Detailed Rationale

CRISIL Ratings has revised its outlook on the long-term bank facilities of Astral Ltd (Astral; part of the Astral group) to ‘Positive’ from ‘Stable’ and reaffirmed the rating at 'CRISIL AA'. The short-term rating has been reaffirmed at ‘CRISIL A1+’.

 

The revision in outlook reflects the expectation of CRISIL Ratings that the Astral group’s credit risk profile may improve on account of continued healthy operating performance along with sustenance of net cash positive status (cash and equivalent net of borrowings). It also reflects the expectation of sustained improvement in the business profile, supported by improved capacity utilisation levels, wider geographical presence and product portfolio.

 

The group’s operating income grew at compound annual growth rate (CAGR) of 26% for the three fiscal through 2023 to reach Rs 5,164.40 crore. The operating margin is expected to improve over the medium term with stabilisation in raw material prices and positive contribution from new products, such as faucets, resulting in reduced earnings before depreciation, tax and amortisation (EBDTA) losses from the same segment. Furthermore, with the operationalisation of new plants in Hyderabad and Guwahati, recently added faucet, paints and valves business, and adequate available production capacities, the group is well poised to sustain double-digit growth, which might lead to operating margin of more than 17% in the near to medium term. Also, operations are expected to remain moderately working capital intensive with gross current assets (GCAs) expected to be 115-130 days over the medium term.

 

The improvement in financial flexibility is expected to sustain, supported by continued healthy operating performance, no large capital expenditure (capex) over the medium term and surplus liquidity anticipated even after factoring in annual dividend outflow of around Rs 60 crore. In October 2023, Astral increased its stake in Gem Paints Pvt Ltd (GPPL) to 80% from 51% and incurred costs for it, which impacted overall cash equivalent. However, it is expected that there will not be significant debt for any kind of acquisition or inorganic growth.

 

The ratings continue to reflect the leadership position of the group in the chlorinated polyvinyl chloride (CPVC) pipes and fittings segment, supported by established brands and entrenched market presence, and the extensive experience of the promoters. The ratings also factor in a strong financial risk profile. These strengths are partially offset by exposure to intense competition and supplier concentration risk, and susceptibility to volatility in raw material prices and foreign exchange (forex) rates.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of Astral and its subsidiaries, Seal IT Services Ltd, UK (Seal IT), Seal It Services INC, USA (Seal It), SISL (Bond It) Ireland Ltd, Ireland (SISL), Gem Paints Pvt Ltd (formerly known Esha Paints Pvt Ltd), and Astral’s joint venture, Astral Pipes Ltd, Kenya. These companies are collectively referred to as the Astral group. In September 2022, Astral Biochem Pvt Ltd (ABPL) and Resinova Chemie Ltd (Resinova) were amalgamated with Astral.

 

Please refer to 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 significant market share and healthy demand prospects

The Astral group registered healthy double-digit growth in revenue, driven by strong demand with volumes growing at steady rate of 10-12%. The group is the market leader in the domestic niche market of CPVC and among the leading players in the PVC (polyvinyl chloride) segment (which together contribute to 3/4th of revenue) with installed capacity of 2.90 lakh tonne per annum across eight locations in India as on March 31, 2023. It enjoys the advantage of being a pioneer in introducing these products in the Indian market. The group complements its CPVC products with PVC products. It has diversified the product basket by adding adhesives and sealants, infrastructure, tank, sanitaryware and faucets, and paint segments. Their established and longstanding presence has resulted in strong brand recall and entrenched market presence.

 

The adhesives and paint segment (around 1/4th of revenue) is likely to grow because of revenue addition from the paints segment backed by renewed and vast distribution network, and extensive advertisement and branding campaigns. Geographically distributed plants (leading to savings in logistics cost) which increase the addressable market, continued benefits from backward integration into CPVC, and better spread of cost on increasing scale are likely to help sustain improvement in the operating margin.

 

Strong financial risk profile

The group has a healthy to strong capital structure with networth of Rs 2,463.9 crore as on March 31, 2023, translating into gearing of 0.14 time and total outside liabilities to adjusted networth (TOLANW) ratio of 0.57 time. Interest coverage and net cash accrual to total debt ratios were comfortable at around 21 times and 1.66 times, respectively, in fiscal 2023. Gearing is expected to improve over the near to medium term with accretion to reserves and gradual reduction in debt. The Astral group continues to maintain healthy debt protection metrics with adjusted interest coverage ratio of 20.57 times in fiscal 2023, which is expected to improve further with increased profitability.

 

Weakness:

Exposure to intense competition and supplier concentration risk

The pipes and fittings industry is highly competitive, especially in the commoditised products segment which has low differentiation. The segment is price-sensitive, which prevents prompt pass-through of increase in input cost to customers. The group majorly procures CPVC resin from Seikisui Chemical Co Ltd (Seikisui). For PVC too, it relies on a few suppliers.

 
Susceptibility to fluctuations in raw material prices and forex rates

The group imports around a quarter of its raw material requirement. Any significant fluctuations in forex rates may impact profitability, which is also vulnerable to inherent volatility in the prices of raw materials (PVC and CPVC resins) that are dictated by global crude oil prices. Over the five fiscals through 2023, the operating margin was 15.6-20.8%. In fiscal 2023, the volatility in raw material prices led to a marginal decline in operating margin to 15.9% against 17.8% in fiscal 2022 due to reporting of inventory loss, forex losses, higher employee cost and new product launch for the faucet division. During the first half of fiscal 2024, the operating margin of the group was 15.94%. Furthermore, with operations commencing in new plants in Hyderabad and Guwahati, the recently added faucet, paints and valves business, and adequate available production capacities, the group is well poised to sustain double-digit growth and the operating margin is expected to be 16.5-17% on account of stability in raw material prices and promotional expenses over the near to medium term.

Liquidity: Strong

Liquidity is backed by healthy cash accrual against debt obligation, moderate bank limit utilisation, controlled working capital cycle, and healthy cash and bank balance. The company had accrual of over Rs 590 crore in fiscal 2023 against total outstanding debt (including short-term and long-term debt) of around Rs 356 crore. The group is likely to maintain annual accrual of over Rs 650 crore over the medium term. The working capital cycle is well managed with GCAs at around three months. Average utilisation of secured and unsecured bank limits was 41% during the 12 months through October 2023. Consolidated cash of the group (including cash equivalent) and bank balance was Rs 533.2 crore as on September 30, 2023. Healthy cash accrual, financial flexibility and moderate capex should ensure strong liquidity over the medium term.

Outlook: Positive

CRISIL Ratings believes that the Astral group’s credit risk profile may improve, backed by further strengthening of the financial risk profile along with maintenance of strong market position and sustenance of healthy operating efficiency over the medium term.

Rating Sensitivity factors

Upward factors

• Improvement in the business risk profile, driven by geographical as well as product diversification, aiding revenue growth and increasing market share in the CPVC and PVC pipes segments.
• Sustainable improvement in the operating performance, driven by stable operating margin leading to Rs 1,000 crore of earnings before depreciation, tax and amortisation (EBDTA), while maintaining the financial risk profile and working capital cycle.

 

Downward factors

• Significant fall in revenue with operating margin falling below 13%, resulting in stretched working capital cycle or weakening of the financial risk profile.
• Weakening of the capital structure because of large, debt-funded capex or acquisition.
• Sizeable reduction in cash surplus owing to higher-than-expected shareholder payout or buyback.

About the Group

Astral (erstwhile Astral Poly Technik Ltd) was incorporated in 1996 as a private limited company, promoted by Mr. Sandeep Engineer (chairman and managing director), and was reconstituted as a public limited company in 2007 with the launch of its initial public offering. The company manufactures and trades in CPVC and lead-free PVC plumbing systems for residential, commercial and industrial applications.

In April 2022, Astral acquired a 51% controlling stake in Gem Paints Pvt Ltd (GPPL) for Rs 194 crore and entered the paint business. The National Company Law Tribunal (NCLT), in its order dated July 17, 2023, approved a scheme wherein GPPL transferred its operating paints business to a newly incorporated subsidiary, Esha Paints Pvt Ltd. Following the scheme, Esha Paints Pvt Ltd was renamed GPPL. Astral has retained its 51% controlling interest in GPPL and will acquire the remaining 49% over five years as per the definitive agreement. The non-paints business of GPPL, including subsidiaries and associates representing non-operating business, has been demerged and is no longer a subsidiary of Astral.

In November 2020, Astral acquired the assets of Shree Prabhu Petrochemicals Pvt Ltd for Rs 51 crore and ventured into tank manufacturing.

In July 2018, Astral acquired a 51% stake in Rex Polyextrusion Pvt Ltd (RPPL) for Rs 75.225 crore cash. The balance stake was acquired through issuance of Astral’s shares and RPPL was merged into Astral. This acquisition added a portfolio of high-density polyethylene (HDPE) and PVC pipes with plants in Gujarat, Tamil Nadu, Maharashtra, Uttarakhand and Rajasthan.

In November 2014, Astral acquired a 76% stake in Resinova for Rs 212.8 crore. Resinova manufactures adhesives for construction, engineering, automobile, insulation, household and stationery applications and sells its products under 50 brands, including Bondtite, Bondset, Bondfit, Resigrip, Resicast, Zesta, Solvobond, Resibond and Vetra. In November 2015, Astral acquired a balance 24% stake in Resinova for Rs 73 crore. Subsequently, Resinova was amalgamated with Advanced Adhesives Ltd (AAL) with effect from November 21, 2014, and AAL was renamed Resinova. The merger added cement-solvent solutions to Resinova’s product basket. In September 2022, Resinova and ABPL were amalgamated with Astral.

Formed in 2002, Seal It offers sealants, adhesives and other products under the brand Bond-it. Astral acquired an 80% stake in this company in August 2014 and subsequently company acquired an additional 15% of equity shares of its Subsidiary Company named Seal IT Services Limited, UK from its existing shareholders at a consideration of approximately Rs. 48.1 crores. Post acquisition, the equity ownership of Astral increases from the existing 80% to 95%.

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 and outlook
NA	Letter of Credit	NA	NA	NA	1	NA	CRISIL A1+
NA	Working Capital Facility*	NA	NA	NA	379	NA	CRISIL AA/Positive

*Working capital limits are fully interchangeable with LC/BG/SBLC Limits