Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AAA/Stable/CRISIL A1+’ ratings on the non-convertible debentures, fixed deposits and commercial paper programme of BASF India Ltd (BASF India).

 

On August 02, 2023, credit ratings of BASF SE  (BASF, parent company of BASF India) have been revised by S&P Global Ratings [S&P] from ‘A/A-1’ to ‘A-/A-2’ while revising the outlook from negative to stable. The revision in the ratings reflects declining volumes due to softening demand amid a global economic slowdown, expected elevated leverage due to peaking capex and relatively high energy prices creating pressure on margins. CRISIL Ratings of ‘CRISIL AAA/Stable /CRISIL A1+’ on the bank facilities of BASF India however, remain unaffected by this rating action. BASF India’s business risk profile will continue to benefit from its diverse revenue streams and operational support from the parent, BASF SE.

 

During fiscal 2023, revenue increased by 4% over the previous fiscal driven by volume growth and partially constrained by moderating prices. Agricultural solutions, surface technologies and nutrition and care business segments grew more than 11% in fiscal 2023. Operating margins (Operating profit before depreciation, interest and taxes) moderated to 5% in fiscal 2023 from 7.1% in fiscal 2022 due to carryforward of high cost inventory. The chemical and material segments were majorly impacted because of falling commodity prices.

 

During the three months ended June 2023, company reported revenue and operating margins of Rs. 3375 crores and 5.9% respectively in comparison to Rs. 3888 crores and 8.0% respectively in the corresponding period for last fiscal year. The revenue dipped due to declining selling prices and margins were impacted due to carryforward of high cost inventory.

 

The business risk profile is complemented by a strong financial risk profile and liquidity. Networth and total outside liabilities to tangible networth (TOLTNW) ratio stood at Rs 2,698 crore and 1.42 times, respectively, as on March 31, 2023, against nil debt. Reliance on external debt will likely remain nil as the company’s annual cash accrual will be sufficient to meet modest capital expenditure (capex) plans and working capital requirement.  BASF India manages its -working capital cycle prudently; bulk of the traded inventory is order backed and receivables are stable.

 

Liquidity is further supported by minimally utilised bank limit of around Rs.1500 crore. Besides, as demonstrated amply in the past, CRISIL Ratings believes support from the parent will be forthcoming in case of any exigencies.

 

The ratings continues to reflect CRISIL Rating’s expectation of strong operational and financial support from BASF SE and BASF India’s improving business risk profile. These are partially offset by susceptibility of profitability to inherent risks in the crop protection sector and volatility in crude prices and foreign exchange rates.

Analytical Approach

CRISIL Ratings has factored in support expected from the parent, BASF SE. Also, CRISIL Ratings believes BASF India will, in case of exigencies, receive timely support from its parent for timely debt servicing, as seen in the past. The parent holds 73.33% stake in BASF India, and provides operational, technical and financial support. Moreover, the working capital lines have been carved out from the parent’s global lines of credit.

Key Rating Drivers & Detailed Description

Strengths:

•   Adequate business risk profile, supported by diverse revenue streams: The business risk profile remains healthy supported by a diversified revenue profile and established position in six key business segments: agricultural solutions (13% of revenue in fiscal 2023), materials (28%), nutrition and care (20%), industrial solutions (17%), chemicals (16%)  and surface technologies (5%). Products cater to various end-user industries, including automotive, personal and home care, agriculture, footwear, pharmaceuticals, petrochemicals, and refining. The diversified revenue streams mitigates the impact of cyclicality and competitive pressures in any particular business segment.

 

•   Strong business and financial assistance from the parent, BASF SE: The company receives strong operational and product support from BASF SE, one of the leading chemical players in the world. High level of integration between the parent and the Indian arm reflects synergies arising from similar businesses. CRISIL Ratings believes the parent will extend timely, need-based financial support in case of pressure on cash flow, and also support financing of large capex, if undertaken. The company undertook external commercial borrowing (ECB) to fund expansion of its Dahej plant (currently repaid), and the parent also rearranged the repayment terms when cash generation was impacted.

 

•   Improving financial risk profile: The financial risk profile of BASF India improved in fiscal 2023. Backed by steady accretion to reserve, networth improved to reserves and stood at Rs 2,698 Crore as on March 31, 2023. The company remains debt free as on March 31, 2023 and had minimal working capital utilisation to the tune of 14% for the 12 months through March 2023. Unutilised bank lines and cash and bank balance stood at Rs 367 crore as on March 31, 2023.

 

Weaknesses:

•   Susceptibility to volatility in crude and forex rates: Operating margin in key business segments of BASF India depends on crude prices as raw materials are crude derivatives. Most of the raw materials are sourced from group companies outside India. Profitability is also vulnerable to movement of the US dollar and Euro against the Rupee, despite hedging, and low margin on few traded products.

 

•   Exposure to risks inherent in the crop protection sector: The domestic crop protection segment is affected by irregular monsoon and volatility in farm income. The sector is also subject to specific registration processes in different countries and various environmental rules and regulations. This has an impact on BASF India’s agricultural-solutions business, which is a key revenue contributor.

Liquidity: Superior

Cash balance stood at Rs 367 crore on March 31, 2023 and working capital lines of around Rs 1500 crore remain mostly unutilised Besides, the company is expected to generate healthy accruals over the medium term. Liquidity is also aided by expectation of strong financial support extended by the parent, as observed in the past.

 

ESG Profile

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

 

The chemicals 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, impact on health and wellbeing of its workers and local community on account of its nature of operations.

 

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

 

Key ESG highlights:

• ESG disclosures of the company are evolving and it is in the process of strengthening the disclosures going forward
• BASF has a goal to reduce their GHG emissions worldwide by 25% by 2030 compared with 2018. The company also aims to achieve net zero carbon dioxide  emissions by 2050.
• The Company’s manufacturing site at Mangalore is meeting its power demand through renewable solar energy, which has helped to reduce carbon dioxide emission.
•  By 2030, the company aims to increase the proportion of women in leadership positions at BASF worldwide to 30%.
•  Its governance structure is characterised by 50% of its Board comprising independent directors, presence of investor grievance redressal mechanism.

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

Outlook: Stable

CRISIL Ratings believes BASF India will continue to benefit from its diversified revenue profile, and improving market scenario. BASF India’s financial risk profile expected to be healthy over the medium term. BASF India is expected to continue benefitting from the strong parent support. The rating will also remain sensitive to any changes in BASF SE's credit profile.

Rating Sensitivity factors

Downward factors

* Downgrade in the rating of BASF SE by S&P

* Change in expectations regarding support from the parent

* Substantial weakening of operating profitability to below 2.5-3%, impacting cash generation

* Large debt-funded acquisition or capex, weakening the debt metrics

About the Company

BASF India, a 73.33% subsidiary of BASF SE, is the flagship company of the BASF group in India. The parent began operations in India, after acquiring RA Cole Pvt Ltd (a manufacturer of expanded polystyrene), which was renamed BASF India in September 1967. The portfolio of BASF SE comprises six segments: Chemicals, Materials, Industrial Solutions, Surface Technologies, Nutrition & Care and Agricultural Solutions.

Key Financial Indicators^

As on/for the period ended March 31	Unit	2023	2022
Revenue from operations	Rs crore	13645	13111
Profit After Tax (PAT)	Rs crore	403	595
PAT Margins	%	3	4.5
Adjusted debt/adjusted net worth	Times	0	0
Interest coverage	Times	52.05	46.06

^CRISIL Ratings adjusted numbers have been referred to in this entire rating rationale.

Any other information: Not applicable