| Aarti Industries Limited | ||||||
| Long-term rating upgraded to 'CRISIL AA/Stable'; short-term rating reaffirmed ; NCD Withdrawn | ||||||
| Rating Action | ||||||
| ||||||
| ||||||
| 1 crore = 10 million | ||||||
| Refer to annexure for Details of Instruments & Bank Facilities |
| Detailed Rationale |
|
CRISIL has upgraded its rating on the long term bank facilities and long term borrowing programme of Aarti Industries Limited (AIL) to 'CRISIL AA/Stable' from 'CRISIL AA-/Positive', while reaffirming its rating on short term bank facilities and commercial paper at 'CRISIL A1+'. CRISIL has also withdrawn its rating on Rs 80 crore on the non-convertible debenture of AIL (See Annexure 'Details of Rating Withdrawn' for details) as it is fully redeemed. The rating is withdrawn in line with CRISIL's policy. |
| Analytical Approach |
|
For arriving at the ratings, CRISIL has combined the business and financial risk profiles of AIL and its subsidiaries, Aarti Corporate Services Ltd, Alchemie (Europe) Ltd, Innovative Envirocare Jhagadia Ltd, Aarti USA Inc., Shanti Intermediaries Pvt Ltd (subsidiary of Aarti Corporate Services Ltd), Nascent Chemical Industries Ltd (subsidiary of Aarti Corporate Services Ltd), Ganesh Polychem Ltd, Aarti Polychem Pvt Ltd, Aarti Organics Limited, Aarti Bharuch Limited, Aarti Pharmachem Limited and Aarti Spechem Limited. This is because all the companies have significant managerial, operational, and financial linkages and collectively are referred to as the Aarti group. |
| Key Rating Drivers & Detailed Description |
|
Strengths: * Established market position with diversified revenue, higher revenue visibility and healthy profitability AIL has maintained its dominant market position in the Nitro chloro benzene (NCB) and D-chloro Benzene (DCB) -based specialty chemicals segment. The group has NCB capacity of 75,000 tonne p.a. (planned to be expanded to 108000 tonnes p.a. over medium term). AIL also has presence in other chemical value chains such as toluene, hydrogenation, ethylation, chlorination, sulphuric acid etc. It has been gradually ramping up capacity utilization of all product lines. Overall the specialty chemical segment contributes to ~80% of revenues and revenues in this segment have grown at compounded annual growth rate (CAGR) of 12% over past four fiscals. 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. In the pharma segment, contributing ~20% to the overall revenues, the company has diversified presence in active pharma ingredients (APIs), key intermediates as well as Xanthine derivatives. It is the largest manufacturer of xanthine derivatives in India. The pharma segment revenues have registered a CAGR of 15% in the last four fiscals. The group has a diversified revenue profile, reflected in no single customer or product contributing more than 8% to revenue. The group supplies to diverse end-user industries such as polymer additives, pigments, dyes, paints, pharmaceuticals, agrochemicals, fertilizers, and fast-moving consumer goods, and is insulated from downturn in any particular industry. Also, over 40% of its net revenue is from exports, providing geographical diversity. The group has registered healthy revenue growth of 13% in the past 4 fiscals, ending 2020, and barring flattish revenues in fiscal 2021, will continue to maintain double digit profitability growth over the medium term. This is despite termination of one of two large contract manufacturing arrangements entered into with two global multinational companies, which would have provided assured business and high revenue visibility over long term. * Sound operating efficiency because of continuous investment in process improvement initiatives and high level of integration AIL enjoys high economies of scale as it is the largest producer of NCB, DCB, Nitro Toluene etc. in the domestic market and has built up 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 maximising the share of value-added benzene derivatives enables AIL to sustain strong operating efficiency. In addition, the group has increased its captive power generation, which will help improve operating efficiency as well as save on power cost. Also in the pharma segment, the group has backward integration in the form of key intermediates for manufacturing of APIs. AIL has significantly low dependence on China for raw materials due to high level of backward integration. With the high level of integration and greater focus on higher margin products, the group has been able to increase the operating margin from 15.3% in fiscal 2014 to 23.3% in fiscal 2020 despite volatility in raw material prices. The return on capital employed (RoCE) has also remained healthy between 15-20% during these fiscals, in spite of large capex. These metrics will continue to remain at healthy levels over the medium term. * Healthy and improving financial risk profile AIL carried out debt funded capex of about Rs.3600 crore in the past five fiscals, including just over Rs.2500 crore in the last three fiscals. The company also has a capex plan of Rs 2000 crore over fiscal 2021 and 2022 in multiple value chains to increase market share as well as for long term contracts with global MNCs. The additional capex requirements in fiscal 2020 were mainly funded out of proceeds of QIP and internal accrual, leading to lower dependence on external debt. The debt protection metrics as well as gearing levels have improved sharply in the last couple of fiscals. Interest coverage and gearing which were 5.4 times and 1.26 times in fiscal 2018, improved to 7.9 times and 0.68 times in fiscal 2020. Over the medium term, with increase in scale, while borrowings are expected to increase moderately with overall debt remaining around Rs 2300 ' 2400 crore, the debt protection metrics are expected to remain comfortable with interest cover ranging from 7-10 times and gearing remaining below 0.7 times. Weaknesses: * Working capital intensive operations AIL's operations have remained working capital intensive marked by high gross current assets (GCA) days ranging between 120-150 days in past five years. 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. * Project risk and risk related to volatility in commodity prices The company has been carrying out a large capital expansion in 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 Rs.2500 crore in past 3 fiscals, and has planned capex of over Rs.2000 crore in fiscals 2021 and 2022. 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 contracts and long term relationships with clients as well as the improved scenario due to supply side reforms in chemical industry in China, 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 plus business model, which has reflected in consistent operating profitability of 16-23% over last ten fiscals, nevertheless, it remains exposed to the volatility in commodity prices. |
| Liquidity Strong |
|
AIL has strong liquidity driven by expected cash accruals of over Rs.600 crore per annum (and increasing), and cash and cash equivalents of Rs 220 crore as on August 31, 2020. The utilization of Rs 1200 crore fund based working capital bank limits under consortium (including commercial paper) stood at 80-85% on an average over the eight months ended August 2020. Additionally, the company has unutilised outside consortium limits of ~Rs 500 crore. The group has annual long term repayment obligations of around Rs 280-360 crore over fiscals 2021 to 2023. CRISIL expects internal accruals, cash & cash equivalents and unutilized bank lines to be sufficient to meet the repayment obligations. Besides, the group's capex of ~Rs 2000 crore over fiscal 2021 and 2022, too is expected to be funded mainly from accruals, with low reliance on debt. |
| Outlook: Stable |
|
CRISIL believes the Aarti group's business risk profile will 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 funding. |
| Rating Sensitivity factors |
|
Upward Factors * Significant and sustained improvement in operating performance leading to increase in cash accruals beyond Rs.850-900 crores. * Improvement in debt metrics backed by strong cash generation or equity infusion, for instance gearing sustaining below 0.5-0.7 times Downward Factors * Material weakening of operating performance, also severely affecting cash accruals below Rs.450 crores. * Higher than expected debt funded capex or acquisitions, or elongation of working capital cycle, leading to material impact on debt metrics; for instance, gearing increasing above 1.1-1.3 times on sustained basis. |
| About the Group |
|
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. It also manufactures active pharmaceutical ingredients at its units in Tarapur and Dombivali in Maharashtra, and at Vapi. The company announced demerger of its home & personal care division into separate entity in June 2018. The demerger was completed in June 2019. The group has a strong market position in the nitro-chloro-benzene-based specialty chemicals segment. The company also commissioned greenfield Nitro Toluene facility in Jhagadia, Gujarat in fiscal 2018 and two units for high value specialty chemicals in Dahej in fiscal 2020. In fiscal 2017, it commenced calcium chloride and polydiacetylene (PDA) facilities in Jhagadia, Gujarat and a multipurpose ethylation unit at Dahej, Gujarat. The company also has four full-fledged R&D centres, recognised 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 (ARTC) which will house about 250 scientists and engineers. |
| Key Financial Indicators | ||||||||||||||||||||||||
|
|
Any other information: Not applicable |
| Note on complexity levels of the rated instrument: CRISIL complexity levels are assigned to various types of financial instruments and are included (where applicable) in the Annexure -- Details of Instrument in this Rating Rationale. For more details on the CRISIL complexity levels, please visit www.crisil.com/complexity-levels. |
| Annexure - Details of Instrument(s) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| *Unallocated | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annexure- Details of Rating Withdrawn | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annexure - List of entities consolidated | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
| Annexure - Rating History for last 3 Years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| All amounts are in Rs.Cr. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annexure - Details of various bank facilities | ||||||||||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||
| For further information contact: | ||||||
|