Rating Rationale
September 30, 2021 | Mumbai
Chembond Chemicals Limited
Ratings reaffirmed at 'CRISIL BBB+ / Stable / CRISIL A2 '
 
Rating Action
Total Bank Loan Facilities RatedRs.19 Crore
Long Term RatingCRISIL BBB+/Stable (Reaffirmed)
Short Term RatingCRISIL A2 (Reaffirmed)
1 crore = 10 million
Refer to Annexure for Details of Instruments & Bank Facilities

Detailed rationale:

CRISIL Ratings has reaffirmed its ‘CRISIL BBB+/Stable/CRISIL A2’ ratings on the bank facilities of Chembond Chemicals Ltd (Chembond; part of the Chembond group).

 

The ratings continues to reflect the Chembond group’s established market position with presence in diversified sub-segments in the specialty chemicals sector with healthy financial risk profiles. These strengths are partially offset by working capital-intensive operations and exposure to intense competition in the speciality chemicals industry.

 

Performance in fiscal 2021 was not materially impacted by pandemic related disruptions, however, revenue growth was subdued. Revenue grew by 2.38% in fiscal 2021 with improved operating margin of 6.8%. Revenue growth is expected to recover in fiscal 2022 onwards with sustained profitability on the back improved economic conditions and sustained demand from clients

Analytical approach:

For arriving at its ratings, CRISIL Ratings continues to combine the business and financial risk profiles of Chembond with those of its subsidiaries (see annexure). This is because all these entities, together referred to as the Chembond group, are owned and managed by the same promoters and have significant operational and financial linkages.

 

Please refer Annexure - Details of Consolidation, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths

  • Established market position with presence in diversified sub-segments: The group enjoys a leadership position in India in the water treatment chemicals segment. High brand visibility of primary products has enabled cross-selling of other chemicals such as industrial coatings and construction chemicals. The group also supplies industrial enzymes for applications in animal feed, textiles, and alcohol processing. Customer base is spread across the automobiles, steel, fertilisers, refineries, petrochemicals, power plants, and infrastructure segments. The group had lost a major revenue stream from toll manufacturing from a reputed multinational corporation in fiscal 2019. This loss in revenue was expected to be compensated by ramp-up in operations in segments such as material division, and animal health and nutrition segment. However, growth in these divisions has been lower than expected and could only partially compensate for the loss of revenue from toll operations. Scale-up in operations and improvement in profitability will remain key rating sensitivity factors.

 

  • Healthy financial risk profile: Networth was large at around Rs 218.9 crore (adjusted for intangibles) as on March 31, 2021, while total outside liabilities to adjusted networth ratio was strong at 0.2 time. These are likely to remain at similar levels over the medium term. Debt protection metrics were robust, with interest coverage and net cash accrual to total debt ratios of 59 times and over 13 times, respectively, for fiscal 2021. Surplus liquid funds, estimated at around Rs 82.5 crore as on March 31, 2021, should ensure minimal reliance on incremental working capital debt, backed by no significant capital expenditure (capex). Capital structure and debt protection metrics are expected to remain strong over the medium term.

 

Weaknesses

  • Working capital-intensive operations: Gross current assets were around 164 days as on March 31, 2021, largely driven by receivables of 112 days. Receivables cycle is expected remain at around 100-100 days over the medium term. Inventory is usually maintained at 30-40 days and is likely to remain steady. Working capital cycle is supported by sizeable credit from suppliers (payables of 70-100 days). However, operations will remain working capital intensive over the medium term.

 

  • Exposure to intense competition: Competition is intense in the surface and water-treatment chemical sector due to moderate capital requirement and easy availability of raw materials. Customer profile is strong and includes players such as Reliance Industries Ltd (CRISIL AAA/Stable/CRISIL A1+), Indian Oil Corporation (CRISIL AAA/Stable/CRISIL A1+), Gail India Ltd, and Haldia Petrochemicals Ltd. However, the group is not the only supplier to these clients, which restricts its bargaining power. Additionally, any vendor rationalization by customers or loss of price competitiveness because of technological disadvantages may constrain revenue. Recently acquired businesses in the automotive segment also has significant competition, thereby constraining growth. However, diverse nature of the customer profile and spread across industries and geographies minimize adversities such as loss of customers in any segment or industry.  

Liquidity: Adequate

Net cash accrual were at Rs 25 crore in fiscal 2021, and is likely to be Rs 15-18 crore per fiscal over the medium term against nominal debt obligation and capex of Rs 15-20 crore per fiscal. Bank limit continued to remain largely unutilised over the past 12 months. Liquid assets of around Rs 82.5 crore as of March 2021 also support liquidity.

Outlook: Stable

CRISIL Ratings believes the Chembond group will benefit over the medium term from its established market position and healthy relationship with key customers

Rating Sensitivity factors

Upward factors:

  • Improvement in revenue growth and operating margin leading to sustained net cash accrual above Rs 25 crore
  • Sustained financial risk profile backed by strong capital structure, adequate liquidity, and robust debt protection metrics

 

Downward factors:

  • Subdued revenue growth, and operating margin sustaining below 5% over the medium term resulting in net cash accrual below Rs 10 crore
  • Stretch in working capital cycle or large, debt-funded capex/acquisition  weakening capital structure and overall financial flexibility

About the Group

Set up in 1975 by Dr Vinod Shah, Mr Ashwin Nagarwadia and Mr Parviz Dastur, Chembond manufactures speciality chemicals and provides a range of products for diverse industrial applications. It offers metal-treatment chemicals, water-treatment chemicals, and industrial enzymes through its subsidiaries and joint ventures (JVs). The company also manufactures chemicals for the construction and infrastructure sectors, and high-performance coatings for structural protection from corrosion, for floors and walls in clean rooms, and for shop floors and building exteriors. The company diversified into equipment-based solutions for water treatment. Additionally, it trades in building construction chemicals. Manufacturing and blending plants are in Tarapur (Maharashtra), Baddi (Himachal Pradesh), Chennai (Tamil Nadu), and Dudhwada (Vadodara, Gujarat). Warehouses and branch offices are in Ahmedabad (Gujarat), New Delhi, Faridabad (Haryana), and Kolkata (West Bengal).

 

In 2001, the Chembond group formed a JV with Ashland Inc, USA, and simultaneously acquired Drewtreat Chemicals Ltd for water-treatment chemicals. Pursuant to the sale of water-technologies business globally by Ashland Inc to Solenis Netherlands BV (Solenis). Solenis took over the minority stake in the Indian JV, Chembond Ashland Water Technology Ltd; the JV was renamed Chembond Solenis Water Technologies Ltd effective August 21, 2014. On April 27, 2017, Chembond entered into an agreement to acquire the equity shares of Chembond Solenis Water Technologies Ltd from Solenis Netherlands BV, after which the said entity became a wholly owned subsidiary of Chembond.

 

In November 2017, Chembond acquired 100% stake in Phiroze Sethna Pvt Ltd (Phiroze Sethna), which manufactures sealants and adhesives for the automotive industry. Phiroze Sethna also has a wholly owned subsidiary, Gramos Chemicals India Pvt Ltd, which manufactures products used in paint shops in the automotive industry.

Key Financial Indicators

Particulars

Unit

2021

2020

Revenue

Rs crore

274.7

268.3

Profit after tax (PAT)

Rs crore

20.4

3.1

PAT margin

%

7.4

1.1

Adjusted debt/adjusted networth

Times

0.0

0.0

Interest coverage

Times

58.7

21.7

 

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL Ratings' complexity levels are assigned to various types of financial instruments. The CRISIL Ratings' complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL Ratings' 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

Coupon

Rate (%)

Maturity Date

Issue Size

(Rs. Cr)

Complexity levels

Rating Assigned  with Outlook

NA

Bank Guarantee

NA

NA

NA

3.00

NA

CRISIL A2

NA

Cash Credit

NA

NA

NA

16.00

NA

CRISIL BBB+/Stable

 

Annexure – List of entities consolidated

Names of Entities Consolidated

Extent of Consolidation

Rationale for Consolidation

Chembond Chemicals Limited

Fully consolidated

Parent company. Common promoters and significant operational and financial linkages

Chembond Clean Water Technologies Ltd

Fully consolidated

Chembond owns majority stake in the company and asserts control. Common promoters and significant operational and financial linkages

Chembond Water Technologies Ltd

Fully consolidated

Wholly owned subsidiary of Chembond. Common promoters and significant operational and financial linkages

Chembond Biosciences Ltd

Fully consolidated

Wholly owned subsidiary of Chembond. Common promoters and significant operational and financial linkages

Chembond Material Technologies Ltd

Fully consolidated

Wholly owned subsidiary of Chembond. Common promoters and significant operational and financial linkages

Chembond-Calvatis Industrial Hygiene Systems Ltd

Fully consolidated

Chembond owns majority stake in the company and asserts control. Common promoters and significant operational and financial linkages

Chembond Polymers and Materials Ltd

Fully consolidated

Wholly owned subsidiary of Chembond. Common promoters and significant operational and financial linkages

Chembond Water Technologies (Malaysia) Sdn. Bhd.

Fully consolidated

Step down subsidiary of Chembond. Common promoters and significant operational and financial linkages

Phiroze Sethna Pvt Ltd

Fully consolidated

Wholly owned subsidiary of Chembond. Common promoters and significant operational and financial linkages

Gramos Chemicals India Pvt Ltd

Fully consolidated

Wholly owned step-down subsidiary of Phiroze Sethna Pvt Ltd. Common promoters and significant operational and financial linkages

Chembond Distribution Ltd

Fully consolidated

Wholly owned subsidiary of Chembond. Common promoters and significant operational and financial linkages

 

Annexure - Rating History for last 3 Years
  Current 2021 (History) 2020  2019  2018  Start of 2018
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund Based Facilities LT 16.0 CRISIL BBB+/Stable   -- 30-06-20 CRISIL BBB+/Stable 02-05-19 CRISIL A-/Stable 28-03-18 CRISIL A-/Stable CRISIL A-/Stable
Non-Fund Based Facilities ST 3.0 CRISIL A2   -- 30-06-20 CRISIL A2 02-05-19 CRISIL A1 28-03-18 CRISIL A1 CRISIL A1
All amounts are in Rs.Cr.
Annexure - Details of Bank Lenders & Facilities
Facility Amount (Rs.Crore) Rating
Bank Guarantee 3 CRISIL A2
Cash Credit 9 CRISIL BBB+/Stable
Cash Credit 7 CRISIL BBB+/Stable
Criteria Details
Links to related criteria
CRISILs Approach to Financial Ratios
Rating criteria for manufaturing and service sector companies
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating Criteria for Chemical Industry
CRISILs Criteria for Consolidation
Understanding CRISILs Ratings and Rating Scales

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