| Deepak Nitrite Limited | ||||||
| Ratings reaffirmed at 'CRISIL AA / Stable / CRISIL A1+ ' | ||||||
| Rating Action | ||||||
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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 Deepak Nitrite Limited (DNL group, including its subsidiaries) at ‘CRISIL AA/Stable/CRISIL A1+’.
The ratings take into consideration healthy operating performance in the current fiscal despite challenges of raw material price inflation and logistical faced by the sector. Company is expected to witness growth of about 50% along with operating margins of 23-24% in the current year. This is expected to be driven by healthy volume growth in Phenol segment (with >120% utilization level), higher realization in Basic Chemical (BC) and Performance Products (PP) segments. The Fine and Specialty Chemical (FSC) segment witnessed moderation in margins, with earnings before interest and tax (EBIT) margin of 29.6% in first nine months of fiscal 2022, however the same is expected to normalize in coming quarters.
Overall performance is expected to remain healthy over the medium term because of capital expenditure (capex) planned. Growth would be primarily driven by addition of new capacities in BC and FSC segments; addition of downstream products in Phenol segment and entry into new chemistries, namely fluorination and photo-chlorination. DNL is expected to incur capex of Rs 600-700 crore p.a. over next 2-3 years. New products will support growth from fiscal 2023 onwards. Operating profitability is expected to range at 22-23% over the medium term, leading to continued strong cash generation. That said, annual cash accruals of Rs 850-950 crore would be sufficient to fund the capex and take care of repayment obligation and incremental working capital requirement. Company has plans to raise capital through Qualified Institutional Placement (QIP) in the coming year, however the plan is not finalized yet. It will be incurring capex through the newly formed subsidiary, Deepak Clean Tech Ltd (DCTL). CRISIL Ratings will continue to monitor developments over the QIP and investment plan of the company
With healthy cash generation in the current year, company has already reduced debt levels which remained at Rs 286 crore as on December 31, 2021 on consolidated levels. This has resulted in healthy debt metrics for the company, for instance, debt by earnings before interest, tax, depreciation and amortisation (EBITDA) to remain much below 0.5 time over the medium term. Interest coverage is estimated to be more than 20 times in fiscal 2022 from 9 times in fiscal 2020, while the ratio of total outside liabilities (TOL)/Tangible net worth (TNW) will remain below 0.5 time from 1.06 time in fiscal 2020. Any large debt-funded capex or acquisition will remain a key rating sensitivity factor.
The ratings reflect the DNL group’s healthy business profile driven by long track record and market leadership across most of its product segments, benefits expected to emanate from recent commissioning of large phenol manufacturing capacity at DPL, diversified revenue profile and improving operating efficiency. The ratings also factors in the group’s improving financial risk profile because of healthy accruals and strong debt metrics. These strengths are partially offset by moderate working capital requirement and susceptibility to volatility in spreads between the pricing of the feedstock and the finished products in DPL. |
Analytical Approach For arriving at the ratings, CRISIL Ratings has combined the business and financial risk profiles of Deepak Nitrite Limited and its subsidiaries, Deepak Phenolics Ltd ( DPL; 100% subsidiary, India), DCTL (100% subsidiary) and Deepak Nitrite Corporation Inc, (100% subsidiary, USA), and referred to as DNL group, as they have significant managerial, operational, and financial linkages.
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: Healthy business profile driven by market leadership across its most of product segments DNL group is the market leader in most of its businesses. In the FSC segment, continuous investment in research & development (R&D), and integrated operations have made DNL establishing its relationship with key customers for supplying products which find application in pharma, personal care and agro-based chemicals. In basic chemical business, the group is the largest player in India for supplying sodium nitrite/nitrate (market share of 80%), fuel additives (75%) and nitro-toluene (50%). Its market position in the PP business (market share of 75% in optical brightening agents) is supported by large capacity, integrated operations (backward integration to Diamino Stilbene Disulfonic Acid (DASDA)) and receipt of customer approvals.
The group supplies to diverse end-user industries such as polymer additives, pigments, dyes, paints, pharmaceuticals, agrochemicals, refineries, ply, laminate and fast-moving consumer goods, and is insulated from downturn in any particular industry. Also, one fourth of its net revenue is from exports, providing geographical diversity. The group maintained a strong revenue growth rate (CAGR of 26% in the past five fiscals). DNL group will sustain its healthy market share, given its leadership position, established track record, and large R&D capability leading to technical expertise.
Diversified revenue profile and improving operating efficiency DNL group has a diversified revenue profile, with presence in the BC business (contributing 17% to overall revenue in first nine months of fiscal 2022), FSC business (12%), PP business (7%) and phenol & acetone business (64%). Furthermore, no customer contributes more than 7% to total revenues indicating diversified customer profile. Entry in phenol segment in fiscal 2019 has driven improvement in scale of operations and diversity profile of the group. With full ramp up of phenol/acetone capacity in the first year of operation, phenol segment (revenue at about Rs 2010 crore in fiscal 2020) contributed about 50% of the group’s revenue in fiscal 2020 itself. With addition of value added product, Isopropyl Alcohol (IPA), the contribution has further increased.
The management has successfully diversified geographical presence through investments in the FSC business. The diversified revenue stream protects against downswing in any one business, and keeps operating margin steady. Furthermore, cost efficiency measures in the FSC and PP businesses, strong R&D capability, and market leadership in across its product segments has kept operating profitability healthy. Benefits of operating leverage, recovery in margin for PP segment will lead to healthy operating profitability as well as return on capital employed (RoCE) over the medium term.
Improving financial profile with reduction in overall debt level Financial risk profile of the group improved substantially in fiscal 2021, with cash accrual of over Rs 928 crore and reduction in overall debt levels. With strong cash generation in the current year, company has further reduced debt levels. As a result, debt protection metrics are estimated to remain healthy in fiscal 2022 with interest cover improving to about 30 times and net cash accruals to total debt at over 300%.
The group has incurred capital spend of Rs.1300 crores over the past 3 fiscals in setting up the Phenol plant and brownfield expansion under BC and FSC. Going forward, capital spend is expected to range between Rs.600-700 crores annually, which can be met from internal accruals, obviating need for material debt addition, and therefore continued strong debt metrics.
Weakness: Moderate working capital requirement DNL group has moderate working capital requirement owing to debtor days of 70-90 days and gross current assets (GCA; net of cash) of 130-160 days in the past 3-4 years. With increasing contribution of phenol to total revenues and its better working capital cycle, GCA days of the group to remain at 100-120 days over the medium term. Any increase in debtor days on sustained basis and working capital requirement with increasing scale will be key monitorable.
Volatility of raw material prices and competition from imports: The raw material prices are linked to movement in crude oil prices for some of the major products. Though with diversification into other segments where formula-based pricing is used, the group has reduced exposure to such volatility. Increased contribution to phenol segment, wherein DNL group’s profitability will remain vulnerable to volatility in spreads between the pricing of feedstock (benzene and propylene) and finished products.
The domestic phenol sector faces competition from imports contributing 40% of domestic demand. Any changes in anti-dumping duty impacting demand-supply situation of some of its products may remain key monitoring factor. During fiscal 2021, DNL is estimated to increase supply by 10% in phenol sales, despite competition from imports, sustenance of similar resilience will remain key monitorable. |
Liquidity: Strong The group is expected to have healthy liquidity with annual cash accruals of over Rs. 850 crore over the medium term as against debt repayments of Rs 70-80 crore per annum. The fund based bank limit of Rs 500 crore remain unutilized over the past 9 months ended December 31, 2021. Further, the company also had cash and equivalent of over Rs 200 crore as on Feb 28, 2022. Working capital requirements, capex plans, debt obligations are expected to be met through internal accruals, leading to limited dependence on external debt over medium term. |
Outlook Stable CRISIL Ratings believes the DNL’s business risk profile will benefit from increasing contribution of phenol segment and improving performance and market leadership across other product segments over the medium term. Moderation in capital spend and healthy cash generating ability will ensure sustained strong debt metrics |
Rating Sensitivity factors Upward factors:
Downward factors:
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About the Company DNL was established in 1970s by Mr. Chimanlal K. Mehta (Founder & Promoter). It is well diversified with presence across three segments viz. Basic Chemicals (BC), Fine and Specialty Chemicals (FSC) and Performance Products (PP). The group has ventured into Phenol-Acetone segment through its 100% subsidiary Deepak Phenolics Limited in 2018. The group enjoys strong competitive positioning in most of the product categories and has a strong client base and caters to over 900+ clients in over 40+ countries. The group has manufacturing facilities located at Nandesari, Dahej (Gujarat), Roha, Taloja (Maharashtra) & Hyderabad (Telangana) & R & D facility at Nandesari, Vadodara.
The group reported consolidated profit after tax (PAT) of Rs.799 crore on net revenues of Rs.4930 crores in the first nine months of fiscal 2021, compared with revenues of Rs. 2897 crores and PAT of Rs.486 crore in the corresponding months of fiscal 2021 |
Key Financial Indicators (Consolidated)
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Any other information: Not applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
*Fund Based Limits and Non Fund Based Limits are interchangeable. **Fund Based Limits are interchangeable with Non Fund Based Limits |
Annexure – List of entities consolidated
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| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||
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| All amounts are in Rs.Cr. | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annexure - Details of Bank Lenders & Facilities | |||
| Facility | Amount (Rs.Crore) | Name of Lender | Rating |
| Fund-Based Facilities | 15 | Axis Bank Limited | CRISIL AA/Stable |
| Fund-Based Facilities | 63 | Bank of Baroda | CRISIL AA/Stable |
| Fund-Based Facilities | 20 | DBS Bank Limited | CRISIL AA/Stable |
| Fund-Based Facilities^ | 10 | HDFC Bank Limited | CRISIL AA/Stable |
| Fund-Based Facilities& | 17 | ICICI Bank Limited | CRISIL AA/Stable |
| Fund-Based Facilities^ | 50 | Kotak Mahindra Bank Limited | CRISIL AA/Stable |
| Fund-Based Facilities | 65 | Standard Chartered Bank Limited | CRISIL AA/Stable |
| Fund-Based Facilities | 100 | State Bank of India | CRISIL AA/Stable |
| Fund-Based Facilities | 20 | The Hongkong and Shanghai Banking Corporation Limited | CRISIL AA/Stable |
| Fund-Based Facilities^ | 10 | YES Bank Limited | CRISIL AA/Stable |
| Non-Fund Based Limit | 75 | Axis Bank Limited | CRISIL A1+ |
| Non-Fund Based Limit | 17 | Bank of Baroda | CRISIL A1+ |
| Non-Fund Based Limit& | 33 | ICICI Bank Limited | CRISIL A1+ |
| Non-Fund Based Limit | 45 | State Bank of India | CRISIL A1+ |
| Proposed Fund-Based Bank Limits | 210 | Not Applicable | CRISIL AA/Stable |
Criteria Details
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