Detailed Rationale

Crisil Ratings has upgraded its rating on the long term bank facilities of Epigral Ltd (Epigral) to ‘Crisil AA/Stable’ from ‘Crisil AA-/Positive’ and has reaffirmed its ‘Crisil A1+’ rating on the short term bank facilities.

 

The rating action reflects sustenance of the strong business risk profile of Epigral, supported by its continued focus on speciality and derivative business (54% share in revenue in the first nine months of fiscal 2025, compared with 42% in the corresponding period of previous fiscal and 30% in fiscal 2023), that is expected to improve further and contribute to around two-third of the revenue over the next two to three fiscals.

 

The revenue grew 37% on-year to Rs 1,923 crore in the first nine months of fiscal 2025, driven by volume growth of 15%, majorly from the derivatives and speciality business. Revenue contribution from this business increased to 54% during the same period as compared with 42% in the corresponding period of the previous fiscal. Blended realisation also benefited from the change in the product mix. The revenue is expected to grow at a similar rate in fiscal 2025, with the expectation of the second half remaining stronger compared with the first half on account of seasonal demand for the key products namely, chlorinated polyvinyl chloride (CPVC) and epichlorohydrin (ECH). The company is in the process of doubling 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, with healthy utilisation rates in existing capacities, the revenue is expected to witness over 30% growth in fiscal 2025, and stabilise at 12-15% in fiscals 2026 and 2027. With additional capacities of CPVC and ECH available for the entire fiscal, the revenue growth is expected to strengthen once again in fiscal 2028.

 

Epigral’s Ebitda (earnings before interest, taxes, depreciation and amortisation) margin increased to 28% in the first nine months of fiscal 2025 from 23.5% in the first nine months of fiscal 2024 (24.9% in fiscal 2024), due to continued focus on value-added offerings, and is expected at 27-28% in fiscal 2025. Crisil Ratings expects the company’s Ebitda margin to stabilise at ~25% thereafter, aided by the strong volume growth from existing products and ramping up of new products.

 

Furthermore, the rating action also factors in sustenance of the strong financial risk profile. Epigral has strengthened its balance sheet by the recent equity raise of Rs 333 crore via qualified institutional placement (QIP) and majorly utilised the proceeds towards the retirement of debt, leading to overall debt declining to Rs 570 crore as on December 31, 2024 from Rs 895 crore as on September 30, 2024. Furthermore, the networth is also expected to increase to over Rs 1,800 crore and with limited capital expenditure (capex)-related debt, the gearing will remain comfortable at under 0.4 time as on March 31, 2025. The ratio of debt to Ebitda, which was 1.4 times in the first half of fiscal 2025 further improved to 0.79 time in the first nine months of fiscal 2025 post the retirement of debt from the QIP proceeds, and 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. The return on capital employed (RoCE) stood at 16.2% in fiscal 2024 and is expected to be ~22% in fiscal 2025. The RoCE is expected to remain healthy albeit moderate to 20-21% by fiscal 2027, as the sizeable capex is completed.
 

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 the 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 the 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, chloromethanes, ECH and CPVC, that will be further strengthened with ramp-up of upcoming additional facilities for ECH and CPVC. Most of Epigral’s chlorine and hydrogen derivative products such as Chloromethanes (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 speciality chemical business 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 speciality and derivative products vis-à-vis commodity products such as caustic soda is expected to improve to 70:30 over the medium term from 56:6 during the first nine months of fiscal 2025.
 

• Healthy operating margin: The company has maintained a comfortable operating margin of over 25% since fiscal 2019, despite volatility, owing to its integrated operations and low-cost production model. The operating profitability increased to 28% in the first nine months of fiscal 2025 from 23.5% in the first nine months of fiscal 2024 (24.9% in fiscal 2024) on account of sustained increase in utilisation and volume contribution from commissioning of new projects. The increase 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 realisation 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 over the medium term, which will help in stabilising operating profitability at ~25%.

 

• Comfortable and improving financial risk profile: Strong annual cash generation has enabled the company to strengthen its balance sheet over time. Furthermore, QIP proceeds of Rs 333 crore, bolstered balance sheet strength, with proceeds being used to pare debt; ergo the debt was comfortable at Rs 583 crore as on December 31, 2024 (Rs 895 crore including OCRPS of Rs 41 crore and term debt of ~Rs 667 crore as on September 30, 2024), resulting in comfortable capital structure and debt protection metrics. The gearing is expected to remain below 0.4 time as on March 31, 2025, while the debt protection metrics such as adjusted interest coverage ratio is projected at ~13 times over fiscals 2025-2028. Furthermore, the ongoing capex of Rs 780 crore will be funded with a prudent mix of debt and cash accrual. Hence, the debt to Ebitda ratio, which is expected at ~1 time in fiscal 2025, is unlikely to moderate beyond 1.5 times over the medium term, despite the project-related debt.

 

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, the scale of operations remains moderate compared with peers. Besides, around 46% of its revenue was derived from the chlor-alkali business as on December 31, 2024, especially caustic soda, which is commoditised in nature, and prone to business cycles. Nevertheless, the revenue share 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 the profitability of domestic players including Epigral. While the company’s Ebitda margin has fluctuated, it remains healthy.

Liquidity: Strong

Epigral’s liquidity is likely to remain strong, with expected annual cash accrual of Rs 450-700 crore being sufficient to cover debt obligations of Rs 150-250 crore over the medium term. Furthermore, working capital lines of Rs 400 crore were utilised ~35% on average over the six months ended December 31, 2024 and witnessed further reduction post the inflow of proceeds from QIP in October 2024, where the average utilisation for the three months from October to December 2024 was low at 16%, providing sufficient cushion for meeting incremental working capital requirement and exigencies. Internal accrual and undrawn sanctioned term loan limits should suffice to cover the expansion capex requirement over the medium term.

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. Healthy cash accrual and progressive debt repayment will help buttress the impact of project-related debt, enabling sustenance of the strong debt protection metrics over the medium term.

Rating sensitivity factors

Upward factors:

• Significant increase in the scale of operations aided by swift ramp-up of new capacities while sustaining RoCE over 25% on a sustained basis
• Sustenance of the financial risk profile, including through prudent funding of capex and good working capital management

 

Downward factors:

• Significant moderation in the operating performance, with sustained deterioration in operating margin, impacting the cash generation
• Significant delay in commissioning new capacities or higher-than-expected debt availed of for funding the capex leading to deterioration in debt metrics – debt to Ebitda ratio of over 2 times on a sustained basis

About the Company

Incorporated in 2007 and formerly known as Meghmani Finechem Ltd, Epigral 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 and 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 and 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 Ratings adjusted numbers

Any other information: Not Applicable