Detailed Rationale

CRISIL Ratings has revised its outlook on the long-term bank facilities of Epigral Ltd (Epigral) to ‘Positive’ from ‘Stable’ while reaffirming the rating at ‘CRISIL AA-’. The rating on the short-term bank facilities has been reaffirmed at ‘CRISIL A1+’.

 

The revision in outlook factors in the stronger-than-expected business performance by Epigral driven by increased focus on specialty and derivative products (45% of share in revenue in fiscal 2024 compared to 26% in fiscal 2022), share of which has been rising compared to commodity products (chlor alkali), also ensuring stable and healthy profitability. The rating action also factors in better-than-expected financial risk profile, which is likely to sustain despite large ongoing capex, due to prudent funding from proceeds of the recently concluded equity raise for Rs.333 crore via qualified institutional placement (QIP).

 

Revenue for the first half of fiscal 2025 witnessed robust year-on-year (y-o-y) growth of 37% to Rs 1277 crore driven by overall volume growth of 17%, majorly coming from the derivatives and specialty business. Revenue contribution from this segment increased to 56% during the same period in comparison to 42% in the corresponding period of the previous fiscal. Blended realisation also benefited from the change in product mix. Revenue for fiscal 2025 is expected to grow at a similar rate backed with the expectation of the second half remaining stronger in comparison to the first half on account of seasonal demand for the key products namely, chlorinated polyvinyl chloride (CPVC) and epichlorohydrin (ECH). Further, the company is also in the process to double its CPVC resin and ECH capacities entailing a capital investment of ~Rs. 780 crore, which is expected to be commissioned by the first half of fiscal 2027. Epigral has demonstrated track record in the execution of complex projects such as Chloromethanes, CPVC, ECH and hydrogen peroxide in the past. Hence, on the back of contribution from the downstream chlorine and hydrogen products along with healthy utilisation rates in existing capacities, revenue is expected to witness steady growth of 12-15% in fiscals 2026 and 2027 and thereby grow around 18-20% in fiscal 2028 with the ramp up in the additional capacities for CPVC and ECH.

 

Epigral’s earnings before interest, tax, depreciation and amortisation (EBITDA) margin improved to 27.8% during the first half of fiscal 2025 in comparison to 21.8% in the first half of fiscal 2024 (224.9% in fiscal 2024) on account of increase in utilisation and volume contribution from commissioning of new projects. The improvement in the EBITDA margin is driven by the benefits of operating leverage and shift in favour of better realising products, and not withstanding pressure on realisations across the chemical value chain. With continuing improvement in the share of derivative and specialty products, EBITDA margin for fiscal 2025 are expected to remain at 27-27.5% and thereafter stabilise above 25% over the medium term.

 

Overall debt as on September 30, 2024, stood at Rs 895 crore resulting in adjusted gearing of 0.64 time. However, the inflow of proceeds from QIP in October 2024 have been deployed to repay the outstanding debt to the tune of Rs. ~250 crore that will help gearing improve below 0.4 time as on March 31, 2025. Further, networth is also expected to improve to over Rs ~1800 crores as on March 31, 2025. The ratio of debt/EBITDA, which was at 1.99 times on March 31, 2024, and has declined to 1.4 times in the first half of fiscal 2025, is not expected to peak above 1.5 times as per discussion with the management, with project related debt expected to be raised mainly in fiscals 2026 and 2027.

These strengths are partially offset by the company’s high albeit reducing dependence on the intensely competitive chlor alkali industry, exposure to regulatory risks, vulnerability of operating margin to fluctuations in caustic soda prices and exposure to project implementation risks.

Analytical Approach

CRISIL Ratings has considered the standalone business and financial risk profiles of Epigral. CRISIL Ratings has also treated the optionally convertible redeemable preference shares (OCRPS) of Rs 41 crore outstanding as on September 30, 2024, as debt.  The OCRPS were issued to group company, Meghmani Organics Ltd (rated 'CRISIL A+/Negative/CRISIL A1') in fiscal 2019.

Key Rating Drivers & Detailed Description

Strengths:

• Steady revenue growth and good demand prospects: Revenue visibility over the medium term will be driven by steady demand for caustic soda, hydrogen peroxide and chloromethanes and quick ramp up of upcoming additional facilities for ECH and CPVC. Most of Epigral’s chlorine and hydrogen derivative products such as CMS, ECH and CPVC are aimed at import substitution as domestic capacities are low and there is a demand-supply mismatch in these products. This is expected to continue over the medium term as well aiding Epigral’s revenue growth and diversification from downstream products, which are the derivatives.

 

Epigral is further strengthening its position in the specialty chemical segment by doubling the existing capacities of CPVC to 1,50,000 tonne per annum (TPA; from existing 75,000 TPA) and ECH to 1,00,000 TPA (from existing 50.000 TPA) and also through the setting up of chlorotoluene value chain. 

 

The company has been continually focusing on diversifying its revenue stream by adding capacities in downstream chlorine products thereby reducing dependance on the highly competitive caustic soda market. Hence, over time, the share of specialty and derivative products vis-à-vis commodity products such as caustic soda is expected to improve to 70:30 over the medium term from 56:44 during the first half of fiscal 2025.

 

• Healthy operating margin: The company has maintained a comfortable operating margin of over 25%, despite volatility, owing to its integrated operations and low-cost production model. The operating profitability improved to 27.8% during the first half of fiscal 2025 in comparison to 21.7% in the first half of fiscal 2024 (24.9% in fiscal 2024) on account of increase in utilisation and volume contribution from commissioning of new projects. The improvement in the operating margin is driven by the benefits of operating leverage and shift in favour of products with better realisation, and not withstanding pressure on realisations across the chemical value chain.

 

With Epigral diversifying into downstream chlorine derivative products such as CMS, ECH and CPVC, contribution from caustic soda is expected to reduce in future, which will help in stabilising operating profitability.

 

• Comfortable and improving financial risk profile: The company has healthy capital structure with adjusted networth of Rs 1,380 crore and debt of Rs 895 crore (including OCRPS of Rs 41 crore and term debt of Rs ~667 crore) as on September 30, 2024, translating into gearing of 0.64 time. Gearing is expected to improve over the near-to-medium term with accretion to reserve and inflow of QIP proceeds that have been deployed for debt reduction. Epigral continues to maintain healthy debt protection metrics with adjusted interest coverage of ~13 times estimated over fiscals 2025-2028. Further, the capex will be funded with a prudent mix of debt and cash accrual. Debt/EBITDA ratio which is expected at ~1 time in fiscal 2025, is unlikely to moderate beyond 1.5 times over the medium term, despite project related debt being availed.

 

Weaknesses:

• High though moderating dependence on the intensely competitive chlor alkali industry: The chlor alkali industry is intensely competitive and dominated by large players such as Gujarat Alkalis and Chemicals Ltd, DCM Shriram Ltd and Grasim Industries Ltd. The top seven players together hold 40-50% of the market share. While Epigral has been growing at a healthy pace and new products will add to revenue visibility further, scale of operations remains moderate compared to peers. Besides, currently around 44% of its revenue is derived from the chlor-alkali segment as on September 30, 2024, especially caustic soda, which is commoditised in nature, and prone to business cycles. Nevertheless, revenue from chlor-alkali is expected to go down further to 30-35% by fiscal 2028 with ramp up of downstream facilities.

 

• Vulnerability to fluctuations in caustic soda prices and regulatory risk: Profitability of caustic manufacturing companies depends on the prevailing ECU prices. Cyclical downturns or adverse variability in demand-supply balance may drag down realisations for caustic soda players. The government of India imposed an anti-dumping duty on caustic soda imports from South Korea and China. Hence, prices could come under pressure in the event of increased imports from China, and removal of anti-dumping duty, thus impacting profitability of domestic players including Epigral. The company’s operating margin has been at 30-35% in the past three years, reflective of the aforesaid factors.

Liquidity: Strong

Liquidity profile of the company is likely to remain strong with expected cash accrual of Rs 450-700 crore being sufficient to cover repayment obligations of Rs 150-250 crore over the near-to-medium term. Further, working capital lines of Rs 400 crore were utilised ~45% on average over the six months ended September 30, 2024 that has witnessed further reduction post the inflow of proceeds from QIP, providing sufficient cushion for meeting incremental working capital requirement and exigencies. Internal accruals and undrawn sanctioned term loan limits should suffice to cover the expansion capex requirements going forward.

Outlook: Positive

CRISIL Ratings believes Epigral’s business risk profile will continue to benefit from the diversity in revenue from downstream derivative products and healthy operating efficiency. Healthy cash accrual and progressive debt repayment, will help buttress the impact of project related debt, enabling sustenance of strong debt metrics over the medium term.

Rating sensitivity factors

Upward factors:

• Improvement in operating performance driven by ramp up of new capacities, supporting double digit revenue growth and sustenance of healthy operating margin.
• Sustenance of healthy financial profile and debt metrics; for instance, debt/EBITDA remaining below 1.3-1.5 times

 

Downward factors:

• Significant moderation in operating performance with sustained deterioration in operating margin, impacting cash generation.
• Significant delay in commissioning of new capacities or higher-than-expected debt availed for funding the capex leading to deterioration in credit metrics - debt/EBITDA of over 2.25 times on a sustained basis

About the Company

Epigral, formerly known as Meghmani Finechem Ltd, incorporated in 2007, is a leading integrated manufacturer of chemicals in India. Epigral is the first to set up an Epichlorohydrin plant and largest capacity plant of CPVC, in India. Along with ECH & CPVC, Epigral is a leading manufacturer of caustic soda, caustic potash, chloromethanes, hydrogen peroxide, chlorine and hydrogen.

About the Group

The Meghmani group is a diversified business conglomerate with interests in agrochemicals, base chemicals, dyes & optical brightening agent (OBA), pigments, paracetamol and PVC flex boards and banners. The group companies are managed by the Patel and Soparkar families as elaborated. The group commenced operations in 1977 with a partnership firm, Ashish Chemicals, to manufacture pigments; currently, the group has more than 15 manufacturing facilities at different locations in Gujarat.

Key Financial Indicators

Particulars*	Unit	2024	2023
Revenue	Rs crore	1929	2188
Profit after tax (PAT)	Rs crore	196	353
PAT margin	%	10.1	16.1
Adjusted debt/Adjusted networth	Times	0.78	0.84
Interest coverage	Times	6.6	10.6

*CRISIL adjusted numbers

Any other information: Not Applicable