Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL A/Stable/CRISIL A1’ ratings on the bank facilities and short-term debt of DIC India Ltd (DIC India).

 

The rating reaffirmation reflects the improvement in the operational performance of the company over the first six months of 2024, with revenue growing 9% to Rs 441 crore (Rs 407 crore in the first half of 2023), driven by improvement in demand from the packaging segment, export revival and increased contribution from the toluene-free ink segment, which started operations in 2023. Operating margin improved to 4.5% in the first half of 2024 from 1.2% in the corresponding period of 2023 owing to increased contribution from toluene-free ink, a higher margin product, and improvement in other expenses post closure of the loss-making Kolkata plant. This, along with the company’s cost cutting measures, such as undertaking Kaizen mechanism for  improved operating efficiency and controlling fixed cost. The operating margin is expected at 4-5% over the medium term owing to improving operating leverage. In 2023, revenue declined by 5% on-year to Rs 828 crore (Rs 872 crore in 2022) due to fall in realisation of ~7% and volume growth of ~2%. The operating profitability moderated to 1.7% in 2023 from 2.4% in 2022 owing to one-time expenses related to shutting down of the Kolkata plant. Also, the plant of flexi-packaging ink (toluene-free ink) was under trial between January 2023 and March 2023 resulting in higher fixed cost.

 

The financial risk profile was healthy with adequate networth of Rs 406 crore as on June 30, 2024, and negligible debt on the books. Debt protection metrics will likely remain strong with the company not expected to tie up additional debt. Liquidity was strong with cash surplus of Rs 27 crore as on June 30, 2024. Also, bank lines of Rs 132 crore remain fully unutilised. Expected annual cash accrual of Rs 30-35 crore will sufficiently cover capital expenditure (capex) and working capital requirement.

 

The ratings also factor in the improvement in the operational performance of the parent, DIC Corporation, Japan, over the six months through 2024, with revenue improving by 5% to 538.8 billion yen from 515.3 billion yen and operating margin improving to 9%, from 7% over the six months through 2024. With no new debt and improvement in profitability, the parent’s interest coverage ratio has improved to ~9.8 times in the first half of 2024 from ~6.3 times in 2023. Gearing remained at 1.46 times as on June 30, 2024, in line with December 31, 2023. These ratios are expected to improve further on account of improving revenue and profitability. The operating performance of DIC India will remain monitorable.

 

The ratings continue to reflect the strong position of DIC India in the domestic printing inks market, its healthy financial risk profile and the strong technological and managerial support received from the 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 available to DIC India from DIC Japan.

Key Rating Drivers & Detailed Description

Strengths:

• Established position in the printing inks industry: DIC India is the second-largest player in the domestic printing inks industry with presence in newsprint, publication and packaging industries. The company introduced flexi-packaging toluene-free ink in 2023. It is increasingly focusing on the packaging ink segment to meet demand from end-user industries. Revenue share from the packaging segment has been picking up over the past 4-5 years and is expected to go up further. Strong presence in the packaging segment may also result in higher profitability.

 

• 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. As per policy, the parent will also meet the financial needs of DIC India in case of distress.

 

For DIC Japan, gearing and interest coverage ratio improved to 1.46 times and 9.77 times, respectively, in the first half of 2024 from 1.47 times and 6.30 times, respectively, in 2023. In 2023, DIC Japan achieved revenue of JPY 1,038 billion (JPY 1,054 billion in 2022) with operating margin of 6.8%.

 

• Healthy financial risk profile: At standalone level, gearing was nil as on June 30, 2024, on account of absence of term debt and minimal bank limit utilisation over the 12 months through July 2024. Debt protection metrics of DIC India were healthy, as reflected in interest coverage ratio of over 30 times in the first six months of 2024. Capex is expected at Rs 10-15 crore, mainly for maintenance purposes, and will likely be funded entirely through internal accrual and cash surplus (Rs 27 crore as on June 30, 2024).

 

Weaknesses:

• Modest operating efficiency: For the first half of 2024, the company reported operating margin of ~4.5% (1.2% in the first half of 2023 and 1.7% in 2023). The operating margin has improved significantly on account of stabilisation and increasing utilisation of the new facility of toluene-free ink, leading to improvement in the product mix and decline in other expenses and employee costs because of the Kolkata plant closure, and improving efficiency measures, such as undertaking the Kaizen mechanism. Operating margin moderated to 1.7% in 2023 from 2.4% in 2022. Despite improvement in gross margin by 210 basis points (bps) owing to improving product mix and declining cost of raw material, the operating margin moderated by around 70 bps because of increasing cost of other expenses related to the shutting down of the Kolkata plant. Also, the flexi-packaging ink plant (toluene-free ink) was under trial between January and March 2023, resulting in higher fixed cost. Over the medium term, the operating margin will likely improve with increasing share of revenue from the toluene-free ink segment and closure of the loss-making Kolkata unit.

 

• Susceptibility to risks inherent in the printing ink industry: The printing ink business is inherently working capital-intensive. Substantial decline in newspaper ink demand (from 33% in 2017 to 23% in 2024) was mainly owing to migration of users to online news, which got a boost during the Covid-19 pandemic. Revenue remained range-bound on account of sluggish demand from the newsprint ink segment. The operating margin remains susceptible to volatility in prices of petroleum-based raw materials and foreign exchange rates. Moreover, intense competition restricts pricing flexibility, resulting in modest profitability and low return on capital employed.

Liquidity: Strong

Liquidity will remain healthy, with cash accrual expected to be Rs 30-35 crore per annum against nil debt obligation and yearly capex of Rs 10-15 crore over the medium term. Liquidity is supported by cash surplus of Rs 27 crore as on June 30, 2024, and minimally utilised fund-based bank limit of Rs 132 crore as on July 31, 2024.

Outlook: Stable

DIC India will continue to benefit from its healthy financial risk profile and support from the parent. However, the business risk profile will remain susceptible to fluctuations in raw material prices.

Rating sensitivity factors

Upward factors:

• Increase in revenue driven by higher market share in the domestic ink segment through better product mix and segment diversity
• Sustained improvement in operating margin to over 5% 
• Improvement in the credit risk profile of the parent or enhanced support from the parent

 

Downward factors:

• Sustained weak operating performance with operating margin below 2% leading to lower cash accrual
• Large, debt-funded acquisition or capex or stretched working capital cycle weakening the capital structure or debt protection metrics
• Reduced support from the parent or weakening in the credit risk profile of the parent

About the Company

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

 

As on June 30, 2024, the company reported revenue of Rs 441 crore (Rs 407 crore a year earlier), and earnings before interest, tax, depreciation and amortisation of Rs 20 crore (Rs 5 crore a year earlier).

Any other information: Not Applicable