Detailed Rationale

CRISIL Ratings has revised its rating outlook on the long-term bank facility of Birla Carbon India Private Limited (BCIPL) to ‘Positive’ from ‘Stable’ and reaffirmed the rating at ‘CRISIL AA-’; the rating on the short-term facility and commercial paper programme has been reaffirmed at ‘CRISIL A1+’.

 

The outlook revision reflects the expectation of sustaining the strong operational performance resulting from gain in market share in fiscal 2022 after capacity addition, while maintaining healthy operating profitability and significant debt reduction seen in the last two fiscals resulting in improvement in the business and financial risk profile of the company.

 

The ratings continue to factor in the strong parentage and synergistic benefits from being a part of the Aditya Birla group. The ratings also take into account the reduction in loans and advances to group companies to around Rs 1,100 crore as of June 2022 from Rs 2,245 crore as on March 31, 2020. The amount realised was mainly used towards deleveraging to about Rs 407 crore as on March 31, 2022, from Rs 1,208 crore as on March 31, 2020. These loans and advances are extended to Aditya Birla group companies and are interest-bearing and repayable on demand. The loans and advances are expected to remain at a similar level or reduce over the medium term. However, any sustained increase in such loans or inability to recall them in a timely manner may adversely affect overall liquidity and hence remain a key rating sensitivity factor.

 

Exposure to risks related to the cyclical nature of the automobile industry and susceptibility of realisations to fluctuation in crude oil prices and foreign exchange (forex) rates partially offset the strengths.

Analytical Approach

CRISIL Ratings has considered the standalone business and financial risk profiles of BCIPL.

Key Rating Drivers & Detailed Description

Strengths:

Strong market position in the domestic carbon black industry

The company is the second-largest player, after Philips Carbon Black Ltd, in the domestic market with a share of 33-38%. It has increased production capacity by 80,000 tonne per annum (TPA) in April 2021, taking the overall capacity to 3,89,000 TPA. Manufacturing facilities are located close to tyre manufacturers to minimise logistics cost.

 

Capacity utilisation was over 95% in fiscal 2022 against 70% in fiscal 2021 and 87% in fiscal 2020. In fiscal 2021, utilisation dropped to 30% in the first quarter due to the pandemic-induced lockdown but recovered from the second quarter onwards. Consequently, the overall sales volume for carbon black, which is primarily utilised in the tyre manufacturing process, declined by just 3% in fiscal 2021 over the previous fiscal. In fiscal 2022, the volumes grew by more than 30%, supported by healthy domestic demand and exports. This resulted in healthy capacity utilisation of more than 95%. Over the medium term, capacity utilisation is expected to remain high on the back of strong market position and healthy demand.

 

Reputed clientele

The company mainly caters to tyre manufacturers and draws 90-95% of total revenue from this segment. It diversified client base over the last few fiscals, with the top 5 players accounting for about 65% of revenue mix against 80% earlier. Large scale of operations coupled with timely and quality service supports healthy relationships with key customers.

 

Benefits of strong parentage

The company is a wholly owned subsidiary of SKI Carbon Black (Mauritius) Ltd (SKI Carbon Black), which is the holding company for all carbon black business entities of the Aditya Birla group, and operates under the common brand, Birla Carbon. SKI Carbon Black is also one of the world’s largest producers of carbon black, with an installed capacity of around 20 lakh TPA. A geographically diversified business risk profile enables benefits of marketing under a common brand and central procurement of feedstock. An in-house research and development centre focuses on yield enhancement through technology initiatives, thereby lowering cost of production and driving process improvements.

 

Strong financial risk profile

Operating margin has remained at 16-17% in the last 2-3 fiscals. Gearing continues to be comfortable and improved to 0.15 time as on March 31, 2022, from 0.3 time as on March 31, 2021, and about 0.6 time as on March 31, 2020. This was owing to reduction in debt as receipts from redemption of loans and advances were largely used to lower debt to Rs 407 crore as on March 31, 2022, from Rs 1,208 crore as on March 31, 2020.

 

Debt protection metrics were robust, with interest coverage and net cash accrual to adjusted debt ratios of about 44 times and 1.35 times, respectively, for fiscal 2022; compared with about 7 times and 0.6 time, respectively, in fiscal 2021. With expected stable cash accrual and lower debt, debt protection metrics are expected to remain stable over the medium term.

 

Moderate working capital cycle

Raw material and finished goods inventory is 90-100 days on average. Raw materials are sourced through 90 to 180-day letter of credit. On the other hand, credit of 90 days is provided to customers. The company contracted short-term debt of ~Rs 300 crore as on March 31, 2022, to fund working capital.

 

Weaknesses

High susceptibility to cyclicality in the automobile industry

Demand for domestic carbon black depends on growth of the tyre industry. Hence, any fluctuation in demand from this industry owing to slowdown in the automobile industry can adversely impact revenue. 

 

Exposure to volatility in crude oil prices and forex rates; albeit supported by ability to pass through increased input costs

Carbon black feedstock (CBFS), derived from crude oil, is a major raw material for carbon black production. Hence, any increase in crude oil prices may drive up CBFS prices, and thus increase the operating cost of players such as BCIPL. However, the company passes on such price hikes to customers, although with lag, thereby mitigating any risk to profitability. Furthermore, exposure to volatility in forex rates is largely mitigated by entering into forward contracts. Stable revenue from sale of surplus power generated also supports operating margin.

 

Support towards group companies

The loans and advances to group companies have reduced to Rs 1,112 crore as of June 2022 from Rs 2,245 crore as on March 31, 2020. CRISIL Ratings understands these outstanding amounts are not expected to increase beyond current levels over the medium term. These bear interest and are repayable on demand; the interest is received on time. Any increase in such loans and advances or inability to recall them in a timely manner, thereby affecting overall liquidity, will be key rating sensitivity factors.

 

Exposure to risks related to removal of anti-dumping duty on carbon black

The Government of India, on November 18, 2015, had imposed an anti-dumping duty on carbon black originating in, or exported from, China and Russia; this levy was valid till December 2020. On January 5, 2021, the government decided not to impose such duty. Although there was no impact of this on demand, CRISIL Ratings will continue to monitor any effect on the business of BCIPL.

Liquidity: Strong

Cash accrual is estimated to be more than Rs 450 crore per annum against yearly term debt repayment of Rs 53 crore in fiscals 2023 and 2024. Regular cash flows from customers, along with adequate working capital limit and other short-term loan facilities, also support liquidity. Cash and equivalent stood at Rs 115 crore as on May 31, 2022, while unutilised limit was Rs ~1,200 crore with drawing power of Rs 600-700 crore. Capital expenditure plans of more than Rs 300 crore over the three fiscals through 2025 towards regular maintenance, improvement of operational efficiency and other capex are to be fully funded through internal accrual. The company also benefits from strong parentage of Aditya Birla Group.

Outlook: Positive

The ‘Positive’ outlook factors in the expected sustenance of healthy operating performance with continuation of high market share, robust operating margin and no material increase in leverage.

Rating Sensitivity Factors

Upward Factors

• Sustenance of healthy market share around current levels along with healthy operating profitability of around 14-16% on sustained basis
• Reduction in debt with higher cash accrual or redemption of loans and advances, thus strengthening financial risk profile

 

Downward Factors

• Consistent drop in operating margin to below 13-14% along with lower overall market share
• Rise in leverage due to further increase in advances to group companies

About the Company

BCIPL [previously, SKI Carbon Black (India) Pvt Ltd], an Aditya Birla group company, is a wholly owned subsidiary of SKI Carbon Black. The company manufactures carbon black, which is used mainly in the tyre industry. It also has a cogeneration power plant with a capacity of ~100 megawatt.

 

BCIPL started the carbon black business in India in 1988 through Hi-Tech Carbon, Renukoot (Uttar Pradesh). The second plant was opened in Gummidipoondi, Tamil Nadu, followed by a third in Patalganga, Maharashtra. In 2013, Hi-Tech Carbon demerged from Aditya Birla Nuvo Ltd and SKI Carbon Black India Pvt Ltd was incorporated, which was renamed Birla Carbon India Pvt Ltd in 2018. The production capacity is currently 389,000 TPA.

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 levels	Rating assigned with outlook
NA	Commercial Paper	NA	NA	7 to 365 Days	600	Simple	CRISIL A1+
NA	Fund-Based Facilities*	NA	NA	NA	100	NA	CRISIL AA-/Positive
NA	Non-Fund Based Limit^	NA	NA	NA	400	NA	CRISIL A1+

*Interchangeable with non-fund-based limit

^Interchangeable with fund-based limit