Detailed Rationale

CRISIL Ratings has reaffirmed its 'CRISIL AA/Stable/CRISIL A1+' ratings on the bank facilities and debt instruments of Aarti Industries Limited (AIL; a part of the Aarti group),

 

The company has maintained its strong business risk profile, which is reflected in market leadership, consistent performance, diversified revenue profile at geography, product, end user industry and customer level. The ratings also factor in the established market position of AIL and sound operating efficiency, supported by a high level of integration as well as healthy financial risk profile. These strengths are partially offset by large working capital requirement, risks related to implementation of projects and volatility in raw material prices.

 

Revenue of the group was robust at Rs. 6,620 crore in fiscal 2023, an on-year growth of 21%, backed by healthy volume gains led by strong demand trajectory for company’s products in the key end-user industries. Operating margins contracted by 350 basis points to 16.5% during the fiscal, on account of weak geographical mix due to slowdown in consumer discretionary spending in key high margin geographies. In addition, contract termination under first long term contract in fiscal 2022, also weighed on operating margins due to under recovery of fixed overheads owing to low capacity utilization run rates.

 

Turnover is expected to grow by 10-12% over the medium term driven by proposed expansion in pipeline coupled with gradual ramp up of newly added capacities. Operating margins are expected to improve from fiscal 2025 onwards on the back of resumption in sales in high margin markets and volume ramp-up from previous capital expenditure (capex) investments. Over the medium term, operating margins are expected around 16-18%.

 

Financial risk profile remains healthy driven by strong networth, comfortable capital structure, and healthy debt protection metrics. Capital structure marked by adjusted gearing stood at 0.60 times as on March 31, 2023 and is expected to increase over the medium term around 0.7-0.8 times on account of debt funded capex investments. Over fiscal 2024-25, AIL shall cumulatively invest Rs. 3,000 crore for capex, which includes a substantial part is for the Chloro toluene & downstream project (which has an overall outlay of about Rs. 2,500 crore and would be invested over a three year period i.e. fiscal 2024-26). The project shall be commercialized in a phased manner starting from second half of fiscal 2025, and ramp-up shall be witnessed in fiscal 2026 and beyond. Key debt protection remains healthy as indicated by interest coverage of 6.48 times as on March 31, 2023, and over the medium term the same is expected to remain above ~4.0 times, thereby providing sufficient buffer to cash flows.

 

Post receipt of the NCLT order in September 2022, AIL successfully completed the demerger of the pharma segment into “Aarti Pharmalabs Limited” with July 01, 2021, appointed date.

Analytical Approach

For arriving at the ratings, CRISIL Ratings has combined the business and financial risk profiles of AIL and its subsidiaries, Aarti Corporate Services Ltd, Nascent Chemical Industries Ltd (subsidiary of Aarti Corporate Services Ltd), Shanti Intermediates Pvt Limited (subsidiary of Aarti Corporate Services Ltd), Innovative Envirocare Jhagadia Ltd, Alchemie (Europe) Ltd, Aarti Polychem Pvt Ltd, Aarti Bharuch Ltd, Aarti Pharmachem Ltd, Aarti Spechem Ltd, and Augene Chemical Pvt Ltd. This is because all the companies have significant managerial, operational, and financial linkages and collectively are referred to as the Aarti group.

 

Please refer Annexure - List of entities consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

Established market position with diversified revenue, strong revenue visibility and healthy profitability
AIL has maintained its dominant market position in the Nitrochlorobenzene (NCB) and Dichloro Benzene (DCB)-based specialty chemicals segment. AIL also operates in other chemical value chains such as toluene, and sulphuric acid. It has been gradually ramping up capacity utilization of all product lines. AIL is the largest producer of benzene derivatives in India, and a major player among global manufacturers, with a 25-40% global market share across various products.

The group has a diversified revenue profile, reflected in no single customer or product contributing more than 5-6% of fiscal 2022 revenues. It supplies to diverse end-user industries such as polymer additives, pigments, dyes, paints, pharmaceuticals, agrochemicals, fertilizers, and fast-moving consumer goods, and is thereby insulated from downturn in any particular industry. Also, around 41% of its net revenue is from exports, providing geographical diversity. The group has registered healthy revenue growth during the five fiscals through 2023 and will continue to maintain steady growth over the medium term.

 

Sound operating efficiency because of continuous investment in process improvement initiatives and high integration

AIL enjoys high economies of scale as it is the largest producer of NCB, DCB and Nitrotoluene in the domestic market and has built up a large and flexible manufacturing capacity. Operating efficiency is also supported by strong research and development (R&D) capability. Integrated operations to manufacture higher-order derivatives of benzene, ability to change the product mix according to the demand-supply scenario, and continuous process improvement for maximizing the share of value-added benzene derivatives enable AIL to sustain strong operating efficiency. In addition, the group has increased its captive power generation, thereby improving operating efficiency and saving on power cost. AIL has significantly low dependence on China for raw materials due to high level of backward integration and relationship with domestic suppliers. The company recently entered into long term offtake agreement with Deepak Fertilizers and Petrochemicals Corporation Ltd for sourcing of Nitric Acid (supply commencing from April 01, 2023 onwards). The said agreement eliminates the need to invest in backward integration. With ample integration and greater focus on higher-margin products, the group has been able to maintain the operating margins around 16-23% in the last 5 fiscals, despite volatility in raw material prices. These metrics will continue to remain healthy over the medium term.

 

Healthy financial risk profile

AIL’s financial risk profile remains healthy marked by heathy net worth of Rs 4,813 crore estimated as of March 31, 2023, and comfortable capital structure with adjusted gearing of about 0.60 time estimated as of March 31, 2023. The company has planned capital expenditure totaling Rs. 3,000 crore over fiscal 2024-25, which includes a substantial part is for the Chloro toluene & downstream project (which has an overall outlay of about Rs. 2,500 crore and would be invested over a three year period ie. Fiscal 2024-2026). The project shall be commercialized in a phased manner starting from second half of fiscal 2025, and ramp-up shall be witnessed in fiscal 2026 and beyond. The said capex investments shall be largely funded through debt, and hence, adjusted gearing is expected to increase and remain between 0.7-0.8 time over the medium term. Key debt protection remains healthy as indicated by interest coverage of 6.48 times as on March 31, 2023, and over the medium term the same is expected to remain above ~4.0 times, thereby providing sufficient buffer to cash flows.

 

Weaknesses:

Large working capital requirement

AIL’s operations have remained working capital intensive marked by high gross current assets (GCA) net of cash days ranging between 120-170 days in past five years ended March 31, 2023. The higher working capital requirement is mainly owing to requirement to maintain large inventories as the company maintains around two months of raw material inventory and has large number of products in the portfolio leading to high finished goods inventory requirement.

 

Exposure to project risk and risk related to volatility in commodity prices

The company has been carrying out a large capital expansion in the past and will continue to do so over medium term, thereby increasing capacities in multiple value chains to increase market share as well as for long-term contracts with global MNCs. The company has carried out sizeable capex of over Rs.4,500 Crore during fiscal 2019 through to fiscal 2023; and is expected to incur further capex of Rs. 3,000 crore over fiscal 2024-25. As a result of heavy capex investments, return on capital employed (RoCE) has moderated over the years. In addition, termination under first long term contract also weighed on RoCE. Ramp up of newly added capacities, leading to increase in scale of operation and improvement in return metrics, will remain closely monitored.

Although the capex is in similar product segments, ensuring the projects are completed in stipulated time and within stipulated costs will be critical. Also, while the offtake risk is relatively lower due to presence of long-term relationships with clients, overall ramping up of capacities as envisaged, will remain a key monitoring factor.

Additionally, the main raw material, benzene is a crude derivative, prices of which remain susceptible to any sharp volatility in crude prices. While the group has consistently demonstrated its ability to pass on the volatility in raw material prices due to its cost-pass on business model, which has reflected in consistent absolute operating profitability over last 10 fiscals; nevertheless, it remains exposed to the volatility in commodity prices.

Liquidity: Strong

AIL has strong liquidity driven by expected cash accruals of Rs. 800-1,000 crore per annum, and cash and cash equivalents of Rs 199 crore as on March 31, 2023. The utilization of fund based working capital bank limits under consortium stood at 76% on an average over the twelve months ended May 2023. The group has annual long term repayment obligations of around Rs 360 crore over fiscals 2024 to 2025. CRISIL Ratings expects internal accruals, cash & cash equivalents, and unutilized bank lines to be sufficient to meet the repayment obligations.

Outlook: Stable

The Aarti group’s business risk profile should remain stable over the medium term, backed by healthy market position, good revenue diversity, pick-up in end-market demand and strong operating efficiencies. The financial risk profile should also remain healthy driven by improving cash accrual and moderate dependence on debt for capex and working capital requirements.

 

ESG Profile

CRISIL Ratings believes that AIL’s Environment, Social, and Governance (ESG) profile supports its already strong credit risk profile.

 

The Chemical sector has a high impact on the environment because of the high greenhouse gas (GHG) emissions, high hazardous waste generation by its core operations. The sector has a social impact because of its large workforce, impact on health and wellbeing of its workers and local community on account of its nature of operations.

 

AIL Ltd has continuously focused on mitigating its environmental and social impact. 

 

AIL Limited’s Key ESG highlights:

• ESG disclosures of the company are evolving, and it is in the process of further strengthening the disclosures going forward
• AIL has a goal to reduce their greenhouse gas emissions by 10% from 2019-20 level. It also aims at reducing water consumption by 20% from 2019-20 level.
• AIL’s governance structure is characterized by 50% of its board comprising independent directors, presence of investor grievance redressal mechanism.

 

There is growing importance of ESG among investors and lenders. AIL’s commitment to ESG principles will play a key role in enhancing stakeholder confidence, given its medium share of market borrowings in its overall debt and access to both domestic and foreign capital markets

Rating Sensitivity Factors

Upward factors

• Substantial increase in scale of operations with operating margins above 20% on sustained basis
• Improvement in financial risk profile and debt metrics, backed by strong cash generation; low gearing and a significant improvement in RoCE

 

Downward factors

• Any significant impact on operating profitability or sizeable contract terminations leading to weakening of operating margins below 15% on sustained basis
• Further large, debt-funded capex or acquisitions or sizeable stretch in the working capital cycle, leading to material impact on debt metrics; for instance, gearing increasing on a sustained basis.

About the Company

AIL, the flagship company of the Aarti group, manufactures organic and inorganic chemicals at its major facilities in Vapi, Jhagadia, Dahej and Kutch, in Gujarat and in Tarapur in Maharashtra. The group has a strong market position in the NCB-based specialty chemicals segment. The company also commissioned a Greenfield Nitrotoluene facility in Jhagadia in fiscal 2018 and two units for high-value specialty chemicals in Dahej in fiscal 2020. In fiscal 2017, it commenced calcium chloride facilities in Jhagadia and a multipurpose ethylation unit at Dahej. The company also has four full-fledged R&D centres, recognized by the Department of Scientific and Industrial Research, Government of India. In fiscal 2020, it commissioned its flagship research and technology centre in Navi Mumbai called the Aarti Research and Technology Centre, which will house about 250 scientists and engineers.

Key Financial Indicators CRISIL Ratings Adjusted Numbers

Particulars	Unit	2023*	2022	2021
Revenue	Rs crore	6,620	5,454	4,506
Profit After Tax (PAT)	Rs crore	546	1,185	535
PAT Margins	%	8.25	21.73	11.88
Adjusted debt/adjusted networth	Times	0.60	0.57	0.81
Interest coverage	Times	6.48	16.81	11.37

*FY23 figures and ratios are based on published abridged financials

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	Commercial Paper	NA	NA	7-365 days	400	Simple	CRISIL A1+
NA	Long-Term Borrowing Programme*	NA	NA	NA	100	Simple	CRISIL AA/Stable
NA	Cash Credit	NA	NA	NA	1200	NA	CRISIL AA/Stable
NA	Letter of credit & bank guarantee	NA	NA	NA	600	NA	CRISIL A1+
NA	Term Loan	31_Mar-2017	6.95%	Dec-2023	55	NA	CRISIL AA/Stable
NA	Rupee Term Loan	23-Dec-2020	7.75%	Dec-2025	100	NA	CRISIL AA/Stable
NA	Rupee Term Loan	25-Feb-2021	6.25%	Feb-2026	100	NA	CRISIL AA/Stable
NA	Foreign Currency Term Loan	15-Sep-2020	L(6M)+190bps	June-2025	295	NA	CRISIL AA/Stable

*Unallocated