Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL A+/Stable/CRISIL A1’ ratings on the bank facilities and debt programmes of DIC India Limited (DIC India).

 

The ratings continue to reflect the stable operational performance of DIC India over the six months through fiscal 2021, with expected revenue growth of 15% over the complete fiscal and operating margin of 2.5-3%, driven by strong demand from the packaging segment offsetting fall in demand from the publication and news sector. As a result, net cash accrual is expected to remain stable in calendar year (CY) 2021. DIC India has a comfortable financial risk profile, supported by the absence of any maturing debt and sufficient cash accrual for the upcoming capital expenditure (capex) for the setting up of new unit. Debt protection metrics were strong, indicated by interest coverage ratio of 18.48 times in CY20.

 

The operating margin had improved in CY20, backed by change in the product mix, increase in value-added products and benign raw material prices. Profitability is estimated to moderate in CY21 to 2.5-3% on account of rising raw material prices and demand remaining below pre-pandemic levels. Profitability is expected to improve in the medium term, with rising share of the higher-margin packaging segment and contribution from value-added products expected to improve. Thus, operating efficiency is expected to remain moderate over the medium term, with return on capital employed (RoCE) at 3-5%.

 

Liquidity is sufficient to withstand any near-term impact on revenue, and cash balances along with internal accruals will be sufficient for the capex to be undertaken for a new unit over CY21-23. Monetisation of a land parcel in Mumbai led to net consideration of Rs 153 crore; Rs 102 crore has been received until September 30, 2021. With additional working capital limit of Rs 100 crore extended by common bankers of the parent, DIC Corporation Japan (DIC Japan), at healthy interest rates, the average unutilised limit of Rs 132 crore with DIC India at September 2021 should support liquidity in the absence of any yearly maturing debt.

 

The ratings continue to reflect the strong position of DIC India in the printing inks market in India and its healthy financial risk profile and strong technological and managerial support received by the company from its ultimate parent, DIC Japan, a global leader in printing inks. These strengths are partially offset by susceptibility to risks inherent in the printing ink industry and modest operating profitability.

Analytical Approach

CRISIL Ratings has factored in the business and need-based financial support from DIC India's parent, DIC Japan.

Key Rating Drivers & Detailed Description

Strengths:

• Strong position in the printing inks sector

DIC India is the second largest player in the domestic printing inks market, with presence in the newsprint, publication and packaging industries. It is increasingly focusing on the packaging ink segment to meet demand from the end-user industry. Revenue share from the packaging segment increased susbtantiallyin CY21 from CY19, and future revenue will be driven by the packaging segment. Stronger presence in the packaging segment may also result in higher profitability. Capacity addition from CY22 will support growth in the future.

 

• Strong technological, managerial and need-based financial support from DIC Japan

DIC India receives strong support from its parent in terms of technology transfer, process improvement and understanding of the global printing inks business. Moreover, DIC Japan is actively involved in DIC India's operations and product development initiatives. Operating performance of DIC Japan showed resilience during the Covid-19 pandemic, with CY20 revenue declining only by 9% compared with CY19 and the operating margin remaining steady at 7%. Credit risk profile is comfortable, with gearing expected marginally above 1 time as on December 31, 2021, and interest coverage at 25 times in CY21. As per policy, the parent will also support the financial needs of DIC India in case of distress.

 

• Healthy financial risk profile

Gearing was 0.0 time as on June 30, 2021, on account of absence of any long-term debt and nil bank limit utilisation over the last 12 months ended August 31, 2021. The capex was funded mainly through internal cash accrual. The company is not expected to rely on external borrowing over the medium term. In February 2020, it entered into an agreement with Godrej Properties Ltd to sell its land at Chandivali in Mumbai for a consideration of Rs 153 crore; DIC India has received Rs 102 crore as of September 30, 2021, and is likely to receive Rs 17.5 crore by December 2021 while the balance amount will be settled at a later date. The company had cash surplus of Rs 65 crore and incurred capex of Rs 9 crore until June 2021.

 

Weaknesses:

• Modest operating efficiency

Profitability is susceptible to fluctuations in input price and the ability to pass on price hikes to end users, as indicated by low operating margin of 3.6% and 2.9% in CY20 and CY19, respectively, when prices of key raw materials (solvents, resins, pigments, oils) had risen over the two years through 2019. Furthermore, the end-user industries (the newspaper and packaging segments) are unable to pass on the price hike entirely on account of intense competition. However, DIC India has been increasing its presence in the flexible packaging segment over the past two years; this offers better scope for passing on the price hike. Furthermore, change in the product mix towards higher-margin value-added products has helped increase per-unit realisation, which along with regular price hikes and higher share of the packaging segment will help contain the impact of increase in raw material prices, with the operating margin estimated at 2.5-3% in CY21. The margin is expected to improve with company taking further price hikes and through cost cutting measures taken in CY20. RoCE has ranged between negative 1.7% and 9.6% in the last five years on account of fluctuations in profitability. The company’s ability to improve its operating margin (by passing on any price hike) remains a key monitorable.

 

• Susceptibility to risks inherent in the printing ink industry

The printing ink segment is inherently working capital intensive. The operating margin remains susceptible to volatility in the prices of petroleum-based raw materials and foreign exchange rates. Revenue has been range-bound on account of sluggish demand from the newsprint ink segment. Moreover, intense competition restricts pricing flexibility, resulting in modest profitability and low RoCE.

Liquidity: Strong

Liquidity remains adequate in the absence of any long-term debt. Bank limit utilisation was nil The company also has access to additional working capital limit of Rs 100 crore via common bankers of its parent, DIC Japan. Cash and equivalents stood at Rs 65 crore as on September 30, 2021.

Outlook: Stable

The credit risk profile of DIC India will remain supported by the healthy financial risk profile and parent support, while the business risk profile will remain susceptible to fluctuations in raw material prices.

Rating Sensitivity factors

Upward factors

• Substantial increase in revenue and improvement in the operating margin over 5% resulting in net cash accrual of Rs 60-80 crore
• Sustenance of a healthy financial risk profile and strong liquidity
• Improvement in the credit risk profile of the parent

 

Downward factors

• Sustained weak operating performance leading to operating margin of 1% or lower
• Any large, debt-funded acquisition or capex or sizeable stretch in the working capital requirement
• Weakening of the credit risk profile of the parent

About the Company

DIC India (formerly, Coates of India Ltd) manufactures printing ink, including newsprint ink, offset ink, liquid ink and lamination adhesives used in the newspaper, publishing and packaging industries. Facilities are in Kolkata, Ahmedabad, Noida and Bengaluru. The company has the second-largest ink manufacturing capacity in India, at 60,648 tonne per annum. Singapore-based DIC Asia Pacific Pte Ltd, a wholly owned subsidiary of DIC Japan, holds 71.75% equity stake in DIC.

 

For the six months ended June 30, 2021, the company reported revenue of Rs 338 crore (Rs 291 crore for the corresponding period of the previous fiscal), earnings before interest, taxes, depreciation and amortisation of Rs 15 crore (Rs 9 crore) and net profit of Rs 7 crore (Rs 77 crore; higher on account of profit from sale of land).

Key Financial Indicators

As on December 31st		2020	2019
		Actual	Actual
Operating income	Rs crore	611	793
Profit after tax (PAT)	Rs crore	86	18
PAT margin	%	14.0	2.3%
Adjusted debt/adjusted networth	Times	-	0.12
Adjusted interest coverage	Times	18.48	6.99

 

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs crore)	Complexity level	Rating assigned with outlook
NA	Non Convertible Debentures*	NA	NA	NA	10	NA	CRISIL A+/Stable
NA	Short Term Debt	NA	NA	7-365 days	50	Simple	CRISIL A1
NA	Cash Credit	NA	NA	NA	32	NA	CRISIL A+/Stable
NA	Letter of credit & Bank Guarantee	NA	NA	NA	14.7	NA	CRISIL A1
NA	Proposed Working Capital Facility	NA	NA	NA	12.39	NA	CRISIL A+/Stable

* Yet to be issued