Detailed Rationale

CRISIL Ratings has revised its rating outlook on the long-term bank facilities of Excel Industries Ltd (EIL) to ‘Negative’ from ‘Stable’ and reaffirmed the rating at ‘CRISIL A+’. The short-term rating has been reaffirmed at ‘CRISIL A1’.

 

The revision in outlook follows a slower-than-expected ramp up in operational performance post a sharp deterioration in operational performance during the first nine months of fiscal 2024 (9MFY24). With the industry demand outlook likely to remain uncertain for the next couple of quarters, prolonged delay in recovery of operating performance would adversely impact the business risk profile of EIL even as its financial risk profile is expected to remain strong.

 

Revenue declined sharply by 31% in 9MFY24 to Rs 593 crore (9MFY23: Rs 864 crore),. The decline in revenue was majorly on account of steep fall in realisation both in the agro chemical and specialty chemical product groups owing to inventory corrections which has adversely impacted players in the chemical industry. Demand was also relatively muted especially in export regions such as the US and Europe due to overall slowdown in economy. As a result, exports declined by 50% to Rs 91 crore in 9MFY24 while domestic segment de-grew by 26% to Rs 502 crore (9MYF23: Rs.681 crore). Given steep decline in gross margins (by almost 300 basis points) in 9MFY24 to 38.5% (fiscal 2023: 42.05%) on account of inventory losses and loss of operating leverage, the company’s operating margin has declined significantly to 1.8% in 9MFY24 (fiscal 2023: 11.61%). Going forward, delay in recovery of operating performance could restrict improvement in the operating margin and adversely impact the business risk profile of the company.

 

However, the ratings continue to factor in the company’s established market position in the diethylthiophosphoryl chloride (DETC) segment and phosphonates product segment; presence in diversified customer segments, and geographies; and a strong financial risk profile because of healthy networth and debt protection metrics.

 

The financial risk profile remains comfortable, with strong networth of Rs 1,442 crore and a near debt-free balance sheet as on December 31, 2023. Total outside liabilities to tangible networth (TOL/TNW) ratio is expected to remain comfortable at below 0.3 time over the medium term. Cash surplus including liquid investments stood over Rs 200 crore (including short-term investments) as on December 31, 2023. Further, annual cash accrual -- expected at over Rs 85-100 crore per fiscal -- should be sufficient to meet capital expenditure (capex) and incremental working capital requirement. The company also has access to Rs 65 crore of unutilised fund-based bank limit, which provides added cushion. These strengths are partially offset by limited-yet-improving product diversity.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of EIL and its wholly owned subsidiaries -- Kamaljyot Investments Ltd and Excel Bio Resources Ltd. Goodwill worth Rs 18.85 crore on acquisition of the Visakhapatnam plant of Netmatrix Crop Care Ltd has been amortised for five years starting fiscal 2020.

 

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:

• Diversified revenue across end-user industries, customer segments, and geographies: The company started as an agrochemical intermediate manufacturer and has expanded its product portfolio over the years by leveraging its process chemistry capabilities in other segments, such as performance and speciality chemicals, polymer additives, and pharmaceutical inputs. Performance and speciality chemicals cater to diverse segments, such as soaps and detergents, water treatment, and paints and coating. The company has also presence in the polymer additives and pharmaceutical inputs segments to diversify revenue and reduce dependence on agrochemicals.

 

• Comfortable financial risk profile: The capital structure remains comfortable, marked by healthy networth of Rs 1,442 crore as on December 31, 2023, due to steady accretion to reserve over the years and minimal debt. Absence of any large, debt-funded capex and prudent working capital management will enable low reliance on bank funding. Hence, the capital structure and debt protection metrics should remain strong over the medium term, with TOL/TNW ratio expected below 0.30 time over the medium term. This coupled with growing scale and improving profitability should further boost the financial risk profile.

 

Weaknesses:

• High product concentration in revenue: DETC had about 40% share in overall revenue in fiscal 2023, which exposes the company to the inherent risk associated with price volatility determined by the supply situation in China. DETC is uses in making chlorpyrifos and profenofos, which are agrochemical technicals. The product concentration risk is however partially offset by the rising contribution from the non-agrochemical segment, which contributed to 40% of the revenue in fiscal 2023. Within the non-agrochemical segment, share of total revenue of phosphonates (key specialty chemical product) has been increasing steadily with recent capacity expansion in this segment. Any adverse regulatory decision or significant decline in prices of DETC may have a material impact on the performance of the company and will be a key monitorable.

 

• Exposure to risks inherent in the agrochemical business: Revenue and profitability are susceptible to any unfavourable impact of government policies with respect to pollution control, product toxicity, or import and export of raw materials. The agrochemical revenue is also susceptible to vagaries of the monsoon. Though increasing focus on other segments should result in a more diversified revenue profile, and provide some cushion, revenue and profitability will be linked to these risks as a large part of income is derived from agrochemical intermediaries.

Liquidity: Strong

Cash surplus including liquid investments stood over Rs 200 crore (including short-term investments) as on December 31, 2023. Further, annual cash accrual -- expected at over Rs 85-100 crore per fiscal -- should be sufficient to meet capex and incremental working capital requirements. The company also has access to Rs 65 crore of unutilised fund-based bank limit, which provides added cushion.

Outlook: Negative

Operating performance of EIL is expected to remain subdued in the near to medium term, resulting in suboptimal cash generation. However, prudent working capital management, adequate cash surplus and unutilised bank lines will continue to support liquidity. 

Rating Sensitivity factors

Upward factors:

• Sustained revenue growth, with material diversification in revenue profile; increase in share from specialty chemical/pharmaceutical/polymer divisions
• Maintenance of operating margin over 10-12%, benefitting cash generation
• Sustenance of healthy financial risk profile and improvement in liquidity

 

Downward factors:

• Sustained decline in revenue with operating margin falling below 10%
• Large, debt-funded capex or a sizeable stretch in the working capital cycle, increasing gearing to above 1 time

About the Company

Incorporated as a private-limited company in 1960, EIL was reconstituted into a public-limited company in 1971. Following the demerger of its crop protection business from its former associate, Excel Crop Care Ltd, EIL began manufacturing chemical intermediaries used in agrochemicals, commodity polymers, engineering polymers, soaps and detergents, water-treatment chemicals and biocides. The promoter group owned 52.60% stake in the company as on March 31, 2023.

Key Financial Indicators

As on/for the period ended March 31	Unit	2023	2022
Revenue	Rs.Crore	1,090	1,178
Profit After Tax (PAT)	Rs.Crore	76*	157*
PAT Margin	%	6.9	13.3
Adjusted gearing	Times	0.00	0.00
Interest coverage	Times	64.23	80.35

*Considering amortization of goodwill

Any other information: Not Applicable

Annexure - Details of Instrument(s)

ISIN	Name of the instrument	Date of Allotment	Coupon Rate (%)	Maturity Date	Issue size (Rs.Crore)	Complexity Level	Rating assigned with outlook
NA	Cash credit*	NA	NA	NA	65	NA	CRISIL A+/Negative
NA	Inland guarantees	NA	NA	NA	3.5	NA	CRISIL A1
NA	Inland/Import Letter of Credit	NA	NA	NA	41.5	NA	CRISIL A1
NA	Letter of credit/bank guarantee	NA	NA	NA	39.5	NA	CRISIL A1

*Interchangeable with export packing credit, foreign bills discounting, and inland bills discounting