Rating Rationale
August 27, 2020 | Mumbai
Deepak Nitrite Limited
Rating outlook revised to 'Positive'; ratings reaffirmed
 
Rating Action
Total Bank Loan Facilities Rated Rs.750 Crore
Long Term Rating CRISIL AA-/Positive (Outlook revised from 'Stable' and rating reaffirmed)
Short Term Rating CRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has revised its outlook on the bank facilities of Deepak Nitrite Limited (DNL group, including its subsidiaries) to 'Positive' from 'Stable' while reaffirming the rating at 'CRISIL AA-'. The short term rating has been reaffirmed at 'CRISIL A1+'.
 
The rating revision follows the DNL group's improved business profile, supported by better product diversity through ramp up of its phenol and isopropyl alcohol (IPA) business, as well as sustained growth in performance of its key business segments- Basic Chemical (BC) and Fine and Specialty Chemical (FSC). Further, its operating profitability has also registered healthy improvement to ~25% in fiscal 2020, and is expected to sustain at over 20% over the medium term.
 
In fiscal 2020, the group posted revenue of Rs 4258 crore, an increase of 57% y-o-y supported by full year contribution from the Phenol facility which was commissioned in November 2018 apart from healthy revenue growth from performance products (PP) segment. Market leadership in various products across segments and diversity in terms of end-user industries, geography and customer, will continue to provide stability to its operations. Expected addition of downstream products in Phenol and new product addition in FSC is likely to benefit its market position in near term. Strong R&D capabilities have led entry of the group into majorly import driven product categories wherein it has achieved market leadership, scale and cost leadership as compared to its peers.
 
The group's operating profitability improved to 25.1% in fiscal 2020 from 16.1% in fiscal 2019 supported by extraordinary performance of PP segment as well as increase in the margins for the BC segment owing to cost efficiency measures, change in product mix and favourable industry conditions.
 
The company's revenues were impacted by COVID related issues in the first quarter of fiscal 2021, resulting in revenues declining by 35%; albeit operating profitability improved further to 26.9%. The company commissioned its IPA plant in Deepak Phenolics Limited (DPL) which supported performance achieving 110% capacity utilization within first quarter. Operations amidst Covid 19 situation have normalised recently, and no significant degrowth in revenues is likely in the remainder of fiscal 2021. Operating profitability is also expected to sustain over 20% in the medium term, driven by synergies in the operations by backward and forward integration in multiple segments and measures with respect to cost efficiencies and changes in product mix. RoCE too is estimated to remain above 25% over the medium term.
 
The rating continues to be supported by the group's healthy and improving financial risk profile with consolidated gearing and debt to EBIDTA improving to 0.71  times and 1 time in fiscal 2020 from 1.1 times and 2.7 times respectively in fiscal 2019. Debt protection metrics also remains robust with interest cover of 9 times and net cash accruals to total debt at over 60%. Group also pre-paid a part of debt in first quarter of fiscal 2021.
 
Going forward, cash accruals are expected to remain over Rs 500 crore per annum as against debt repayments of Rs 50-70 crore and capital expenditure (capex) of Rs 250-350 crore. With moderate capex intensity and only gradual rise in working capital requirements, gearing is expected to remain below 0.5 time over the medium term, while the debt to EBITDA ratio too is expected to remain at 0.8- 1 time. 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 in its subsidiary ' 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 as reflected in healthy debt protection 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 has combined the business and financial risk profiles of Deepak Nitrite Limited and its subsidiaries, DPL (100% subsidiary, India) 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 - Details of Consolidation, 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 Xylidines, Oximes, Cumidines, Nitro Oxylene, 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, fertilisers, and fast-moving consumer goods, and is insulated from downturn in any particular industry. Also, one third of its net revenue is from exports, providing geographical diversity. The group maintained a strong revenue growth rate (CAGR of 19% 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, FSC business, PP business and phenol & acetone business. 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.
 
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 RoCE over the medium term.  
 
* Improving financial profile with reduction in overall debt level
Financial risk profile of the group improved in fiscal 2020, with cash accrual of over Rs 600 crore, a sharp increase from Rs 250 crore in fiscal 2019. Debt protection metrics also remained healthy with interest cover of 9 times and net cash accruals to total debt at over 60%. Going forward, cash accruals are expected to remain over Rs 500 crore per annum as against debt repayments of Rs 50-70 crore and annual capex of Rs 250-350 crore, leading to continued improvement in debt metrics.
 
During fiscals 2017-2019, the group incurred its largest capex through DPL, with 60% debt funding which led to moderation in the financial risk profile. This capex was primarily towards setting up capacities for phenol and acetone. Thus, debt to EBITDA ratio increased to 4.8 times as on March 31, 2018. However, the same has come down significantly, around 1 time in fiscal 2020 and is expected to remain below 1 time over medium term.
 
CRISIL believes group's financial risk profile will improve further over the medium term, driven by continued healthy operating performance, and prudent capital spending. Nevertheless, any large debt-funded capex or acquisitions will remain a key rating sensitivity factor.
 
Weaknesses:
* 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 130-160days 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 120-130 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 steep competition from imports primarily from Taiwan, South Africa and USA. These players have an advantage of large capacities (in excess of their demand) and government support. In view of significant injury to the domestic industry as a result of dumping by these countries, the Government of India has levied an anti-dumping duty on import of such products. Any changes in the government stance can have an impact on the operating profitability of DNL and will be a key monitorable.
Liquidity Strong

The group is expected to have healthy liquidity with annual cash accruals of over Rs. 500 crore over the medium term as against debt repayments of Rs 50-70 crore per annum. The fund based bank limit of Rs 500 crore was utilized at an average of 44% over the past 12 months ended June 30, 2020. Further, the company also had cash and equivalent of Rs 150 crore as on June 30, 2020. 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: Positive

CRISIL believes the DNL's business risk profile will continue to benefit from market leadership across product segments and healthy operating efficiency over the medium term. Healthy cash accruals, moderate capex intensity and progressive debt repayment will continue to drive improvement in financial risk profile.
 
Rating Sensitivity Factors
Upward factors:
* Significant and sustained improvement in scale of operations and sustenance of profitability resulting in net cash accruals over Rs 500 crore on sustained basis
* Sustenance of improved debt metrics backed by healthy cash accruals and moderate capex i.e. debt/EBITDA  and gearing remaining at 0.8-1 time and ~0.5-0.6 times respectively
 
Downward factors:
* Sharp deterioration in operating performance leading to accruals of lower than Rs.300 crores
* Higher than expected debt funded capex or elongated working capital cycle, leading to weakening of debt metrics; for instance, gearing over 1-1.2 times and Debt/EBITDA of 1.5-1.75 times on sustained basis.

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 recently ventured into Phenol-Acetone segment through its 100% subsidiary Deepak Phenolics Limited.  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.99 crore on net revenues of Rs.674 crores in the first quarter of fiscal 2021, compared with revenues of Rs. 1050 crores and PAT of Rs.132 crore in the corresponding quarter of fiscal 2020.

Key Financial Indicators
Particulars Unit 2020 2019
Revenue Rs. Cr. 4258 2713
Profit After Tax Rs. Cr. 611 174
PAT Margin % 14.4 6.4
Adjusted Debt/Adjusted Net worth Times 0.7 1.1
Interest coverage Times 9.0 5.0

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments and are included (where applicable) in the Annexure -- Details of Instrument in this Rating Rationale. For more details on the CRISIL complexity levels, please visit www.crisil.com/complexity-levels.
Annexure - Details of Instrument(s)
ISIN Name of Instrument Date of Allotment Coupon Rate (%) Maturity Date Issue Size (Rs Cr) Complexity
Levels		 Rating Assigned with Outlook
NA Term Loan NA NA Mar-26 157.5 NA CRISIL AA-/Positive
NA Fund Based Facilities NA NA NA 300 NA CRISIL AA-/Positive
NA Non Fund Based Limit NA NA NA 137 NA CRISIL A1+
NA Non Fund Based Limit* NA NA NA 33 NA CRISIL A1+
NA Proposed Fund Based Bank Limits NA NA NA 122.5 NA CRISIL AA-/Positive
*interchangeable with fund based limits
 
Annexure - List of entities consolidated
Names of Entities Consolidated Extent of Consolidation Rationale for consolidation
Deepak Phenolics Limited Full consolidation Subsidiary
Deepak Nitrite Corporation Inc Full Consolidation Subsidiary
Annexure - Rating History for last 3 Years
  Current 2020 (History) 2019  2018  2017  Start of 2017
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund-based Bank Facilities  LT/ST  580.00  CRISIL AA-/Positive      03-05-19  CRISIL AA-/Stable    --    --  -- 
Non Fund-based Bank Facilities  LT/ST  170.00  CRISIL A1+      03-05-19  CRISIL A1+    --    --  -- 
All amounts are in Rs.Cr.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Fund-Based Facilities 300 CRISIL AA-/Positive Fund-Based Facilities 300 CRISIL AA-/Stable
Non-Fund Based Limit 137 CRISIL A1+ Non-Fund Based Limit 170 CRISIL A1+
Non-Fund Based Limit* 33 CRISIL A1+ Term Loan 273.5 CRISIL AA-/Stable
Proposed Fund-Based Bank Limits 122.5 CRISIL AA-/Positive Proposed Fund-Based Bank Limits 6.5 CRISIL AA-/Stable
Term Loan 157.5 CRISIL AA-/Positive -- 0 --
Total 750 -- Total 750 --
*interchangeable with fund based limits
Links to related criteria
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating criteria for manufaturing and service sector companies
Rating Criteria for Chemical Industry
CRISILs Criteria for Consolidation

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