| Chemplast Sanmar Limited | ||||||
| Rated amount enhanced | ||||||
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| Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings. | ||||||
| 1 crore = 10 million | ||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has reaffirmed its ratings on the bank facilities of Chemplast Sanmar Limited (CSL) at ‘CRISIL AA-/Stable/CRISIL A1+’.
The rating factors CRISIL Ratings expectations that CSL’s operating performance will witness steady recovery from fiscal 2024, supported by better realizations of suspension PVC (S-PVC) and paste PVC (~80% of consolidated revenues) and healthy prospects for PVC products. CRISIL Ratings also expects the custom manufacturing (CMC) and other chemicals businesses of CSL (caustic soda, chloromethanes and hydrogen peroxide) to continue to perform well amid stable demand and growing realization. These businesses have helped the company to diversify their business offerings and have supported the bottom line of the company at the times of extreme fluctuations in PVC prices.
Domestic demand of PVC is expected to continue to be healthy due to strong demand from the construction sector, including residential segment and irrigation projects. More than 70% of the domestic demand for S-PVC is from pipe and fitting businesses which in turn is dependent on the domestic irrigation/ water conveyancing/ construction activity. The demand for S-PVC from the profiles segment is also growing in India. Domestic demand for S-PVC is expected to reach ~3.3 mn MT in fiscal 2023 and is expected to grow at 8-9% CAGR through fiscal 2025. The Indian domestic S-PVC capacity is only ~1.5 mn MT, with over 50% of demand being catered by imports majorly from China, Japan, Korea and Taiwan.
CSL is the second largest producer of PVC in India only behind Reliance Industries Limited, with annual S-PVC capacity of 331,000 MT (increased by 31000 MT in fiscal 2023) and largest producer of paste PVC with an annual capacity of 66,000 MT. The company is expanding its paste PVC capacity by 41,000 MT and the same is expected to be added by October-December 2023 quarter. Due to pent up demand for PVC in the domestic market and higher prices of PVC due to restricted supply from China, consolidated revenue of the company grew by 55% in fiscal 2022. The PVC segment contributed towards more than 80% of the consolidated revenue of the company. Realizations in the other specialty chemical business of the company also grew at a healthy rate. However, due to strict covid lock down in China and zero COVID policy in the first half of fiscal 2023, dumping from China increased into the Indian market, impacting domestic PVC realizations until November 2022. Paste PVC prices which had higher realization and profitability also dropped 42% during the period. However, lifting of Covid related restrictions in China and recovery in Chinese consumption of PVC products, from mid-November 2022, led to a gradual recovery in domestic PVC prices, both S-PVC and paste PVC. While there are some temporary pressures on PVC prices now, these are expected to recover and improve gradually over fiscal 2024 as well.
CSL’s revenue is expected to decline by 15-17% in fiscal 2023 due to lower PVC realisations, relative to fiscal 2022, despite continued volume growth. Realization from the other specialty chemical businesses of the company (caustic soda, chloromethane, Hydrogen peroxide and custom manufacturing) is expected to be stable. With PVC prices recovering, revenue is expected to grow steadily by 10-15% in the medium term driven by higher PVC prices and additional paste PVC and custom manufacturing capacity becoming available from fiscal 2024. Operating profitability expected to moderate to 9%-11% in fiscal 2023 from 20% in fiscal 2022 due to lower realization in PVC, and then improve to 14-15% in the medium term, supported by better share of higher margin paste PVC and custom manufacturing revenues.
CSL’s financial risk profile remains adequate and supported by more than Rs 1100 crore of unencumbered cash and cash equivalents as on December 31, 2022. Interest coverage is expected at 3.75x in fiscal 2023 compared to 3.89x in fiscal 2022. The company has announced capex of ~Rs 1100 crore to be done in phases over fiscal 2023 and fiscal 2024 towards expansion of capacity in paste PVC and custom manufacturing. The capex is expected to be implemented with debt of Rs 810 crore which is to be disbursed in phases, and balance from accruals. The ratio of debt/EBITDA is expected at 2.2-2.4 times in fiscal 2023, and improve to below 2 times over the medium term, supported by improved operating profits.
The ratings continue to factor CSL’s established market presence in the PVC segment (both paste and suspension segments, through CCVL), diversified revenue stream catering to multiple end user industries, long standing relationship with customers and healthy demand prospects for its products. The rating also factors in the long vintage and experience of the promoters in the PVC and chemicals sector. CSL’s financial risk profile is adequate, benefitting from healthy cash generating ability. These strengths are partially offset by part commoditized nature of products (S-PVC) which lends variability to operating margins. Besides there is also high import dependence of key raw materials for suspension PVC business, which exposes the company to risk in foreign exchange fluctuations. However, CSL is diversifying its businesses by adding more capacity in their higher margin businesses such as paste PVC and custom manufacturing to mitigate this risk. CSL also uses plain vanilla forwards to hedge its imports to reduce forex risk. |
Analytical Approach For arriving at the ratings, CRISIL Ratings has consolidated the business and financial profiles of CSL and its 100% subsidiary, CCVL. This is due to the strong business and financial linkages between the companies. Both companies (CSL and CCVL) adopted fair value method of accounting in fiscal 2019, in line with Ind AS accounting standards, and accordingly revalued their assets, and created a combined revaluation reserve of ~Rs.1500 crore. The same has been knocked off against the consolidated net worth. Depreciation has also been considered without the impact of revaluation of assets, and accordingly profit after tax has been adjusted from fiscal 2019 onwards.
Please refer Annexure – List of entities consolidated, which captures the list of entities considered and their analytical treatment of consolidation |
Key Rating Drivers & Detailed Description Strengths: Revenue growth, supported by diverse revenue streams and healthy demand prospects: CSL’s business risk profile benefits from its established market position in India in the PVC (paste and suspension) segment and in the chlor alkali business in South India. The company is the largest player in the domestic specialty paste PVC resin business (~80% market share basis production capacity and ~45% considering imports) and second largest player in the suspension PVC business (~20% market share basis production capacity and ~10% considering imports). Revenues also benefit from diversity in product segments with ~60% of revenues derived from suspension PVC, ~20% from specialty paste PVC resin and balance ~20% from other chemicals (chlor alkali and custom manufacturing). In addition to Suspension PVC and speciality Paste PVC, CSL also manufactures caustic soda (5% of revenues) chloro-methanes, refrigerant gases and hydrogen peroxide. Besides, the company also undertakes complex custom manufacturing chemicals of starting materials and intermediates for consumption by life sciences and fine chemical sectors, adding to its business diversity.
Revenue visibility over the medium term will be driven by steady demand for both suspension and specialty paste PVC resin and CS businesses, while contribution from the chlor alkali segment is expected to remain stable. PVC realizations dipped in in fiscal 2023, as explained earlier, but are recovering gradually, and are expected to remain stable/witness slight improvement over the medium term. Operating margins are expected to be lower at 9-11% in fiscal 2023 due to lower PVC realizations and increase in power and fuel costs, and improve to 14-15% in the medium term with increase in price of PVC and stable realization from the specialty chemical businesses. Demand will continue to benefit from the large demand supply mismatch in India and market leadership position in the domestic markets.
Demand for S-PVC is expected to register a CAGR of 8-9% driven by growth in the PVC pipes and fittings sector which in turn is driven by the affordable housing, infrastructure and irrigation sectors all benefitting from increased Government spending in these sectors. Demand for specialty paste PVC resin is also expected to register a CAGR of 6-8% driven by demand from end user industries like auto, leather and medical consumables. Imports contributed to over 50% of domestic demand for both suspension and specialty paste PVC resins as domestic capacity additions remain muted inhibited by high capital cost of setting up new units and high dependence on imports for key raw materials.
The expansion in the specialty paste PVC resin segment is expected to further strengthen CSL’s market position in the domestic sector. Also, capex in the CMC business will ensure further diversification in revenue streams as well as strengthen the overall business risk profile.
Integrated nature of operations: CSL’s plant at Mettur for manufacturing of specialty paste PVC resin and chlor alkalis is highly integrated with captive salt mines (on lease) and captive power plant to meet requirements for its chlor alkali business. Chlorine derived from caustic soda manufacturing is then combined with ethylene to produce ethylene dichloride which is converted to specialty paste PVC resin. Imported methanol and chlorine are used to manufacture chloro-methanes, while hydrogen produced through the salt electrolysis route is used to produce hydrogen peroxide. CSL also has its own marine terminals at Karaikal and Cuddalore for importing ethylene and Vinyl Chloride Monomer (key raw material for suspension PVC) respectively. The integrated nature of operations enhances its operating efficiencies relative to its peers, and helps it register higher operating margins than peers.
Experience of Sanmar Group in the chemicals and PVC business: The Sanmar Group has been engaged in the manufacturing of chemicals and PVC sectors for over five decades. The Group also has presence in shipping and engineering sectors through other entities. The promoters have scaled up the domestic PVC/chemicals business to over USD 500 million and is an established player in the domestic markets for its products. The Sanmar group also ventured in the international markets through an acquisition in Egypt (TCI Sanmar S.A.E, TCIS) in 2007 and has expanded the entity to being a major PVC and chlor alkali player in the MENA region. The group’s PVC/chemicals business has consolidated revenues of over USD 1 billion, making the group a major player in this space. This has also enabled the Group to attract investments from marquee investors like Fairfax Group and successful IPO of CSL wherein it raised Rs 3850 crore in August 2021.
Adequate financial risk profile: Financial risk profile of the company remained stable and is well supported by large unencumbered cash reserves of ~ Rs 1100 crore. Interest coverage ratio improved to 3.89x in fiscal 2022 due to higher operating profits; same is expected to moderate to ~3.75 times in fiscal 2023. CSL does not have any significant fund based working capital debt as it gets a long credit period for key supplies of inputs. Interest coverage ratio is expected to remain above 3x in the medium term even though the company is planning to add long term debt in phased manner between fiscals 2023-2025. CSL is incurring capex of Rs 360 crore towards expanding their paste PVC capacity by 41,000 MT per annum, and Rs.680 crore for enhancing customs manufacturing capacity. These projects will be funded by debt of Rs.810 crore, and balance from accruals/liquid surpluses. Debt/EBITDA ratio is expected to be ~2.4x in fiscal 2023 due to increase in debt for the projects and lower operating profits, and then recover to below 2x in the medium term, despite additional capex related debt, owing to better operating profits.
Weakness: Vulnerability to fluctuations in PVC prices and regulatory risk: Profitability of PVC and chlor alkali manufacturing companies depends on the prevailing PVC and ECU prices. Cyclical downturns have resulted in variations in operating profitability in the past for these players including CSL. Import of PVC currently attracts an import duty of 7.5% while duties on import of key raw materials is negligible. While the import duty levels are comparable to other emerging economies, any adverse change in duty structure will impact operating margins.
However, CSL has managed to slowly rationalize other fixed costs and has also ventured into manufacturing of custom chemicals all of which has lent more stability to margins.
High dependence on imports for key raw materials thereby exposing company to risk of forex fluctuations: CSL on a consolidated basis has high import requirements for procuring ethylene, methanol and VCM for paste PVC, chloro-methanes and suspension PVC respectively. CSL imported close to 90% of its raw material requirements in fiscal 2022 and fiscal 2023. This exposes the company to forex fluctuations as it has low exports. However, pricing of PVC products (resin and suspension) are generally dollar linked on import parity basis providing a partial natural hedge. Further, CSL also uses plain vanilla forwards to hedge its imports to reduce forex risk. |
Liquidity: Strong Liquidity expected to remain strong with cash and cash equivalents of ~Rs 1100 crores at December 31, 2022, and with cash accruals expected to improve over the medium term. The planned capex of Rs 1100 crore for capacity expansion is to be implemented by debt of ~Rs 810 cr and balance from accruals. Debt raised is expected to have moratorium of 18 months from the date of disbursement. Expected net cash accruals of Rs 233 crore is expected to be sufficient for debt repayment of Rs 69 crore in fiscal 2023 and part financing of the planned capex. Cash accruals of over Rs.400-500 crore from fiscal 2024 is expected to be sufficient for annual debt repayment of Rs 70-80 crore, and part funding of capex. CSL is expected to maintain around Rs.800-1000 crore of cash on sustained basis, for any future exigency. |
Outlook: Stable CRISIL Ratings expects CSL’s business profile will continue to benefit from its established business position in the PVC businesses, increase in scale of operations and diversity in revenue streams, healthy demand prospects and operating efficiencies. The company’s financial risk profile is expected to remain adequate driven by improving accruals, prudent and well phased out capital spend, and good working capital management. No support is expected to be rendered to associate entities or to the holding company over the medium term. |
Rating Sensitivity Factors Upward Factors:
Downward Factors:
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About the Company CSL, part of the South India based Sanmar Group, is among the leading PVC and chemicals player in India. CSL completed its IPO on August 24, 2021 and post IPO promoter shareholding is ~55% and balance 45% is with the public.
CSL started operations in 1967 with manufacturing of PVC. CSL on a standalone basis has installed capacities for manufacturing 66,000 tonne per annum (tpa) of paste PVC resin, 119,000 tpa of caustic soda, 35,000 tpa of Chloromethanes and 34,000 tpa of Hydrogen Peroxide and 1068 tpa of custom manufactured chemicals across 3 locations in Tamil Nadu. Additionally, CCVL has manufacturing capacity of suspension PVC of 331,000 tpa at Cuddalore.
For the nine month period ended December 31, 2022, CSL reported a net profit of Rs106 crore on net sales of Rs. 3794 crore, compared with net profit of Rs. 417 crore on net sales of Rs. 4085 crore during corresponding period of previous fiscal. |
Key Financial Indicators*
*CRISIL Ratings Adjusted |
Any other information: Not applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
@Rs 100 crore sub limit for SBLC for Buyers Credit; Rs 20 crore sub limit of Bank Guarantee; Rs 50 crore sub limit of Capex LC; Rs. 20 crore OD/CC limit is fully interchangeable with LC limits **Rs 30 crore sub limit for Bank Guarantee #Rs 30 crore sublimit for EPC/PCFC/CC/WCDL; Rs 60 crore Capex LC limit is sub-limit of term loan %Rs 100 crore sub limit for BG/SBLC for Buyers Credit; Rs 10 crore sub limit of Bank Guarantee/WCDL/CC; Rs. 100 crore Capex LC & FBG / SBLC for availing Buyers’ credit are sub-limit of term loan $Rs 50 crore sub limit for BG/SBLC for Buyers Credit; Rs 20 crore sub limit of Bank Guarantee; Rs 20 crore sub limit of OD/CC. ^Rs 60 crore sublimit for Packing Credit; Rs 10 crore sub limit for WCDL; Rs 25 crore sublimit for BG; Rs 5 crore sub limit for OD/CC; ,Rs. 50 crore sublimit for Capex LC *Rs 50 crore sub limit for SBLC for Buyers Credit; Rs 1 cr sub limit of OD/CC; Rs 25 crore sublimit for WCDL and bank guarantee &Rs. 25 crore sub-limit of EPC/PCFC/CC/WCDL; Rs. 80 crore Capex LC as sublimit of term loan. |
Annexure – List of Entities Consolidated
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| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Annexure - Details of Bank Lenders & Facilities | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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This Annexure has been updated on 05-Apr-2023 in line with the lender-wise facility details as on 30-Sep-2021 received from the rated entity
@Rs 100 crore sub limit for SBLC for Buyers Credit; Rs 20 crore sub limit of Bank Guarantee; Rs 50 crore sub limit of Capex LC; Rs. 20 crore OD/CC limit is fully interchangeable with LC limits
**Rs 30 crore sub limit for Bank Guarantee
#Rs 30 crore sublimit for EPC/PCFC/CC/WCDL; Rs 60 crore Capex LC limit is sub-limit of term loan
%Rs 100 crore sub limit for BG/SBLC for Buyers Credit; Rs 10 crore sub limit of Bank Guarantee/WCDL/CC; Rs. 100 crore Capex LC & FBG / SBLC for availing Buyers’ credit are sub-limit of term loan
$Rs 50 crore sub limit for BG/SBLC for Buyers Credit; Rs 20 crore sub limit of Bank Guarantee; Rs 20 crore sub limit of OD/CC.
^Rs 60 crore sublimit for Packing Credit; Rs 10 crore sub limit for WCDL; Rs 25 crore sublimit for BG; Rs 5 crore sub limit for OD/CC; ,Rs. 50 crore sublimit for Capex LC
*Rs 50 crore sub limit for SBLC for Buyers Credit; Rs 1 cr sub limit of OD/CC; Rs 25 crore sublimit for WCDL and bank guarantee
&Rs. 25 crore sub-limit of EPC/PCFC/CC/WCDL; Rs. 80 crore Capex LC as sublimit of term loan
Criteria Details
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