Detailed Rationale

Crisil Ratings has reaffirmed its ‘Crisil A/Stable/Crisil A1’ ratings on the bank facilities and fixed deposits of Transpek Industry Ltd (TIL).

 

The ratings continue to reflect TIL’s steady business risk profile in fiscal 2024. The scale of operations and operating margin have been impacted because of subdued demand and volatile raw material prices, which was anticipated. The financial risk profile continues to remain strong, driven by robust networth, low gearing and strong liquidity.

 

The revenue was Rs 578 crore and operating margin was 15.3% in fiscal 2024. In the first half of fiscal 2025, revenue improved to Rs 315 crore (Rs 283 crore in the first half of fiscal 2024) due to normalisation in demand and stabilisation of prices. However, operating profitability remained at similar level of 15.25% in the first half of fiscal 2025 (12.67% in fiscal 2024). The second half of the fiscal is expected to be better, with operating income improving 8-9% and operating margin expected to be better over ~13% for the full fiscal. While overall performance is expected to improve on-year with demand conditions normalising, expected product diversification and entry into new markets, the pace of recovery is anticipated to be gradual. Continued pressure on operating performance for an elongated period might further weaken the business risk profile and will, hence, remain a key rating sensitivity factor.

 

The ratings continue to reflect TIL’s established market position with a diversified revenue profile in terms of end-user industries and geographical presence with comfortable financial risk profile. These strengths are partially offset by susceptibility to volatility in raw material prices and cyclicality in the chemical segment, working capital-intensive operations with high product and customer concentration risk, and exposure to risks inherent in the chemical industry.

Analytical Approach

Crisil Ratings has evaluated the standalone business and financial risk profiles of TIL.

Key Rating Drivers & Detailed Description

Strengths:

• Established market position with a reputed and diversified clientele with moderate operating income: The business risk profile is supported by the company’s established position in the domestic and international markets as it caters to various industries, such as polymers, agrochemicals, plastics, performance materials, coatings, pharmaceuticals, personal care, and flavours and fragrances, enabling it to withstand a downturn in any one end-user segment. Furthermore, overseas markets, including the US, South Korea and Europe, contribute ~85% to the revenue. Operating income remined at Rs 587 crore in fiscal 2024 from Rs 834 crore in fiscal 2023 on account of slower demand that led to lower volume offtake in specialty chemical. Furthermore, revenue in the specialty chemical key products declined owing to both price corrections and lower volume, largely due to global macro-economic headwinds. However, in the first half of fiscal 2025, TIL achieved revenue of Rs 315 crore. The company has benefited from enhanced capacity, with steady demand for its products. It is planning to diversify by introducing new non-chlorination products to its portfolio, resulting in steady revenue growth of 8-9% over the medium term, which will be a key monitorable.

 

• Comfortable financial risk profile: Networth was strong at Rs 673 crore as on March 31, 2024, while gearing was healthy at 0.07 time. Debt protection metrics were robust, with interest coverage and net cash accrual to total debt (NCATD) ratios of over 6.25 times and 1.38 times, respectively, for fiscal 2024. The company plans to incur capital expenditure (capex) for diversifying its product portfolio, but the cost is yet to be ascertained. The debt protection metrics are expected to remain comfortable over the medium term as benefits of the capex accrue. Despite expected capex over the medium term, the financial risk profile should remain comfortable because of the prudent funding mix of debt and internal cash accrual.

 

Weaknesses:

• Large working capital requirement with high product and customer concentration risk and exposure to risks inherent in the chemical industry: Gross current assets (GCA) were 131 days driven by receivables and inventory of 58 days and 47 days, respectively, as on March 31, 2024. The company maintains an average inventory of 40-50 days for uninterrupted production as key raw materials are imported and there are one-two suppliers for some of the raw materials. Also, it offers 60-90 days’ credit to customers. Against this, the company receives credit of 45-60 days from its suppliers.

 

Revenue from the top six customers accounted for 78% of total sales in fiscal 2024. This risk is mitigated to some extent by TIL’s longstanding relationships with these clients, who are market leaders in their respective fields. Also, it has a long-term take-or-pay supply agreement with customers. Additionally, these products are largely regulated in terms of quality, purity and efficacy, which ensures sticky relationships with customers. Supplier registration in regulated markets usually takes 1-1.5 years, which acts as an entry barrier for other players. Revenue and profitability are exposed to government policies related to pollution control, hazardous products, or import and export of raw materials.

 

• Susceptibility to volatility in raw material prices impacting operating efficiency and cyclicality in the chemical segment: Most of the raw materials of TIL are subject to the risk of volatility in global crude oil prices. Therefore, profitability remains exposed to any adverse movement in raw material prices as it can only be passed on to end customers with a time lag. TIL’s operating margin fluctuated in the 12 quarters through the second quarter of fiscal 2025, leading to overall moderation in its return on capital employed (RoCE). Operating margin was 15.3% in fiscal 2024 and 12.25% in the first half of fiscal 2025, however, with expected product diversification and entry into new markets, the operating margin is expected to be over ~13% over the medium term. Moreover, the chemical industry is intensely competitive and dominated by large players. The top players account for close to 50% of the market share. Furthermore, the industry is susceptible to government regulations and cyclicality. Cyclical downturns or adverse changes in the demand-supply balance may result in lower realisations for chemical manufacturers.

Liquidity: Strong

Cash accrual is expected to be over Rs 65 crore, over the medium term, against nil debt obligation. In addition, Rs 13-15 crore of fixed deposits will be maturing over the medium term, supporting liquidity. The bank limit was unutilised in the 12 months through November 2024. Cash and bank balance was Rs 56 crore during the first quarter of the current fiscal. The current ratio was healthy at 1.90 times as on March 31, 2024. Crisil Ratings believes that if any additional exposure in the group companies in form of investment in shares or advances to group companies, impinging its own cash accrual may impact the liquidity and will remain a rating sensitivity factor. Low gearing and comfortable networth support financial flexibility.

Outlook: Stable

Crisil Ratings believes that TIL’s operating and financial performance will remain healthy, driven by the gradual recovery in demand in the specialty chemical segment. Its financial risk profile is expected to remain strong, despite debt-funded capex, driven by a strong capital structure and healthy cash accrual.

Rating sensitivity factors

Upward factors:

• Double-digit revenue growth with operating margin of over 16-17%, leading to healthy cash generation
• Sustenance of comfortable financial risk profile with low gearing and improvement in liquidity

 

Downward factors:

• Sustained decline in revenue with operating margin falling below 12% on sustained basis or stretched working capital cycle, resulting in weak RoCE
• Any large capex adversely impacting the financial profile

About the Company

Incorporated in 1965, TIL is based in Vadodara, Gujarat. The company manufactures and exports chemicals, mainly acid and alkyl chlorides. Exports contribute to over three quarters of the revenue, with the domestic market accounting for the remaining. The company is listed on the Bombay Stock Exchange and it is promoted by the Shroff family.

Any other information: Not Applicable