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
* 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.
* 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

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