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.