Rating Rationale
April 03, 2020 | Mumbai
BASF India Limited
NCD Rating placed on 'Watch Negative'
 
Rating Action
Rs.20 Crore Non Convertible Debentures CRISIL AAA (Placed on 'Rating Watch with Negative Implications')
Fixed Deposits Programme FAAA/Stable (Reaffirmed)
Rs.750 Crore Commercial Paper CRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has placed its 'CRISIL AAA' rating on the non-convertible debenture programme of BASF India Limited (BASF India) on 'Rating Watch with Negative Implications'. Rating on BASF India's fixed deposits and commercial paper programme have been reaffirmed at 'FAAA/Stable/CRISIL A1+'.

The rating action follows S&P Global Ratings' (S&P) action of placing 'A/A-1' ratings on BASF SE (BASF India's parent) on CreditWatch with negative implications. According to S&P Global Ratings the CreditWatch reflects a one-in-two probability that the rating on BASF SE may be lowered. Due to strong linkages on account of the operational and financial support received from its parent, revision in rating of BASF SE by a notch or more is likely to impact the overall credit profile of BASF India.
 
S&P's rating action on the parent, is due to the significant implications of the coronavirus (COVID-19) pandemic on the world economy, including industrial production stoppages and supply chain issues, especially for cross-border sectors such as chemicals. S&P expects short-term effects from the pandemic on economies, which could be followed by a progressive recovery in second-half 2020 and thereafter. CRISIL believes the recovery of BASF India's operating and financial position to be gradual due to the ongoing lockdowns affecting the global trade the macroeconomic scenarios. Moreover, there is also a possibility of a longer-than-expected downturn, involving further lock-down measures and political restrictions on economic activity, or additional effects on the financial world.
 
Even as its parent is witnessing a challenging business environment, BASF India's operations too will be impacted by the ongoing lockdowns due to COVID-19, as its plants are shut as per the government directives. Also, the demand in nutrition and health segment, care chemicals segment and as well as segments which are dependent on the automotive sector is expected to be sluggish. As a result of lower business levels, its operating profitability (EBITDA) is expected to be affected in the near term. Moreover, delay in receivables and slower movement of inventory, as well as increased merchandising business, is expected to lead to higher short term debt levels.
 
However, the impact of lower business performance is expected to be buttressed by sale proceeds of Rs.595 crore on transfer of construction chemicals business to Master Builders Solutions Pvt Ltd (another BASF group entity), limiting the impact on the company's financial risk profile in fiscal 2021. The transaction is expected to complete by October 2020. Since, annual capital spend is expected to be minimal, overall debt levels are not expected to increase materially, despite higher working capital debt, as Rs.140 crore of long term debt will also be paid down. Liquidity is more than adequate, with unutilised bank lines of Rs.1500 crores, which will also help tide over covering of fixed costs and lower accruals due to reduced operations. Besides, as has been demonstrated amply in the past, support from parent is expected to be forthcoming in case of any exigencies, besides for large capital expenditure (capex).
 
The rating continues to reflect BASF India's adequate business risk profile driven by diversified revenue streams, and strong operational and financial support from BASF SE and its group companies. These strengths are partially offset by BASF India' moderate financial risk profile, increasing working capital levels with addition of merchandise business, vulnerability to inherent risks in the crop protection sector and exposure to volatile crude prices and foreign exchange movements.

Analytical Approach

The ratings of BASF India factor in support expected from its parent, BASF SE. CRISIL believes that BASF India will, in case of exigencies, receive distress support from its parent for timely repayment of debt obligations, considering parent holding of 73.33%, operational, technical and financial support in the form of re-schedulement of ECBs and funding support for the capex.

Key Rating Drivers & Detailed Description
Strengths:
* Adequate business risk profile: This is because of a diversified revenue profile and an established position in key business segments: crop protection (16% of revenue in the 9 months through December 31, 2019), materials (22%), and nutrition and care (19%). The products cater to a variety of end-user industries, including leather, paper, construction, automotive, personal and home care, agriculture, petrochemicals, and refining. The diversity of revenue streams helps mitigate the impact of cyclicality and competitive pressures in any one business segment.
 
* Strong business and financial assistance by parent, BASF SE: The company receives strong operational as well as product support from BASF SE, one of the leading chemical companies in the world. A high level of integration exists between the parent and the Indian arm because of synergies arising from similar businesses. CRISIL believes timely, need based financial support will also be extended by the parent, in case of pressure on cash flows. Besides, any large capex, if undertaken, is also likely to be supported by the parent.
 
Weaknesses:
* Moderate financial risk profile:  BASF India's operating profitability has been under pressure since fiscal 2019, resulting in modest cash generation and credit metrics. For instance, interest cover was below 2 times in fiscal 2019, and is estimated at ~2.25-2.4 times in fiscal 2020. Cash accruals are expected to benefit from sale proceeds of construction chemicals business in fiscal 2021. However, key credit metrics, such as interest cover are expected to weaken in the near term on account of lower business performance, and then gradually recover over the medium term, in line with better business performance and limited capex.
 
* Exposure to risks inherent in the crop protection sector: The domestic crop protection segment is affected by irregular monsoon and volatility in farm income. Also, the sector is highly regulated by specific registration processes in different countries and is subject to various environmental rules and regulations.
 
* Exposure to volatile crude and forex movements: The profitability in the key business segments of BASF India depend on the crude prices as the raw materials used in these segments are crude derivatives. As most of the raw materials are sourced from other group companies outside India, the profitability is also impacted by adverse movement of dollar and Euro against rupee, despite hedging. The impact of these factors was seen on performance in fiscal year 2019 and in nine months of 2020. While appreciating rupee and moderation in crude prices would benefit in financial year 2019-20, managing sharp volatility in these factors will continue to be a challenge.
Liquidity Superior

Annual net cash accrual-expected to be in the range of Rs. 250-280 crore over the medium term and cash balances of Rs 34 cr on Sep 30, 2019, should be sufficient to meet yearly debt obligations (Rs. 166 cr in FY21 and Rs 137 cr in FY22), moderate capex plans (~Rs. 20 crore per annum) and working capital requirements. Furthermore, BASF India uses only about 2% of its fund based facilities of about Rs 1570 crore. Liquidity is further supported by strong financial support from parent; this was reiterated in fiscal 2019 with parent refinancing ECBs to an extent of USD 20 Million with longer tenure loan.

Outlook (for Fixed Deposit Programme): Stable
The rating on the fixed deposit programme of BASF India will remain unchanged, even if BASF India's rating is revised by downwards by up to 1 notch.

Rating Sensitivity factors
Upward Factors (for long term ratings except Fixed Deposits):
* Sustenance of BASF SE's rating at current levels with 'Stable' outlook
* Better than expected performance of BASF India
 
Downgrade Factors
* Downgrade in rating of BASF SE by S&P by a notch (for long term ratings), and by 2 or more notches (for fixed deposit rating), and consequent change in BASF India's rating
* Change in stance of support from parent
* Sharp decline in business performance, resulting in EBITDA margins of less than 2%
* Further weakening of credit metrics; interest cover below 1.25-1.40 times, due to weak profitability, elongation of working capital cycle as well as debt funded capex
About the Company

BASF India, a 73.33% subsidiary of BASF SE, is the flagship company of the BASF group in India. BASF SE began operations in India with the acquisition of RA Cole Pvt Ltd (a manufacturer of expanded polystyrene), which was renamed BASF India in September 1967.
 
BASF SE' portfolio is organized into five segments: Chemicals, Performance Products, Functional Materials & Solutions, Agricultural Solutions and Oil & Gas. All global businesses, except for Oil & Gas, are present in India, through BASF India.

Key Financial Indicators
As on/for the period ended March 31 Unit 2019 2018
Revenue Rs crore 6034 5596
Profit After Tax (PAT) Rs crore 82 247
PAT Margins % 1.4 4.4
Adjusted debt/adjusted net worth Times 0.65 0.65
Interest coverage Times 1.75 4.00
^CRISIL adjusted numbers
 
Key Financial Indicators
As on/for the nine months ended Dec 31, Unit 2019 2018
Revenue Rs crore 5702 4708
Profit After Tax (PAT) Rs crore (22)* (5)
PAT Margins % (0.4) (0.1)
Interest coverage Times 2.68 2.45
*The negative PAT is due to loss on sale of optical brightening agents segment of Rs 26 cr in Oct 2019

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments.
Annexure - Details of Instrument(s)
ISIN Name of Instrument Date of Allotment Date of Redemption Coupon Rate (%) Issue Size
(Rs. Cr)		 Rating Assigned
with Outlook
NA Commercial Paper NA 7-365 days NA 750 CRISIL A1+
NA Non-convertible debentures* NA NA NA 20 CRISIL AAA/Watch Negative
NA Fixed Deposit NA NA NA -- FAAA/Stable
*Yet to be issued
Annexure - Rating History for last 3 Years
  Current 2020 (History) 2019  2018  2017  Start of 2017
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Commercial Paper  ST  750.00  CRISIL A1+  30-01-20  CRISIL A1+  28-03-19  CRISIL A1+  27-03-18  CRISIL A1+  31-03-17  CRISIL A1+  CRISIL A1+ 
Fixed Deposits  FD  0.00  FAAA/Stable 30-01-20  FAAA/Stable  28-03-19  FAAA/Stable  27-03-18  FAAA/Stable  31-03-17  FAAA/Stable  FAAA/Stable 
Non Convertible Debentures  LT  0.00
03-04-20 		 CRISIL AAA/(Watch) Negative  30-01-20  CRISIL AAA/Stable  28-03-19  CRISIL AAA/Stable  27-03-18  CRISIL AAA/Stable  31-03-17  CRISIL AAA/Negative  CRISIL AAA/Negative 
All amounts are in Rs.Cr.
Links to related criteria
CRISILs Approach to Financial Ratios
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating criteria for manufaturing and service sector companies
Rating Criteria for Chemical Industry
CRISILs Criteria for rating short term debt
Criteria for Notching up Stand Alone Ratings of Companies based on Parent Support

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