Detailed Rationale

CRISIL Ratings has reaffirmed the ratings on bank loan facilities of Chemplast Sanmar Limited (CSL) at ‘CRISIL AA-/Negative/CRISIL A1+’

 

In the first half of fiscal 2025, CSL’s realizations from Paste polyvinyl chloride (P-PVC) improved with implementation of provisional anti-dumping duty levied on imports from select countries and increase in freight costs, which benefitted domestic prices. Besides, the realizations of Caustic Soda remained stable while that of Chloromethanes improved with recovery in end use demand. Further, higher volumes of paste PVC (additional 41,000 tonne commenced operations towards end of last fiscal) and offtake from custom manufactured chemicals division (CMCD) enabled revenues growth of 8% y-o-y in the first half of fiscal 2025. Also, operating profitability improved to 7.2% (lower than 8% anticipated but better than 0.6% in first half of fiscal 2024) with benefit of increase in paste PVC realizations, though some impact was seen in the second quarter as imports from countries where anti-dumping duty on paste PVC was not applicable started dumping the product into the Indian market. The Indian government is likely to introduce anti-dumping duties from these countries too which should help stabilize realizations. 

 

CSL’s revenues are expected to grow by 12-15% in fiscal 2025 driven by higher PVC volumes and improvement in realizations of suspension PVC or S-PVC ( 60% of consolidated revenues) with expected implementation of provisional anti-dumping duty in the near term, which will support domestic prices. Besides, improved revenue from CMCD post commencement of phase 2 operations will also support revenue growth.  However, realizations for paste PVC are expected to witness limited improvement due to intense competition, mainly from imports. Operating profitability is expected at 7-8% for fiscal 2025 with operating profits recovering in the second half of fiscal 2025 (Rs 22 crores in fiscal 2024). Over the medium term, the revenues are expected to sustain a steady growth driven by offtake in CMCD and further improvement in realizations with reduced dumping from China. Operating profitability is expected to recover above 10% over the medium term. Any prolonged delay in recovery of realizations and muted offtake from CMCD, which will limit the improvement in profitability might result in a downgrade.

 

CSL’s financial risk profile remains adequate, despite average debt protection metrics, supported by ~Rs 670 crore of unencumbered cash and cash equivalents as on September 30, 2024. Due to lower profitability and capex related debt, debt metrics moderated significantly in fiscal 2024. CSL, at consolidated level, incurred capex of around Rs 1150 crores towards expansion of paste PVC and custom manufacturing (phase 1&2) capacity over fiscals 2023 and 2024 which led to rise in gross debt to Rs 1542 crores at March 31,2024 from Rs 867 crores as on March 31, 2022. CSL, due to better demand visibility, has decided to further invest in expanding the capacity of (phase 3 & 4) at CMCD which will incur a capex of around Rs 160 crores which will be incurred over 12-18 months. Owing to the capex , the debt levels are expected to remain around Rs 1400-1500 crores estimated as on March 31, 2025. Improvement in operating profits and sustenance of cash surplus will reduce the net debt/EBITDA and improve the interest cover to ~2 times for fiscal 2025 (33.1 times and 0.57 times in fiscal 2024 respectively); this however, will be a key monitorable.

 

Earlier, on January 2,2024, the outlook on the long-term bank facilities of CSL was revised to ‘Negative’ from ‘Stable’ owing to two consecutive years of decline in revenues due to steep moderation in realizations of both S-PVC and paste PVC (80% of consolidated revenues), following increased cheaper supplies from China. In addition, the other business segments such as caustic soda , chloromethanes and custom manufacturing also faced headwinds with realisations dropping, leading to revenues witnessing a degrowth of 21% year-on-year in fiscal 2024, with operating profitability declining to 0.6%.

 

The ratings continue to factor CSL’s established market presence in the PVC segment (both paste, and S-PVC through its subsidiary, Chemplast Cuddalore Vinyls Ltd (CCVL, rated ‘CRISIL AA-/Negative’/CRISIL A1+’), 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 and integrated nature of operations. However, these strengths are partially offset by commoditized nature of products (S-PVC) which lends variability to operating margins, and the company’s moderate financial risk profile. Besides there is also high import dependence of key raw materials for PVC business (VCM and EDC), which exposes the company to risk in foreign exchange fluctuations. CSL is diversifying its businesses by adding more capacity in their higher margin speciality 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:

• 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 business (~80% market share basis production capacity and ~45% considering imports) and second largest player in the S-PVC business (~20% market share basis production capacity and ~10% considering imports). The company has also undertaken complex custom manufacturing chemicals of starting materials and intermediates for consumption by life sciences and fine chemical sectors, adding to its business diversity. In addition, CSL also manufactures caustic soda  chloro-methanes, refrigerant gases and hydrogen peroxide. .

 

Revenue visibility over the medium term will be driven by steady demand for both suspension and specialty paste PVC resin and custom manufacturing businesses, while contribution from the chlor alkali segment is expected to remain stable. PVC realizations dipped in fiscal 2023 and fiscal 2024 post highs witnessed in fiscals 2021 and 2022 but are expected to stabilize in the medium term.  Demand will continue to benefit from the large demand supply mismatch in India and established market position of CSL in the domestic markets. The expansion in the specialty paste PVC resin segment has further strengthened 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 and CCVL have their 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.  Operating margin which were at below 1% in fiscal 2024 due to lower PVC realizations are expected to improve to 7-8% in fiscal 2025 and over 10% in the medium term with stable PVC prices and supported by higher paste PVC and custom manufacturing volumes.

 

• 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, rated ‘CRISIL BBB-/Negative/A3) 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.
   

Weaknesses:

• Moderate though improving financial risk profile: Financial risk profile of the company is moderate but improving supported by better profitability, which will aid cash generation. Cash surplus of almost Rs.700 crore also supports the financial risk profile.

 

CSL is incurring capex of Rs 160 crore towards for enhancing customs manufacturing capacity due to better order visibility. Phase-1 & 2 of the CMCD has been already completed. Due to better order visibility, CSL has decided to expand the custom manufacturing capacity further with phase 3 and phase 4. Phase 3 will be completed and commence operations by next fiscal. Civil and infra for phase 4 will be ready by next fiscal. These projects will be funded by mix of debt and  accruals/liquid surpluses. Total debt is expected at Rs 1400- 1500 crore at end of fiscal 2025; resulting in continuing moderate debt metrics, despite some improvement. For instance, net debt/EBITDA and interest cover is expected at ~2 times each for fiscal 2025, compared with 33.1 times and 0.57 times in fiscal 2024 respectively. Further improvement in these metrics is expected over the medium term, with better contribution from CMCD and stablisation of PVC realisations.

 

• Vulnerability to fluctuations in PVC prices and regulatory risk: Profitability of PVC manufacturing companies depends on the prevailing PVC and VCM prices. Cyclical downturns have resulted in variations in operating profitability for these players including CSL. Import of PVC currently attracts an import duty of 7.5% (earlier at 10%) 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. PVC prices are also significantly affected due to fluctuations in supply of PVC from China, which is the largest consumer and producer of PVC. The slowdown in their domestic economy has led to huge quantities being dumped in the global markets, especially India, resulting in considerable correction in PVC prices since fiscal 2023. 

 

CSL is rationalizing other fixed costs and expanding its custom chemicals manufacturing business which will partially insulate the margins from fluctuating PVC prices. The PVC segment will however continue to contribute significant portion of the operating profits.

 

• 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-methane and suspension PVC respectively. CSL imports close to 90% of its raw material requirements, which exposes its profitability to forex fluctuations. However, pricing of PVC products (paste and suspension resin) 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 is expected to remain strong supported by cash and cash equivalents of ~Rs 671 crores at September 30, 2024, and CRISIL Ratings expectations that CSL will maintain surpluses of at least Rs. 700-800 crore in the medium term. Cash accruals are expected to be around Rs 160-180 crores in fiscal 2025 against annual debt repayment of Rs 182 crore. Any shortfall will be funded through cash surplus. Cash accruals thereafter will be higher and along with surpluses suffice to meet annual debt repayment of Rs 100-120 crore till fiscal 2027.

Outlook: Negative

CRISIL Ratings expects that over the near to medium term, CSL’s performance will witness a gradual recovery supported by steady sale volume across its businesses, anticipation of stabilisation in PVC prices and increased contribution from CMCD. This will also lead to better operating profitability and cash generation, which along with prudent capex spend, strengthen its financial risk profile and key debt protection metrics, from current moderate levels. No support is expected to be rendered to associate entities or to the holding company over the medium term.

Rating sensitivity factors

Upward Factors:

• Strong revenue growth and sustenance of operating margins above ~10-12%, supported by better revenue diversity and increased contribution from CMCD, leading to higher cash generation
• Sustained improvement in financial risk profile supported by increased cash generation, prudent capex spending, and better working capital management reflecting in healthy debt metrics; for instance net debt/EBITDA sustaining below 2.5 times.

 

Downward Factors:

• Significant moderation in business performance with operating margins sustaining below 7-8%, also impacting cash generation
• Significant increase in debt levels due to capex, acquisitions, or elongation of working capital cycle impacting key debt metrics; for instance, net debt/EBIDTA in excess of 3.5 times
• Material support, direct or indirect, to promoter holding company or associate companies, especially TCIS
• Moderation in liquidity position including cash surpluses, compared with expectations

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 107,000 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 custom manufactured chemicals across 3 locations in Tamil Nadu. Additionally, CCVL has manufacturing capacity of 331,000 tpa of S-PVC at Cuddalore.

 

For the six month period ended September 30, 2024, CSL reported a net loss of Rs 7 crore on net sales of Rs. 2138 crore, compared with net loss of Rs. 38 crore on net sales of Rs. 1984 crore during corresponding period of previous fiscal.

Key Financial Indicators*

Particulars	Unit	2024	2023
Revenue	Rs. Crore	3924	4942
Profit After Tax (PAT)	Rs. Crore	(115)	181
PAT Margin	%	(2.9)	3.7
Adjusted Debt/Adjusted net worth	Times	22.71	3.33
Interest Coverage	Times	0.57	3.46

*CRISIL Ratings Adjusted

Any other information: Not Applicable