Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AA-/Stable’ rating on the long-term bank facilities of EPIGRAL Limited (Epigral; formerly known as Meghmani Finchem limited). CRISIL Ratings has also reassigned its ‘CRISIL A1+’ rating to the short term bank facility.

 

The rating continues to reflect Epigral’s healthy business risk profile supported by continued diversification in revenue streams, healthy operating margin and improving demand prospects. The rating also factors in a comfortable financial risk profile. 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.

 

Revenue for the first half of fiscal 2024 witnessed 15% de-growth to Rs 933 crore from Rs 1088 crore during the corresponding period of the previous fiscal. The moderation in revenue was on account of the fall in realisations in key products owing to slow down in key end user industries and continued destocking of higher cost inventory. Revenue from chlor-alkali segment fell ~34% to Rs. 540 crores (58% of revenues) from Rs, 816 crore (~75% of total revenues) during H1FY23 owing to fall in realizations by ~40% even as volumes grew by ~6-7%. The derivative segment witnessed a growth of ~44% to ~Rs. 393 crores (42% of revenues) during H1FY24 from Rs. 272 crores (25% of revenues) in H1FY23 owing to commissioning of various chlorine downstream facilities. The share of chlor-alkali in total revenue has been steadily coming down from ~85% in fiscal 2019 to 58% during the first half of fiscal 2024 and is projected to further reduce over the medium term. Contribution from these downstream chlorine and hydrogen products along with healthy utilisation rates in existing facilities are expected to drive healthy revenue growth of 10-11% over the medium term. It might be noted that revenue for fiscal 2023 stood at Rs 2166 crore; year-on-year (y-o-y) growth of ~39% driven by a sharp increase in realisations across products, healthy utilisation levels (75-80%) and higher sales volumes.

 

Given the ongoing challenges, the company’s earnings before interest, tax, depreciation and amortisation (EBITDA) fell to Rs 203 crore during the first half of fiscal 2024 from Rs. 368 crore during the corresponding period previous fiscal. However, on a sequential basis, EBITDA has improved to Rs. 108 crore in the second quarter of this fiscal from Rs 95 crore in the first quarter because of expansion in gross margins by 100bps as larger part of high cost inventory was cleared off during Q1. The margins are expected to sustain at 23-25% over the medium term with ramp up in sales of new products like Chlorinated Polyvinyl Chloride (CPVC) and Epichlorohydrin (ECH).

 

The financial risk profile is comfortable driven by strong capital structure and healthy debt protection metrics. Networth stood at ~Rs 1105 crore with gearing at 0.86 time as on September 30, 2023. Despite ongoing capex, debt protection metrics such as interest cover was 5.2 times in the first half of fiscal 2024.  Furthermore, these metrics are expected to steadily improve over the medium term with progressive debt repayments and accruals being used to meet incremental capex and working capital requirements. Improvement in debt metrics, will nevertheless, remain sensitive to any cost overruns, which may necessitate additional debt funding.

 

Epigral has demonstrated track record in the execution of complex projects such as chloromethanes, CPVC, ECH and hydrogen peroxide over the last three fiscals. It has announced to enter into CPVC compound with a capacity of 35,000 tonne per annum (TPA). This expansion is expected to get commissioned in the fourth quarter of fiscal 2024. Epigral commissioned a 18.34 megawatt (MW) wind solar hybrid power plant in the first quarter of fiscal 2024.. Over the medium term, the company is expected to incur annual capex of Rs 300-350 crore, expected to be funded by a prudent mix of internal accrual and incremental debt.

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 135 crore as debt.

Key Rating Drivers & Detailed Description

Strengths:

Steady revenue growth, healthy operating margin 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 facilities for ECH and CPVC. The company has maintained a comfortable operating margin of over 20% (despite volatility), owing to its integrated operations and low-cost production model. 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.

 

Comfortable and improving financial risk profile: The company has healthy capital structure with networth Rs 1105 crore and debt of Rs 969 crore (including Optionally Convertible Preference Share (OCRPS)of Rs 135 crores which was earlier considered as part of networth and term term debt of Rs ~630 crores) as on September 30, 2023 translating into gearing of 0.84 times. Gearing is expected to improve over the near to the medium term with accretion to reserves and gradual reduction in debt levels. EPIGRAL continues to maintain healthy debt protection metrics with adjusted interest coverage of ~6-9 times estimates over a period of fiscals 2024-2027. Further, the capex will be funded with a prudent mix of debt and cash accruals.

 

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, Grasim Industries Ltd, and Reliance Industries Ltd (rated ‘CRISIL AAA/Stable/CRISIL A1+’). 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 58% of its revenues are derived from the chlor-alkali segment as on September 30, 2023, especially caustic soda, which is commoditized in nature, and prone to business cycles. Nevertheless, revenue from chlor alkali expected to go down further to ~40% over next 3-4 fiscals 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 realizations 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 22-40% in the past six years, reflective of the aforesaid factors.

 

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 and accruals.

Liquidity: Strong

Liquidity profile of the company is likely to remain strong with expected accruals of Rs 300-400 crores being sufficient to cover repayment obligations of Rs 200-240 crores over the near to the medium term. Further, working capital lines of Rs. 300 crores were utilized 60% on an average over the six months ended October 31, 2023, providing sufficient cushion for meeting incremental working capital requirement and exigencies. Internal accruals and undrawn sanctioned term loan limits should suffice to cover the capex requirements going forward.

Outlook: Stable

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. While debt levels are likely to peak in fiscal 2024, healthy cash accrual and progressive debt repayment, will help buttress the impact of debt addition for ongoing projects, enabling improvement in debt metrics over the medium term.

Rating Sensitivity Factors

Upward Factors:

• Improvement in operating performance driven by swift ramp up of new capacities, supporting double digit revenue growth and sustenance of healthy operating margin 
• Continued improvement in financial profile and debt metrics; for instance, debt/EBITDA remaining at 1.2-1.4 times

 

Downward Factors:

• Sizeable 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 2.5-2.7 times on a sustained basis. 

About the Company

Epigral, part of the Ahmedabad-based Meghmani group, was incorporated in September 2007 as a subsidiary of Meghmani Organics Ltd (MOL), to establish a captive source of caustic soda and chlorine derivatives. Pursuant to the National Company Law Tribunal approval for demerger, Epigral was listed on the stock exchanges with the promoters currently holding 71.38% of the equity stake with balance being held by the public.

Key Financial Indicators

Particulars*	Unit	2023	2022
Revenue	Rs.Crore	2166	1554
Profit After Tax (PAT)	Rs.Crore	353	253
PAT Margin	%	16.3	16.3
Adjusted debt/Adjusted networth	Times	0.84	1.42
Interest coverage	Times	10.6	11.60

*CRISIL Ratings adjusted numbers

Any other information: Not Applicable