Detailed Rationale

CRISIL Ratings has revised its outlook on the long-term bank facilities of Chemplast Sanmar Limited (CSL) to ‘Negative’ from ‘Stable’ and reaffirmed the rating at ‘CRISIL AA-’. The short term rating has been reaffirmed at ‘CRISIL A1+’.

 

The revision in the outlook follows the higher than anticipated deterioration in revenues and absolute operating profits of CSL in the current fiscal, due to steep decline in realisations of suspension PVC (S-PVC) and paste PVC (80% of consolidated revenues), following heavy dumping by China. Besides, other business segments such as caustic soda, chloromethanes and customs manufacturing are also facing headwinds due to excess domestic supply, further adding to pressure on profitability for the second year in a row, operating profitability too will be significantly impacted at 2-3%, from 9.5% in fiscal 2023. This along with higher interest costs due to debt raised for capex will exacerbate pressure on net profits and cash accruals in fiscal 2024. That said, better PVC-VCM (Poly Vinyl Chloride-Vinyl Chloride Monomer) spreads, higher contribution from customs manufacturing business with expansion in capacity, is likely to help operating profitability recover to ~10-12% over the medium term, and will remain a monitorable.

 

CSL’s financial risk profile remains adequate and supported by ~Rs 955 crore of unencumbered cash and cash equivalents as on September 30, 2023. This will help buttress impact of moderation in key debt metrics in fiscal 2024 owing to lower operating profitability, and higher capex debt. On the consolidated basis, total debt is expected to increase to Rs 1500-1600 crore at March 31, 2024, compared to Rs 1008 crore at March 31, 2022. due to debt raise for capex plans – including expansion of paste PVC capacity and customs manufacturing capacity.  Interest cover and the ratio of net debt to earnings before interest, depreciation, tax and amortization (EBITDA) is expected to moderate to below 1 times and ~8 times, respectively, in fiscal 2024. Progressive debt repayment, and improved operating profitability of 12-13%,  due to stabilization in PVC prices and spreads and higher contribution from custom manufacturing segment as well as additional PVC capacity, are expected to result in interest cover and net debt/EBITDA recovering to above 2-3 times and below 2 times over the medium term. The same though will be a key monitorable.

 

The ratings continue to factor CSL’s established market presence in the PVC segment (both paste, and suspension  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 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 suspension PVC business (~20% market share basis production capacity and ~10% considering imports). Revenues also benefit from diversity in product segments with ~60-65% of revenues derived from suspension PVC, 15-20% from specialty paste PVC and balance ~20% from other specialty chemicals (chlor alkali and custom manufactured chemicals). In addition to Suspension PVC and specialty Paste PVC, CSL also manufactures caustic soda (10% of revenues) chloro-methanes, refrigerant gases and hydrogen peroxide. Besides, 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.

 

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 to decline in fiscal 2024, as explained earlier, but are expected stabilize in the medium term.  Demand will continue to benefit from the large demand supply mismatch in India and market leadership position in the domestic markets.

 

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 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 is expected to be modest at 2-3% in fiscal 2024 due to lower PVC realizations are expected to improve to 8-10% 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) 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:

• Adequate though moderating financial risk profile: Financial risk profile of the company is adequate, though it is expected to moderate in the near term due to addition of long term debt and modest profitability. Total debt is expected to increase to above Rs 1500 crore in fiscal 2024 compared to Rs 1000 crore in fiscal 2023. Though financial risk profile will continue to be supported by large unencumbered cash reserves of ~Rs 955 crore as on September 30, 2023. Interest coverage is expected to moderate to 1 times in fiscal 2024 (3.46 times in fiscal 2023) due to lower operating profits and higher interest cost before recovering to above 2.5 times in the medium term with improvement in operating profitability.

 

CSL is incurring capex of Rs 360 crore towards expanding its paste PVC capacity by 41,000 MT per annum, and Rs.680 crore for enhancing customs manufacturing capacity.  The expanded paste PVC capacity is expected to be available from the fourth quarter  of fiscal 2024. Phase-I of the custom manufacturing project has been already completed and the  final phase is expected to be completed by the end of fiscal 2024. These projects will be funded by debt of ~Rs.800 crore, and balance from accruals/liquid surpluses. Due to lower profitability and higher debt, net-debt/EBITDA ratio is expected to be above 8 times in fiscal 2024 before stabilizing at below 2 times in the medium term with improved operating profitability.

 

• 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 slowly 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 with cash and cash equivalents of ~Rs 955 crores at September 30, 2023, and CRISIL Ratings expects CSL will maintain surpluses of atleast Rs. Rs 800 crore in the medium term. The planned capex of Rs 1100 crore for capacity expansion is being implemented, taking on debt of ~Rs 800 crore. Debt raised is expected to have moratorium of 12 months from the date of completion of the project. Cash accruals are expected to modest and annual debt repayment of Rs 79 crore is to be made largely through the large cash reserves of the company in fiscal 2024. Cash accruals thereafter will be higher and along with surpluses suffice to meet annual debt repayment of Rs 160-180 crore till fiscal 2026. Company does not have any large capex plans in fiscal 2025 and 2026 except for the maintenance capex which will be implemented through the internal accruals.

Outlook: Negative

CRISIL Ratings expects CSL’s business profile will recover in the medium term from the recent slump with stabilizing PVC price and higher volume of higher margin paste PVC and custom manufacturing chemicals in the overall product mix. This will also lead to better operating profitability and cash generation, which along with prudent capex spend, lead to improvement in key debt protection metrics.. 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 customer manufacturing segment, 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 of 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 TCI Sanmar Chemicals S.A.E (TCIS, rated ‘CRISIL BBB-/Stable/CRISIL A3’).
• 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 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 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 six month period ended September 30, 2023, CSL reported a net loss of Rs 38 crore on net sales of Rs. 1984 crore, compared with net profit of Rs. 80 crore on net sales of Rs. 2605 crore during corresponding period of previous fiscal.

Key Financial Indicators*

Particulars	Unit	2023	2022
Revenue	Rs.Crore	4942	5893
Profit After Tax (PAT)	Rs.Crore	181	701
PAT Margin	%	3.7	11.9
Adjusted Debt/Adjusted net worth	Times	3.33	8.2
Interest Coverage	Times	3.46	3.89

*CRISIL Ratings Adjusted

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of the instrument	Date of Allotment	Coupon Rate (%)	Maturity Date	Issue size (Rs. Crore)	Complexity Level	Rating assigned with outlook
NA	Letter of Credit@	NA	NA	NA	160	NA	CRISIL AA-/Negative
NA	Letter of Credit#	NA	NA	NA	50	NA	CRISIL AA-/Negative
NA	Letter of Credit%	NA	NA	NA	110	NA	CRISIL AA-/Negative
NA	Letter of Credit^	NA	NA	NA	150	NA	CRISIL AA-/Negative
NA	Letter of Credit$	NA	NA	NA	120	NA	CRISIL AA-/Negative
NA	Letter of Credit*	NA	NA	NA	100	NA	CRISIL AA-/Negative
NA	Letter of Credit	NA	NA	NA	10	NA	CRISIL AA-/Negative
NA	Letter of Credit**	NA	NA	NA	100	NA	CRISIL AA-/Negative
NA	Letter of Credit&	NA	NA	NA	95	NA	CRISIL AA-/Negative
NA	Cash Credit$	NA	NA	NA	20	NA	CRISIL AA-/Negative
NA	Cash Credit&	NA	NA	NA	1	NA	CRISIL AA-/Negative
NA	Cash Credit@	NA	NA	NA	1	NA	CRISIL AA-/Negative
NA	Term Loan**	NA	NA	Mar-30	160	NA	CRISIL AA-/Negative
NA	Term Loan*	NA	NA	Sep-30	100	NA	CRISIL AA-/Negative
NA	Term Loan^	NA	NA	Sep-30	250	NA	CRISIL AA-/Negative
NA	Term Loan$	NA	NA	Mar-31	275	NA	CRISIL AA-/Negative
NA	Proposed Non Fund based limits	NA	NA	NA	8	NA	CRISIL A1+

 # Rs 50 crores sub limit for BG / SBLC for Buyers' Credit; Rs. 20 crores sub-limit of bank guarantee; Rs 20 crores sub limit for OD/CC

* Rs 100 crores sub limit for bank guarantee (BG)/standby letter of credit (SBLC) for Buyers Credit; Rs 10 crore sub limit of Bank Guarantee / WCDL / CC; Rs 100 crores capex LC & FBG / SBLC for availing Buyers' Credit as sub-limit of term loan

$ Rs 100 crore sub limit for SBLC for Buyers Credit; Rs 20 crore sub limit of BG; Rs 30 crore sub limit of OD/CC; Rs. 50 crores sub-limit of capex LC; Rs. 20 crores OD/CC limit fully interchangeable with LC limits

^ Rs 25 crore sub-limit of EPC/PCFC/CC/WCDL; Rs. 80 crores capex LC as sub-limit of term loan

% Rs. 60 crores sub-limit for Packing Credit; Rs. 25 crores for bank guarantee; Rs. 10 crores sub-limit as WCDL; Rs 5 crore sub-limit for CC/OD

** Rs 100 crore sub limit for Packing Credit;  Rs 30 crore sublimit for WCDL/CC

@ Rs. 120 crores sub-limit for Packing Credit; Rs 50 crore sublimit for BG; Rs 25 crore sublimit for WCDL; Rs. 50 crores as sub-limit for capex LC

& Rs 95 crores sublimit for SBLC for Buyer's Credit; Rs 30 crores sub limit for BG