Rating Rationale
September 23, 2020 | Mumbai
BASF India Limited
 NCD Rating removed from 'Watch Negative'; Ratings reaffirmed
 
Rating Action
Rs.20 Crore Non Convertible Debentures CRISIL AAA/Negative (Removed from 'Rating Watch with Negative Implications'; Rating Reaffirmed)
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
The common independent director on CRISIL's and BASF India Limited's boards did not participate in the rating committee meeting and the rating process of these instruments.
Detailed Rationale

CRISIL has removed its rating on the non-convertible debenture programme of BASF India Limited (BASF India) from 'Rating Watch with Negative Implications'. The rating has been reaffirmed at 'CRISIL AAA', and assigned a 'Negative' outlook. The rating on BASF India's fixed deposits and commercial paper programme have been reaffirmed at 'FAAA/Stable/CRISIL A1+'.
 
The rating action follows the removal of BASF SE's (BASF India's parent) ratings from 'CreditWatch with negative implications' by S&P Global Ratings (S&P), and their reaffirmation at 'S&P A/A-1' with a 'Negative' outlook. Though S&P expects the weak automotive market and lower margin in the chemical segment to impact operational cash flows of BASF SE in 2020, the impact will be partly mitigated by cost-saving measures. However, a disciplined financial policy with lower capital expenditure (capex) and dividend pay-outs will lead to funds flow from operations to debt (FFO to debt) ratio of about 27%, similar to that in 2019, but below the levels expected before. Recovery in end-use markets should help the FFO to debt ratio improve to over 35% in 2021. The 'Negative' outlook reflects the possibility of a downgrade if the FFO to debt ratio does not recover in 2021.
 
S&P had placed its ratings on debt facilities of BASF SE on CreditWatch with negative implications on March 25, 2020, owing to significant implications of the Covid-19 pandemic on the world economy. This rating action also factored in disruptions in industrial production and supply chain, especially for cross-border sectors such as chemicals.
 
Given the strong operational and financial support provided by BASF SE, any revision in S&P's rating on the parent has an impact on overall credit profile of BASF India.
 
CRISIL expects BASF India's performance to remain subdued in fiscal 2021, due to the Covid-19 induced slowdown across sectors, especially in materials, chemicals and surface technologies. However, this could be partially offset by healthy growth in the agro, nutrition and care segments, benefitting mainly from increased merchandise business from fiscal 2020. Despite a gradual recovery with easing of lockdowns and pick up in industrial activity, overall performance in fiscal 2021 will remain subdued, with operating margin likely to remain in the range of 2-4%.
 
Working capital cycle is likely to be managed prudently, as bulk of the traded inventory is order backed and receivables are stable. Higher credit period provided by group companies, reduces reliance on short-term debt.
 
The company also received Rs 595 crores on completion of divestiture of its construction chemicals business in July 2020. During August, 2020, BASF India completed the acquisition of 100% stake in BASF Performance Polyamides India Pvt Ltd for an aggregate consideration of Rs 303 crore. The acquisition will benefit BASF India, by further strengthening its BASF Performance Material and Monomer portfolio.
 
With minimal annual capital expenditure, overall debt levels may not increase materially; further Rs last and final tranche of the long-term dues of about Rs 140 crore will also be paid in fiscal 2022. Liquidity remains adequate, as the unutilised bank limit of around Rs 1,300 crore can be used to tide over lower accrual amidst subdued business performance. Besides, as demonstrated amply in the past, support from the parent will be forthcoming in case of any exigencies.
 
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 profitability and moderate financial risk profile. Revenue and profitability also remain susceptible to inherent risks in the crop protection sector and volatility in crude prices and foreign exchange rates.

Analytical Approach

CRISIL's ratings on debt programmes of BASF India factor in support expected from its parent, BASF SE. CRISIL 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. Besides, part of 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: BASF India's business risk profile is marked by a diversified revenue profile and established position in key business segments: agricultural solutions (15% of revenue in fiscal 2020), materials (23%) and nutrition and care (20%). Products cater to various end-user industries, including automotive, personal and home care, agriculture, petrochemicals, and refining. As seen in first quarter of fiscal 2021, wherein the agricultural solutions and nutrition and care segments were less affected by the pandemic and outperformed other segments, 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 as well as product support from BASF SE, one of the leading chemical companies in the world. High level of integration between the parent and the Indian arm reflects synergies arising from similar businesses. CRISIL believes the parent will extend timely, need-based financial support in case of pressure on cash flows, and also support financing of any large capex, if undertaken. The company received external commercial borrowings (ECBs) to fund its Dahej expansion in the past, and the parent also rearranged the repayment terms when cash generation was impacted. Most of the ECBs have now been repaid.
 
Weaknesses:
* Moderate operating profitability, amidst exposure to volatility in crude and forex rates: BASF India's operating margin dropped to below 3% in fiscals 2019 and 2020, from almost 6% in fiscal 2018, thus impacting cash generation. While the margin is expected to remain subdued in fiscal 2021, sale proceeds of the construction chemicals business should support accrual.
 
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 other group companies outside India. Thus, profitability is also impacted by adverse movement of the US dollar and Euro against the rupee, despite hedging, and low margin on few traded products. Movements in crude and forex rates did impact performance in fiscals 2019 and 2020. Managing sharp volatility will continue to be a challenge.
 
* Moderate financial risk profile: Weak profitability and modest cash generation has impacted the company's financial risk profile in recent times. Sub-optimal performance of the Dahej unit, which was materially debt-funded, has also constrained the capital structure. Return on capital employed (RoCE) has been low in single digit over the past two fiscals. Besides, credit metrics are sub-par for the rating category (interest cover is below 4 times, except that gearing was comfortable at 0.5-0.7 time in the three fiscals ended March 31, 2020.) Enhancement in credit metrics will hinge largely on BASF India's ability to improve profitability.
 
* 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.
 
Outlook (for NCD programme): Negative
CRISIL believes the Negative outlook on the parent's long-term rating will continue to weigh on BASF India's rating, given the strong linkages between the entities. BASF India's operating performance and returns will also remain constrained over the near term, due to disruptions caused by the pandemic on key industries, including automotive and consumer durables.
 
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 downwards by upto one notch.
Liquidity Superior

Despite weaker profitability, CRISIL expects cash accrual of around Rs 350 crore for fiscal 2021 (aided by Rs 595 crore received on sale of construction business). Accrual of Rs 160-200 crore is further expected per annum over the medium term. Cash balances stood at Rs 80 crore on March 31, 2020 and working capital lines around Rs 1,300 crore remain mostly unutilised. These, along with cash accrual, should suffice to cover the yearly debt of Rs 181 crore and Rs 147 crore, in fiscals 2021 and 2022, respectively. Liquidity is also aided by strong financial support extended by the parent; this was reiterated in fiscal 2019, with the parent refinancing ECBs to an extent of USD 20 million with a longer tenure loan.

Rating Sensitivity factors
Upward scenario (for long-term ratings except fixed deposits):
* Sustenance of BASF SE's rating at current levels with revision in outlook to 'Stable'
* Better-than-expected performance of BASF India
* Large debt-funded capex or working capital requirement, impacting credit metrics further
 
Downgrade scenario
* Downgrade in rating of BASF SE by S&P by a notch and outlook remaining 'Negative' (for long-term ratings), and by two or more notches (for fixed deposit rating), and consequent change in BASF India's rating
* Change in stance of support from parent
* Continued weakness in performance of BASF India, resulting in operating profitability ranging between 1-2%
* Material deterioration in credit metrics due to weak profitability, or material increase in debt due to elongated working capital cycle or large capex; for instance interest cover dipping below 1.25-1.50 times
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 is organised under six segments: Chemicals, Materials, Industrial Solutions, Surface Technologies, Nutrition & Care and Agricultural Solutions. All global business are present in India, through BASF India.
 
For the first three months in fiscal 2021, loss after tax was Rs 29 crore on operating income of Rs 1770 crore against profit of Rs 8 crore on income of Rs 1614 crore for the corresponding period in the previous fiscal.

Key Financial Indicators^
As on/for the period ended March 31 Unit 2020 2019
Revenue Rs crore 7563 6034
Profit After Tax (PAT) Rs crore 19 82
PAT Margins % 0.2 1.4
Adjusted debt/adjusted net worth Times 0.48 0.65
Interest coverage Times 3.5 1.9
^CRISIL adjusted numbers

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)
ISIN Name of Instrument Date of Allotment Date of Redemption Coupon Rate (%) Issue Size
(Rs. Cr)		 Complexity Levels Rating Assigned
with Outlook
NA Commercial Paper NA 7-365 days NA 750 Simple CRISIL A1+
NA Non Convertible Debentures * NA NA NA 20 Simple CRISIL AAA/Negative
NA Fixed Deposits NA NA NA -- Simple 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+  03-04-20  CRISIL A1+  28-03-19  CRISIL A1+  27-03-18  CRISIL A1+  31-03-17  CRISIL A1+  CRISIL A1+ 
        30-01-20  CRISIL A1+               
Fixed Deposits  FD  0.00  FAAA/Stable  03-04-20  FAAA/Stable  28-03-19  FAAA/Stable  27-03-18  FAAA/Stable  31-03-17  FAAA/Stable  FAAA/Stable 
        30-01-20  FAAA/Stable               
Non Convertible Debentures  LT  0.00
23-09-20  		CRISIL AAA/Negative  03-04-20  CRISIL AAA/Watch Negative  28-03-19  CRISIL AAA/Stable  27-03-18  CRISIL AAA/Stable  31-03-17  CRISIL AAA/Negative  CRISIL AAA/Negative 
        30-01-20  CRISIL AAA/Stable               
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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