Detailed Rationale

CRISIL Ratings has assigned its 'CRISIL A+/Stable/CRISIL A1' ratings to the bank facilities of Gulshan Polyols Limited (GPL).

 

The ratings reflect the company’s strong market position as one of the leading manufacturers of starch and its derivatives in the domestic maize processing industry, the extensive experience of the promoters and operational track record of more than 30 years. The ratings are also supported by a diversified product profile and reputed and varied clientele. The financial risk of the company remains strong, with healthy cash accrual and limited reliance on debt as on March 31, 2021. These strengths are partially offset by exposure to volatility in raw material prices and regulatory changes.

 

CRISIL Ratings has also considered the ongoing capital expenditure (capex) of the company, primarily towards enhancing the ethanol capacities in Madhya Pradesh and Assam. While the company remains exposed to project execution risk, tie-ups with oil marketing companies (OMCs) for part of the capacity along with interest subvention available on the proposed borrowing plans lend comfort. However, timely completion of the capex within the stipulated cost will remain a key monitorable.

Analytical Approach

CRISIL Ratings has considered the standalone business and financial risk profiles of GPL.

Key Rating Drivers & Detailed Description

Strengths:

• Extensive experience of the promoters:

GPL is one of the largest players in the mineral and grain processing segments in India. The company manufactures specialty chemicals from grain and minerals at multiple facilities set up across India. The company was incorporated in 1981 by Dr C K Jain, an industrialist with more than four decades of business experience. The extensive experience of the promoters in the starch industry, their strong understanding of the market dynamics and healthy relationships with customers and suppliers will continue to support the business risk profile.

 

• Diversified product profile and reputed clientele:

GPL started operations in 1981 with a small unit of calcium carbonate with capacity of 2,100 tonne per annum (TPA) in Muzaffarnagar. Over the years, the company has diversified into various other products, such as starch, starch derivatives (Sorbitol and Dextrose), sugar, fructose, ethanol and animal feed. Majority of the revenue (~70%) is derived from grain-based products, 12% from mineral processing and 18% from the distillery segment. Under the grain-based segment, 48% comes in from Sorbitol and the remaining from starch and other sugar products. The product mix is expected to shift more towards ethanol, with capacity expansion of 700 kilo litre per day (KLPD) over the next two years. The company is also planning expansion into the Sorbitol and Fructose segments over the medium term.

 

GPL caters to a diverse clientele, from paint manufacturers to fast-moving consumer goods (FMCG) companies to OMCs and paper manufacturing companies. Sorbitol, starch and its derivative products find application in diverse industrial and commercial uses, such as food and drink, personal care and pharmaceuticals, textiles and FMCG. Calcium carbonate is used in polyvinyl chloride irrigation pipes and cables, paints, detergents and plastics, as well as building material in marble and cement. GPL has healthy relationships with its clients, such as Dabur, Asian Paints, Paragon, Colgate, Pidilite, Britannia, Cadilla and Pfizer, among others.

 

• Comfortable financial risk profile:

The operating margin of GPL has remained in the range of 11-13% historically. There was a marginal dip in the operating margins during fiscal 20 on the back of increase in raw material prices, especially maize, which was on an upward trend since June 2019.

 

The capital structure of the company is comfortable, with gearing and total outside liabilities to tangible networth (TOLTNW) ratio improving to 0.03 time and 0.31 time, respectively, as on March 31, 2021, from 0.33 time and 0.48 time, respectively, a year earlier owing to scheduled debt repayment and enhanced networth on account of healthy accretion to reserve. In fiscal 2021, the company paid off all outside debt liabilities and had no term loans outstanding on the books as on March 31, 2021. In the first half of fiscal 2022, revenue registered a 57% growth and stood at Rs 516 crore. Operating margin grew to 17.5% the first half of fiscal 2022 vis-à-vis 15.6% in the corresponding period of the previous fiscal. For fiscal 2022, revenue is expected to grow by 35-40% to around Rs 1,000 crore, with the operating margin at 16.5%.

 

The company is planning to undertake capex to expand its ethanol manufacturing unit by another 500 KLPD in Madhya Pradesh for a total cost of Rs 300 crore, out of which Rs 170 crore is likely to be funded by term loans. GPL is also planning to set up an ethanol unit of 200 KLPD in Assam for a total project cost of Rs 150-160 crore and expansion of its Sorbitol and Fructose capacity to 270,000 TPA for a total cash outlay of Rs 150 crore. Funding for these projects is likely to be split between debt and equity in a ratio of 2:1. Despite sizeable capex in the ethanol segment, the financial risk profile will remain comfortable, supported by healthy cash accrual.

 

Weaknesses:

• Susceptibility to volatility in raw material prices and regulatory changes:

Operations are exposed to inherent risks associated with the agricultural commodity business, such as availability of raw materials, fluctuations in prices and regulatory changes. Cost of maize forms around 70% of the operating income of the company. When the price of maize falls significantly, in order to protect farmers' interests, the government implements minimum support prices at which maize should be sold in the market. This impacts the cost of procurement of maize. The operating margin had declined marginally to 11.2% in fiscal 2020 from 12.5% in fiscal 2019, partly on account of increase in the prices of raw materials and lag in passing on the cost to customers.

 

• Exposure to project execution risk:

The company is planning to expand the ethanol manufacturing capacity of 60 KLPD by 500 KLPD in Madhya Pradesh and another 200 KLPD in Assam over the medium term. GPL has received environmental clearances for the Madhya Pradesh expansion and interest subvention approvals from the Department of Food and Public Distribution and has begun civil construction work at the plant location. The plant is expected to achieve commercial operations by March 2023. Offtake has been tied up to around 60% of the capacity with OMCs for the Madhya Pradesh and Assam locations. The remaining will be sold in the open market to private players, such as Reliance and Essar. While this exposes the company to project execution risk, the track record of the company in ethanol manufacturing lends some comfort. However, timely completion of the new project and commensurate ramp-up will remain a key monitorable.

Liquidity: Adequate

Net cash accrual is expected at Rs 125-150 crore over fiscals 2022 and 2023 each and, thereafter, will likely increase to Rs 220-240 crore in fiscal 2024. Principal repayment will begin only from fiscal 2024. GPL has repaid all debt through accrual in fiscal 2021 and has no outside debt on the books. The company has fund-based working capital facilities of Rs 90 crore from HSBC (Rs 50 crore) and State Bank of India (Rs 40 crore). GPL has efficiently managed its working capital requirement, with working capital facilities of Rs 90 crore utilised at 30% on average.

Outlook: Stable

GPL will continue to benefit from its diversified product profile and healthy relationships with customers.

Rating Sensitivity factors

Upward factors:

• Strong growth in revenue to Rs 1,800-2,000 crore on a sustained basis, along with improvement in profitability
• Sustenance of healthy operating profitability resulting in improvement in return on capital employed (RoCE) and healthy debt coverage indicators despite debt-funded capex

 

Downward factors:

• Substantial delays in project execution resulting in time and cost overrun
• Significantly weaker-than-expected operating profitability (below 11-12%) on a sustained basis impacting cash accrual
• Significant impact on debt protection metrics and RoCE as a result of more-than-expected debt levels on account of sizeable capex or stretched working capital cycle

About the Company

Incorporated in 1981 as a calcium carbonate manufacturing company in Muzaffarnagar and named Gulshan Sugars & Chemicals Ltd (GSCL), the company’s initial capacity was 2,100 TPA. In 2000, GSCL was demerged into three companies, GPL being one of them. GPL was incorporated as a public limited company and registered in October 2000 as well as listed on the Bombay Stock Exchange. In January 2015, it was listed on the National Stock Exchange of India.

 

The company’s business portfolio covers starch sugars, calcium carbonate, ethanol, ethyl neutal alcohol, agro-based animal feed and onsite Precipitated Calcium Carbonate plants with production facilities at Muzaffarnagar in Uttar Pradesh, Bharuch in Gujarat, Chhindwara in Madhya Pradesh, Dhaula Kuan in Himachal Pradesh, Abu Road in Rajasthan, Patiala in Punjab, Tribeni in West Bengal and Amlai in Madhya Pradesh.

 

The company caters to a wide range of industry and niche markets in core sectors, encompassing pharmaceuticals, personal care products, footwear, tyres, rubber and plastics, paints, alcohol, value-added paper, agrochemicals and food and agricultural products. It caters to leading industrial units of the country, such as Colgate Palmolive, Hindustan Unilever Ltd, Dabur, Asian Paints and ITC.

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue Size (Rs crore)	Complexity level	Rating outstanding with outlook
NA	Cash Credit*	NA	NA	NA	50	NA	CRISIL A+/Stable
NA	Cash Credit	NA	NA	NA	40	NA	CRISIL A+/Stable
NA	Bank Guarantee@	NA	NA	NA	10	NA	CRISIL A1

*Sublimit of Rs. 20 crore of Overdraft, Rs. 10 crore of pre and post-shipment credit loan Interchangeable with WCDL, Buyers credit in FCY, IDC facility, Post-shipment buyer loan

@Interchangeable with Letter of Credit.