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 ratings continue to factor in the strong business risk profile of the company, 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 healthy operating efficiency, supported by integrated operations, as well as adequate financial risk profile. These strengths are partially offset by large working capital requirement, exposure to projects risks and susceptibility to volatility in raw material prices. In addition, timely ramp-up of past capital expenditure (capex) and current capex, resulting in return on capital employed (RoCE) improving to double-digits, will remain monitorable.

 

During the nine months ended December 2024, while revenues increased by around 16% on-year to Rs. 5,323 crore on the back of double-digit volume growth witnessed across major product value chains. Operating margins contracted to 13.8% during this period, as against 15.1% during the same period of previous fiscal on account of continued pricing pressure due to global demand issues, increase in demand and supply gap, dumping by Chinese suppliers, etc. Hence, despite double-digit volume growth, operating profits levels increased by around 5% to Rs.734 crore in the first nine months of fiscal 2025. The impact on operating margins was largely witnessed during the second and third quarter of fiscal 2025; operating margins continued to remain buoyant at around 15-16% up till the first quarter of fiscal 2025, however, volatility in the energy business vertical followed by continued pricing pressure resulted in sharp on-year contraction in operating margins during the second and third quarter of fiscal 2025 to 12.0% and 12.6% respectively, as against 16.1% and 15.0% during the same period of last fiscal.

 

In fiscal 2024, AIL’s revenues witnessed on-year decline of around 4% to Rs. 6,372 crore, due to volume contraction owing to global channel inventory de-stocking amidst a slowing geo-political economy and excess supplies from China because of decline in local consumption, which impacted realisations. Volume contraction and pricing pressure was largely witnessed in the agrochemicals, polymer & additives, and pharmaceutical end user industries which AIL caters to; that said, entry into energy additives segment, abated the impact of volumes and pricing emanating from the end user segments on overall revenues. In fiscal 2024, while cumulative revenue contribution from agrochemicals, polymer & additives, and pharmaceuticals declined to 39% (60% in fiscal 2023), the energy additives revenue contribution increased to 34% (15% in fiscal 2023). On the geographic front, domestic revenues witnessed on-year decline of around 11% due to sharp drop in pharmaceutical revenues (99% of the pharmaceutical revenues comes domestic markets), and revenues from exports increased by 4% on-year owing to volume ramp-up in the energy additives business vertical (about 80% of energy additives revenues comes from exports), while agrochemicals and polymer additives business verticals witnessed double-digit revenue decline. Operating margins also contracted by around 110 basis points (bps) to 15.4% in fiscal 2024 on account of pricing pressure and volume drop, partially offset by lower selling and power & fuel costs.

 

Owing to subdued pricing environment, while revenues are expected to grow by 9-11% during fiscal 2025 on the back of volume growth, operating profitability levels are expected to remain flat and thus operating margins are expected at around 14.0-14.5%. That said, with the impact of pricing from overcapacities in China largely bottoming out followed by incremental volume growth from existing product value chains and commercialization of capacities in ‘zone 4, Jhagadia’, the operating margin is expected to improve over the medium term. Revenues during fiscal 2026 are expected to increase by around 7-8%, and following zone 4 capacity commercialization in fiscal 2027, double digit revenue growth is expected. Operating margins over fiscal 2026-27 are expected to improve to 15-16%. That said, timely ramp-up of past capex investments and current expansionary capex spends, resulting in RoCE improving to double-digits, from ~7-8% at present, will remain a key monitorable.

 

The financial risk profile remains adequate owing to large networth estimated at over Rs.5,500 crore as on March 31, 2025, and comfortable adjusted gearing which is estimated at around 0.67 times as on March 31, 2025. The financial risk profile will likely remain comfortable over the medium term despite additional debt being undertaken to fund capex of around Rs 2,800 crore over fiscals 2025-27. Benefits of the capex will accrue from the second half of fiscal 2027, post commercialisation of the new chlorotoluene capacity.

 

That said, gross debt to earnings before interest, tax, depreciation and amortisation (EBITDA), which increased to 3.24 times during fiscal 2024 owing to limited accretion to profitability vis-à-vis debt funded capex investments, is expected to sustain at around 3.5 times over fiscal 2025-26 owing to slower than anticipated recovery in operating performance with continued pricing pressure, coupled with continued debt funded capex investments, before improving to below 3 times, post the commercialization of capacities in ‘zone 4’. Any time or cost overrun in the CT project, or further slippage in operating profitability impacting cash generation, and leading to continuing high gross debt to EBITDA levels will remain a key rating monitorable. While gross debt to EBITDA is expected to remain elevated, interest coverage and net cash accruals to adjusted debt (NCA / TD) over fiscal 2025-27 is expected to moderate however will remain at adequate levels at ~4.2-5.5 times (4.66 times as on March 31, 2024), and 0.19-0.22 times respectively (0.23 times as on March 31, 2024). AIL’s net cash accruals have sufficiently covered debt re-payment obligations in the past, and annual net cash accruals of Rs. 700-850 crore shall be sufficient to cover annual debt re-payment obligations of Rs. 400-550 crore over the next 2-3 years.

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 Circularity Ltd (formerly known as Aarti Spechem Ltd), Aarti Chemical Trading – FZCO, and Aarti Chem Trading USA Inc. (subsidiary of Aarti Chemical Trading – FZCO). This is because all the companies have significant managerial, operational, and financial linkages and collectively are referred to as the Aarti group. Furthermore, the 50:50 joint venture entity i.e., Augene Chemical Pvt Ltd (subsidiary till July 22, 2024) has been consolidated using equity method. 

 

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 segmental and geographical revenue contribution: AIL has maintained its dominant market position in the Nitro-chlorobenzene (NCB) and Di-chloro Benzene (DCB)-based specialty chemicals segment. The company 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 company supplies 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. During fiscal 2024, AIL expanded its product value chain into energy additives end user segment; and the key product value chain in the said vertical is “Methyl Aniline (MMA)”, and expected capacity is around 200 KTPA (as on December 31, 2024). The company has built large capacities and has also started executing large volume bulk orders. The energy additives business vertical contributed to 15% of revenues during fiscal 2023, which increased substantially to 34% during fiscal 2024, and continues to remain over 30% during the first nine months of fiscal 2025.

 

Diversified product value chains covering various end user industries, insulates the company from industry downturns. For instance, agrochemicals, polymer & additives, and pharmaceutical revenue contribution declined from 30%, 12%, and 18% respectively during fiscal 2023 to 21%, 9%, and 9% during fiscal 2024; however, revenue decline was limited to only 4% during fiscal 2024, owing to the energy additives revenue contribution increasing from to 15% during fiscal 2023 to 34% during fiscal 2024. Furthermore, owing to volume ramp-up of energy additives business vertical, impact on operating profitability levels was also limited to 10% on-year decline in fiscal 2024.

 

AIL also has a near equal mix of revenue contribution from domestic markets and export markets, which further insulates the company from industry downturn in any particular economy. For instance, while domestic revenues witnessed on-year decline of around 11%, revenues from exports increased by 4% on-year. The geographic mix as on December 31, 2024, stood at 52% export contribution and 48% domestic contribution.

 

• High integration of operations and strong relationship with suppliers enable effective mitigation of supply chain issues: 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, toluene, and chlorine along with the ability to change the product mix according to the demand-supply scenario, and continuous process improvement for maximizing the share of value-added benzene, toluene, and chlorine derivatives enable AIL to sustain comfortable operating efficiency. In fiscal 2023, the company 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.

 

In addition, owing to the increase in revenue contribution from the energy additives business vertical, import dependency on raw material, especially ‘aniline – key raw material for energy additives business vertical’ has increased, which is currently sourced from China. Raw material imports increased from 19.87% in fiscal 2022 to around 37.69% during fiscal 2024. That said, healthy relationship with Chinese vendors have ensured consistent supply of the aforementioned raw material at longer credit terms.

 

• Adequate financial risk profile: The financial risk profile remains adequate, supported by sizeable net worth of over Rs.5,500 crores, and comfortable adjusted gearing levels (0.67 times) as on March 31, 2025 (estimated). Adjusted gearing is expected to remain between 0.60-0.70 times in the next 2 fiscals, despite sizeable capex spends of around Rs. 2,800 crore over fiscal 2025-27, which will be partly debt funded. That said, over fiscals 2025-27 interest coverage and net cash accruals to adjusted debt (NCA / TD) is expected to remain adequate at around 4.2-5.5 times (4.66 times as on March 31, 2024), and 0.19-0.22 times respectively (0.23 times as on March 31, 2024). However, the ratio of gross debt to EBITDA which is seen peaking at around 3.5 times in fiscal 2025, is expected to improve below 3 times only by fiscal 2027, once benefits from new CT project start accruing. Annual net cash accruals of Rs. 700-965 crore shall be sufficient to cover annual debt re-payment obligations of Rs. 400-565 crore between fiscals 2025-27.

 

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, 2024. The higher working capital requirement is mainly owing to the 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. That said, shift in product mix towards the energy additives business vertical, which have a leaner cash collection period, and when coupled with higher credit period from vendors, net working capital cycle improved from over 90 days in fiscal 2022-23 to around 70 days in fiscal 2024, and the same is also expected to sustain over the medium term.

 

• 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 the 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. 5,500 crore during fiscal 2019 through to fiscal 2024; and is expected to incur further capex of Rs. 2,800 crore over fiscals 2025-27. As a result of heavy capex investments, RoCE has moderated over the years from 17.2% in fiscal 2019 to 7.6% in fiscal 2024. In addition, termination under the first long-term contract also weighed on RoCE. Ramp up of newly added capacities and offtake of projects in zone 4, especially the downstream chlorotoluene product value chains leading to an 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 the stipulated time and within stipulated costs will be critical. In addition, overall ramping up of capacities as envisaged will remain a key monitoring factor.

Additionally, the main raw material, benzene, toluene, and aniline are crude derivatives, 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, supported by annual cash accruals of Rs. 700-950 crore expected over fiscals 2025-2027, which will sufficiently cover debt re-payment obligations of Rs.469 crore in fiscal 2025, Rs.438 crore in fiscal 2026 and Rs.566 crore in fiscal 2027. The company also had commercial paper (CP) of Rs. 400 crores outstanding, which is not carved out of its working capital limits, and the same is expected to be rolled over on maturity. CP borrowings are also proposed to be raised by Rs.200 crore in the near term. The company typically maintains average monthly unencumbered liquid surpluses of around Rs.100-150 crores.

 

The company has secured fund-based limits of Rs. 1,500 crore as of January 2025, which has been utilsed to the extent of 69% on-average during the past six months through to January 2025. In addition, the company also has Rs. 400 crore commercial paper limits, which has been entirely utlised as of January 2025, and unsecured limits of Rs. 700 crore, which has been utilised to the extent of 44% on average during the past six months through to January 2025. Furthermore, the company also has access to Rs. 1,000 crore non-fund-based limits as of January 2025; on-average utilisation of non-fund-based limits during the past six months through January 2025 is around 49%.

 

Capex is expected to involve sizeable debt funding, and the company is also expected to arrange for refinancing of its loans or raise equity to buttress impact of high debt levels as seen in the past, should there be a requirement.

Outlook: Stable

Crisil Ratings’ expects Aarti Industries business risk profile will continue to remain comfortable, supported by its established position in the specialty chemicals business and adequate operating efficiencies. While the financial risk profile remains adequate owing to large networth and comfortable adjusted gearing levels, the ratio of gross debt to EBITDA is seen peaking in fiscal 2025 and expected to improve only by fiscal 2027, post commercialization of new CT capacity. Any time or cost overruns necessitating additional debt raise, or further pressure on profitability impacting cash generation and preventing improvement in key debt metrics, especially gross debt to EBITDA will bear watching.

Rating sensitivity factors

Upward factors

• Increase in scale of operations with improvement in operating margins to over 15-16% on sustained basis
• Improvement in financial risk profile and debt metrics - gross debt to EBITDA improving to around 2.5 times on a sustained basis.

 

Downward factors:

• Any delays in ramp-up of capacities of key product value chains or any further impact on profitability due to prolonged pricing pressure, resulting in operating margins dropping below 13% for a prolonged period.
• Higher-than-expected debt-funded capex or acquisitions or sizeable stretch in the working capital cycle leading to material impact on debt metrics; for instance gross debt to EBITDA sustaining at above 3.5-3.7 times.

 

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, and high hazardous waste generation by its core operations. The sector has a social impact because of its large workforce, the impact on the health and wellbeing of its workers and the 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:

• AIL’s total scope 1 and scope 2 emission intensity per rupee of turnover remained stable at 1.11 during fiscal 2024 (1.13 during fiscal 2023). In addition, the company recycled / reused / recovered around 92% of total waste generated during fiscal 2024 (as against 91% during the same period of last fiscal year). Water recycling rate remained stable at 44% during fiscal 2024.
• AIL’s percentage of ESG screened vendors improved to 51.45% in fiscal 2024 (42.85% in fiscal 2023; 38.00% in fiscal 2022). The company also reported no fatal injuries during fiscal 2023, and LTFIR decline to 0.04 in fiscal 2024 (0.15 in fiscal 2023).
• AIL’s governance structure is characterized by 50% of its board comprising independent directors, presence of investor grievance redressal mechanism, and high quality of financial disclosure.

 

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.

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 company 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 centers, recognized by the Department of Scientific and Industrial Research, Government of India. In fiscal 2020, it commissioned its flagship research and technology center in Navi Mumbai called the Aarti Research and Technology Centre, which will house about 250 scientists and engineers. The promoters held 42.45% stake in AIL as on December 31, 2024, followed by mutual funds 9.75%, insurance companies 7.78%, foreign institutions 7.25%, and public and others - the balance.

 

During the nine month period December 2024, AIL reported a profit of tax (PAT) of Rs.235 crore (as against Rs. 285 crore during the same period of last fiscal) on net revenues of Rs. 5,833 crore (Rs. 5,057 crore).

Any other information: Not Applicable