent ratings, benchmarks, analytics and data to the capital and commodity markets worldwide.
 
For more information, visit www.crisil.com 


Connect with us: TWITTER | LINKEDIN | YOUTUBE | FACEBOOK

About CRISIL Ratings
CRISIL Ratings is part of CRISIL Limited (“CRISIL”). We pioneered the concept of credit rating in India in 1987. CRISIL is registered in India as a credit rating agency with the Securities and Exchange Board of India (“SEBI”). With a tradition of independence, analytical rigour and innovation, CRISIL sets the standards in the credit rating business. We rate the entire range of debt instruments, such as, bank loans, certificates of deposit, commercial paper, non-convertible / convertible / partially convertible bonds and debentures, perpetual bonds, bank hybrid capital instruments, asset-backed and mortgage-backed securities, partial guarantees and other structured debt instruments. We have rated over 24,500 large and mid-scale corporates and financial institutions. CRISIL has also instituted several innovations in India in the rating business, including rating municipal bonds, partially guaranteed instruments and microfinance institutions. We also pioneered a globally unique rating service for Micro, Small and Medium Enterprises (MSMEs) and significantly extended the accessibility to rating services to a wider market. Over 1,10,000 MSMEs have been rated by us.


CRISIL PRIVACY
 
CRISIL respects your privacy. We may use your contact information, such as your name, address, and email id to fulfil your request and service your account and to provide you with additional information from CRISIL.For further information on CRISIL’s privacy policy please visit www.crisil.com.


DISCLAIMER

This disclaimer forms part of and applies to each credit rating report and/or credit rating rationale that we provide (each a “Report”). For the avoidance of doubt, the term “Report” includes the information, ratings and other content forming part of the Report. The Report is intended for the jurisdiction of India only. This Report does not constitute an offer of services. Without limiting the generality of the foregoing, nothing in the Report is to be construed as CRISIL providing or intending to provide any services in jurisdictions where CRISIL does not have the necessary licenses and/or registration to carry out its business activities referred to above. Access or use of this Report does not create a client relationship between CRISIL and the user.

We are not aware that any user intends to rely on the Report or of the manner in which a user intends to use the Report. In preparing our Report we have not taken into consideration the objectives or particular needs of any particular user. It is made abundantly clear that the Report is not intended to and does not constitute an investment advice. The Report is not an offer to sell or an offer to purchase or subscribe for any investment in any securities, instruments, facilities or solicitation of any kind or otherwise enter into any deal or transaction with the entity to which the Report pertains. The Report should not be the sole or primary basis for any investment decision within the meaning of any law or regulation (including the laws and regulations applicable in the US).

Ratings from CRISIL Rating are statements of opinion as of the date they are expressed and not statements of fact or recommendations to purchase, hold, or sell any securities / instruments or to make any investment decisions. Any opinions expressed here are in good faith, are subject to change without notice, and are only current as of the stated date of their issue. CRISIL assumes no obligation to update its opinions following publication in any form or format although CRISIL may disseminate its opinions and analysis. CRISIL rating contained in the Report is not a substitute for the skill, judgment and experience of the user, its management, employees, advisors and/or clients when making investment or other business decisions. The recipients of the Report should rely on their own judgment and take their own professional advice before acting on the Report in any way.

Neither CRISIL nor its affiliates, third party providers, as well as their directors, officers, shareholders, employees or agents (collectively, “CRISIL Parties”) guarantee the accuracy, completeness or adequacy of the Report, and no CRISIL Party shall have any liability for any errors, omissions, or interruptions therein, regardless of the cause, or for the results obtained from the use of any part of the Report. EACH CRISIL PARTY DISCLAIMS ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY, SUITABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE. In no event shall any CRISIL Party be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs) in connection with any use of any part of the Report even if advised of the possibility of such damages.

CRISIL Ratings may receive compensation for its ratings and certain credit-related analyses, normally from issuers or underwriters of the instruments, facilities, securities or from obligors. CRISIL’s public ratings and analysis as are required to be disclosed under the regulations of the Securities and Exchange Board of India (and other applicable regulations, if any) are made available on its web sites, www.crisil.com (free of charge). Reports with more detail and additional information may be available for subscription at a fee – more details about CRISIL ratings are available here: www.crisilratings.com.

CRISIL and its affiliates do not act as a fiduciary. While CRISIL has obtained information from sources it believes to be reliable, CRISIL does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives and / or relies in its Reports. CRISIL keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of the respective activity. As a result, certain business units of CRISIL may have information that is not available to other CRISIL business units. CRISIL has established policies and procedures to maintain the confidentiality of certain non-public information received in connection with each analytical process. CRISIL has in place a ratings code of conduct and policies for analytical firewalls and for managing conflict of interest. For details please refer to: https://www.crisil.com/en/home/our-businesses/ratings/regulatory-disclosures/highlighted-policies.html

CRISIL’s rating criteria are generally available without charge to the public on the CRISIL public web site, www.crisil.com. For latest rating information on any instrument of any company rated by CRISIL you may contact CRISIL RATING DESK at CRISILratingdesk@crisil.com, or at (0091) 1800 267 1301.

This Report should not be reproduced or redistributed to any other person or in any form without a prior written consent of CRISIL.

All rights reserved @ CRISIL