| GHCL Limited | ||
| 'CRISIL AA- / Stable' assigned to Non Convertible Debentures | ||
| Rating Action | ||
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| 1 crore = 10 million | ||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has assigned its ‘CRISIL AA-/Stable’ rating to the Rs 150 crore non-convertible debentures (NCDs) of GHCL Limited (GHCL).
The rating factors in the company’s healthy business risk profile backed by established market position in the domestic soda ash industry and strong operating efficiency as reflected in superior profit margins. The rating also factors in strong financial risk profile as indicated by healthy capital structure and debt protection metrics. Demerger of the textile business would lead to further strengthening of the financial risk profile. These strengths are partially offset by risk associated with large greenfield expansion planned to increase soda ash capacity by 5 lakh tonnes over the medium term, vulnerability of the inorganic chemical business to price fluctuation and volatility in key raw material prices.
During fiscal 2021 the operating margin of inorganic chemical business declined to around 27% from 32% in the previous fiscal due to lower realisation along with subdued demand from key end user industries. During the first quarter of fiscal 2022 the inorganic chemical business margin continued to decline as operations were impacted by resurgence of the Covid-19 pandemic, along with disruption in raw material availability due to cyclone Tauktae. The operating performance is expected to improve as the soda ash prices have seen swift recovery from June onwards, along with healthy demand from key end user industries.
In March 2020, GHCL’s board approved the scheme to demerge its textile business into a separate entity. Once the scheme becomes effective, the textile business (along with all assets and liabilities thereof) shall be carved out and transferred to GHCL Textile Limited (GTL) on a going concern basis. As a consideration for the demerger, GTL will issue its equity shares to the shareholders of GHCL as on the record date in a 1:1 ratio. Post demerger, GHCL shall continue with the inorganic chemical business. The scheme of demerger is approved by stock exchanges, shareholders, the Competition Commission of India (CCI) and secured and unsecured creditors of GHCL and the management expects the entire demerger process to be completed within fiscal 2022. Any material delay in completing the demerger process or reversal of demerger due to any reason would be a key rating sensitivity factor. The management has also articulated that there will not be any cash flow fungibility between both the divisions post demerger and would remain a key monitorable.
Nonetheless, the textile business has seen healthy performance in fiscal 2021 driven by improved profitability of the yarn division and turnaround of the home textile division. The textile business continued to witness healthy uptick in performance during the first quarter of fiscal 2022. |
Analytical Approach CRISIL Ratings has considered the business and financial risk profile of the inorganic chemical division (Soda ash, sodium bicarbonate and consumer products) as the company is under advanced stage to demerge the textile business and no business and financial linkages are expected between the two businesses post completion of the demerger.
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 risk profile GHCL is the second largest domestic soda ash manufacturer in an oligopolistic market wherein top three players accounts for over 85% of the total domestic production capacity, resulting in established market position. GHCL also procures a sizeable portion of key raw materials such as salt (35%), limestone (25%) and lignite through captive sources resulting in better control over input costs thus supporting stable and healthy profitability. The company also enjoys healthy relationships with leading detergent and glass manufacturers in the domestic market
* Strong financial risk profile Over the past two years, free cash flow from operations has largely been utilised towards debt reduction, resulting in strong financial risk profile. This is reflected in debt to earnings before interest, tax, depreciation and amortization (EBITDA) ratio of 1.2 times as on March 31, 2021, and interest coverage ratio of 7.3 times during fiscal 2021. CRISIL Ratings expects the financial risk profile to strengthen further post demerger of the textile business with debt to EBITDA ratio remaining below 2 times over the medium term.
GHCL is currently expanding its soda ash manufacturing capacity from 11 lakh tonne to 12 lakh tonne by end of fiscal 2023 at the existing location through debottlenecking. However as per the management, further expansion at the existing location is difficult due to space constraint. In order to maintain its market share in domestic soda ash industry, GHCL would be undertaking a large greenfield capacity expansion of 5 lakh tonne at a new location in Kutch, Gujarat with estimated outlay of Rs 3,000 crore. At present, the company is in the process of acquiring land (more than 70% of land required has been acquired) and obtaining other regulatory approvals. As per the management this entire process of pre-clearance is expected to take around 12 months. Given the initial stage of the project, the structure including the funding mix and other modalities is not yet finalized, however the management has articulated that the debt to equity ratio would not exceed 1 time and debt to EBITDA ratio would not exceed 3.5 times during the implementation phase. Any material increase in project cost or deviation in stated leverage philosophy would be a key rating sensitivity factors.
Weaknesses: * Vulnerability of the soda ash business to price fluctuations and volatility in key raw material prices. Soda ash prices are linked to the global market and thus remain susceptible to volatility in international prices, driven by capacity addition, currency fluctuations and competition from imports. While improved operating efficiency from large scale of operations offsets impact of any price fluctuation, the business will remain exposed to price volatility. |
Liquidity: Strong GHCL’s inorganic chemical business is expected to generate cash accruals of above Rs 300 crore against debt repayment of Rs 109 crore in fiscal 2022. The fund based working capital limit was moderately utilised at 16% on average for the 12 months through June 2021. Excess accrual and undrawn bank limits are adequate to meet the working capital and capex requirement over the next two years. |
Outlook Stable CRISIL Ratings expects that the company’s credit risk profile will continue to sustain over the medium term driven by healthy market position and strong financial risk profile. |
Rating Sensitivity factors Upward factors
Downward factors
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About the Company Incorporated in October 1983, GHCL is a diversified player with presence in chemicals, textile and consumer products segments. In the chemical segment, the company mainly manufactures soda ash (anhydrous sodium carbonate) and sodium bicarbonate (baking soda). The manufacturing unit is located in Sutrapada, Gujarat, with installed capacity of 11 lakh tonne per annum as on March 31, 2021.
In the consumer product division, GHCL manufactures and sells edible salt and industrial grade salt. It also markets spices, blended spices, and honey under the brand name of i-FLO. GHCL has its salt manufacturing facility at Vedaranyam in Nagapattinam district of Tamil Nadu and a refinery at Chennai for edible salt manufacturing.
The textile segment comprises spinning, weaving, dyeing, printing and processing. The spinning facility is located in Madurai, Tamil Nadu (installed capacity of 31,425 tonne per annum) and home textile division is located in Vapi, Gujarat (weaving capacity of 12 million meter, processing capacity of 45 million meter and cut & sew capacity of 30 million meter per annum).
GHCL is in the process of demerging its textile business into a separate entity, which is expected to be completed within fiscal 2022. The scheme shall become effective upon filing of the certified copy of the order of the National Company Law Tribunal (NCLT) sanctioning the scheme with the Registrar of Companies. |
Key Financial Indicators (Consolidated)
*As the audited soda ash business is not available, the above numbers include textile business |
Any other information: Not applicable |
| Note on complexity levels of the rated instrument: CRISIL Ratings' complexity levels are assigned to various types of financial instruments. The CRISIL Ratings' complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL Ratings' complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments. |
Annexure - Details of Instrument(s)
*Yet to be issued |
Annexure – List of entities consolidated
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| Annexure - Rating History for last 3 Years | |||||||||||||||||||||||||||||||||||||||
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| All amounts are in Rs.Cr. | |||||||||||||||||||||||||||||||||||||||
Criteria Details
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