Detailed Rationale

CRISIL Ratings has revised its rating outlook on the proposed long-term bank facility of Veritas Polychem Pvt Ltd (VPPL; part of Groupe Veritas [GV]) to ‘Negative’ from ‘Stable’ and reaffirmed the rating at ‘CRISIL BBB-’.

 

The outlook revision reflects GV’s exposure to implementation and funding risks associated with the large project being undertaken by VPPL, which is a subsidiary of Veritas India Ltd (VIL, rated ‘CRISIL BBB+/Negative/CRISIL A2). VPPL is setting up a manufacturing-storage-bottling facility at Dighi port in Maharashtra at a project cost of Rs 2,050 crore in phases, funded through debt and promoter capital in a ratio of 2:1. Phase 1 (comprising 1.75 lakh tonne per annum [tpa] polyvinyl chloride [PVC] and 3.6 lakh tpa polymer modified bitumen [PMB] plants, 6 gas storage terminals, and a captive power plant) of the project is to cost Rs 1,400 crore. Phase II will involve setting up 26 additional gas storage terminals and an LPG (liquefied petroleum gas) bottling plant for Rs 650 crore. The scope enhancement and addition of phase II in fiscal 2019 helped the company to get Ultra Mega Power Project approval from the Government of Maharashtra, making it eligible for various benefits (including industrial promotion subsidy and tax and duty concessions). While the plant has been on site since 2018, the project has been delayed by more than three years due to insolvency proceedings under the bankruptcy law at the debt-laden Dighi port, and delay in receipt of environmental clearance. The final NCLT (National Company Law Tribunal) order in favour of Adani Ports and SEZ Ltd and environmental clearance were received in March 2021.

 

The project is exposed to implementation risk given its scale and scope; and to uncertainty related to plant technical output and efficiency as it has been idle for almost three years. Since it is largely debt-funded and yet to achieve financial closure, the project is also exposed to funding risk.

 

After drawdown of the full project debt, group debt (including letter of credit-backed payables) is expected to peak to about Rs 2,600 crore by March 31, 2024. Any delay in financial closure or project implementation resulting in substantial time and cost overruns could adversely impact the cash flows and debt protection metrics of the group and will hence remain key monitorables.

 

The rating continues to reflect the strong financial and operational support VPPL receives from its parent, VIL; and established client relationships given the extensive experience of the promoter in trading in PVC and bitumen. These strengths are partially offset by exposure to risks associated with timely financial closure and implementation and commercialisation of the project, and limited track record of the group in manufacturing.

Analytical Approach

For arriving at its rating, CRISIL Ratings has applied its criteria for notching up ratings for support from the parent, VIL.

 

CRISIL Ratings has also treated as equity the proposed preference shares that are convertible at the option of issuer and held by the promoter of GV and group companies, VIL and Hazel Mercantile Ltd (HML; ‘CRISIL A/Stable/CRISIL A1’). These preference shares will have negligible coupon rate (0.01%), will be subordinated to external debt, and are expected to remain in the business in the long term (11 years).

Key Rating Drivers & Detailed Description

Strengths:

• Strong financial and operational support from parent and group:

The scope of the project has been revised to around Rs 2,050 crore from Rs 1,400 crore estimated earlier, and is to be funded through debt and promoter funds in a mix of 2:1. As on December 31, 2020, about 51% of the promoter contribution had come through infusion from VIL, HML, and GV. Furthermore, the promoter has provided an undertaking that any additional funding for the project will be comfortably met in his personal capacity.

 

• Established trade relationships and extensive experience of the promoter: Mr Nitin Kumar Didwania, promoter of GV, has experience of more than two decades in the trading and distribution of products such as PVC and bitumen in the domestic as well as international markets. This has helped to forge strong relationships with several large chemical suppliers and customers worldwide. He has set up a team of qualified professionals and developed robust and effective risk-mitigating strategies and in-house support systems. Operations have been divided according to commodity and functions. The group currently employs over 800 people, of which about 150 are involved in the international businesses.

 

Weaknesses:

• Project yet to achieve financial closure: Due to delay in environmental clearance owing to the pandemic and handing over the land because of the insolvency proceedings at Dighi port, VPPL’s project has been delayed. The company was earlier close to achieving financial closure for phase 1 of the project. However, having received the environmental clearance in March 2021, fresh discussions have begun for financial closure of the project and is expected to get completed this fiscal. This will remain a key monitorable.

 

• Exposure to project risks: Given the substantial scale and complexity of the project, VPPL faces risks relating to implementation, timely funding tie-ups and receipt of clearances, and material cost overruns. The company has appointed Technip India Ltd as its Engineering, Procurement, Construction Management (EPCM) contractor, which had dismantled and shipped the plant to Dighi port in fiscal 2018. INEOS Technologies is the licence provider for the PVC plant.

 

• Limited track record of the group in manufacturing: GV has extensive experience in trading in chemicals and petrochemicals. It has also set up a tank terminal in Sharjah with a small manufacturing capacity. However, since this will be the first major entry of the group into manufacturing, it will be susceptible to implementation risks.

Liquidity: Adequate

The company has no debt at present, and repayment of the proposed debt is expected to commence only after operations start at the end of fiscal 2024. Till then, all the funding requirements will be met through the proposed debt and equity infusion. Timely support from the promoter and GV is expected to help tide over financial exigencies and meet any liquidity mismatch.

Outlook: Negative

CRISIL Ratings believes VPPL is exposed to timely implementation, commercialisation and funding risks including risks related to the pandemic, associated with its large project, given limited experience in manufacturing. However, the company is likely to receive financial support from the parent and group (in case of cash flow mismatch) until the project is completed and stabilises.

Rating Sensitivity factors

Upward Factors

• Sustained and significant increase in GV’s operating profitability to more than 4%, backed by improvement in tank terminal and trading operations
• Timely implementation of the project as per stipulated costs and funding mix
• Better-than-expected operating performance during initial years of operations due to substantial capacity utilisation

 

Downward Factors

• Delay in achieving financial closure
• Larger-than-expected peak debt of Rs 1,400 crore in the project
• Project implementation issues, including material cost or time overrun, or delays in stabilising operations after commissioning
• Changes in the credit risk profile of the parent or group, and in stance of support

 

The rating will also remain sensitive to any change in the ratings or rating outlook on the parent, VIL.

About the Company

VPPL was set up in 2011 as a wholly owned subsidiary of VIL by Mr Nitin Kumar Didwania. The company plans to set up an integrated industrial complex at Dighi port at a cost of Rs 2,050 crore. This will comprise plants for manufacturing 1,75,000 tpa of PVC and 3,60,000 tpa of PMB, a gas storage terminal consisting of 32 mounded bullets with total capacity of 80,000 cubic metre, an LPG bottling plant, and a captive 18-megawatt power plant. The project is likely to be funded through debt and promoter funds in a ratio of 2:1. The expected construction period is 30 months. As on March 31, 2021, about Rs 344 crore was spent on the project, funded entirely through infusion by VIL, HML and GV’s promoters.

 

The Government of Maharashtra has approved the project as Ultra Mega Project, which will make VPPL eligible for benefits such as duty-free electricity in case of grid connection for 20 years, waiver of stamp duty charges, industrial promotion subsidy as per Packaged Scheme of Incentives 2013 up to 100% of eligible capital investment, and concessions on state government taxes.

 

About the Parent

VIL (formerly, Duroflex Engineering Ltd) was incorporated in Mumbai in 1985. The company stocks, trades in, and distributes bulk chemicals, rubber, and metals. It has three overseas subsidiaries: Veritas International FZE, Hazel International FZE, and Veritas America Trading Inc. Of these, Veritas America Trading Inc has no business operations currently. Hazel International FZE, the wholly owned subsidiary of VIL, has set up a tank terminal with capacity of around 175,000 cubic metres at Hamriyah Free Zone, near Sharjah, at a cost of around Rs 1,000 crore. This was funded through debt and promoter funds in a ratio of 3:2. The terminal has 30 tanks spread across 30,000 square metres and commenced commercial operations in April 2018.

About the Group

GV, owned by Mr Nitin Kumar Didwania, primarily trades in petrochemicals, polymers, rubber, agri-products, paper, heavy distillates, minerals, and metals. HML is the flagship company of the group. The other group companies are VIL, Aspen, and Sanman. The extensive experience of the promoter in the petrochemical trading business and established relationships with customers and suppliers enabled the group to significantly scale up revenue to around Rs 12,600 crore in fiscal 2020. The group has set up various entities for effective management of the business verticals. In the domestic market, it has a network covering 12 locations with adequate storage capacity. Globally, it has presence in 10 countries with 8 international offices.

Key Financial Indicators*

Particulars	Unit	2020	2019
Revenue	Rs crore	NA	NA
Profit After Tax (PAT)	Rs crore	NA	NA
PAT Margin	%	NA	NA
Adjusted debt/adjusted networth	Times	NA	NA
Adjusted interest coverage	Times	NA	NA

*Financials not applicable as project is yet to commence

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 Level	Rating assigned with outlook
NA	Proposed Term Loan	NA	NA	NA	960.0	NA	CRISIL BBB-/Negative