Rating Rationale

Key Rating Drivers & Detailed Description

Strengths:

Established market position and diversified clientele:

HPL’s market position is backed by its promoters’ experience of over four decades, their sound understanding of industry dynamics and healthy business relations. This has helped the company sustain its business risk profile over the years despite high revenue concentration from two product segments i.e., antioxidant and blowing agent. Also, the customer base is diversified across the domestic and international markets, with no customer contributing more than 10% to overall revenue over the past 3-4 fiscals through fiscal 2022. Despite the ongoing uncertainties in the global economy and geopolitical situation, the company has shown year-on-year increase in its sales backed by its diversified product portfolio and customer base leading to increase in domestic sales, though export sales stood dismal amid slowdown in global demand. Going forward, steady demand from both domestic and export markets, leading to sustained improvement in revenue profile will be closely monitored.

Robust financial risk profile:

The capital structure has been healthy due to low reliance on external funds and steady accretion to reserve over the years. Despite networth declining to Rs 353 crore as against CRISIL Ratings’ expectation of Rs 408 crore as on March 31, 2022 due to lower-than-expected operating profitability and buy back of shares initiated by the management, the same remains comfortable. Networth is expected at Rs 390-400 crore and gearing at less than 1 time as on March 31, 2023. Debt protection measures should remain healthy with interest coverage and net cash accrual to adjusted debt ratios of 50-60 and 11-12 times, respectively, in fiscal 2023, supported by the management focus of keeping low dependence on external debt for business requirement. Steady accretion to reserve along with no sizeable dividend outgo plans will further strengthen the financial risk profile.

Weaknesses:

Moderate scale of operations:

Because of steady increase in demand from both domestic and international territories, the scale of operations witnessed 43% growth in fy22 (on-year basis), however, the same continued to remain moderate. With ongoing slowdown in demand from international territories, the export sales have declined to around ~35% in the ongoing fiscal (April-November), as against 46% during fy22, hence further constraining the scalability. Though a portion of export demand is compensated through incremental demand from domestic territories backed by ample production capacity, inputs availability and funds available with the company, the overall revenue growth in fy23 shall remain muted on account of stated slowdown as indicated by expected revenue of Rs 580-600 crore as against Rs 593 crores in fiscal 2022; revenue booking stood at Rs 422 crore during April-Nov. Going forward, steady demand from both domestic and international market, leading to sustained volumetric growth will remain a key monitorable.

Large working capital requirement:

Operations are working capital intensive as reflected in gross current assets of 191 days as on March 31, 2022, driven by moderate receivables (58 days) and large inventory (111 days). Higher level of inventory is maintained due to its wide product portfolio and also due to substantial increase in input prices. Sales to new customers in the international market are against letters of credit and HPL provides open credit of 45-60 days to other customers. Working capital is partially supported by payables of average 70 days and cushion in working capital limits. Timely liquidation of inventory and timely realization of debtors ensuring no further stretch in working capital management amid increasing scale of operations will remain a key monitorable.

Liquidity: Strong

Liquidity is marked by strong expected cash accrual of Rs 50-60 crore which should comfortably cover annual term debt obligation of Rs 1.0-1.5 crore over the medium term and support liquidity. Bank limit utilisation averaged 56%- (including interchangeable non-fund-based limits) over the 12 months through October 2022. Its unutilized bank lines are adequate to meet its incremental working capital needs over the next one year.

Any substantial increase in the Investment or loans and advances to subsidiaries (outstanding of Rs 45.29 crores as on March 31, 2022) weakening the liquidity will be closely monitored. Current ratio is healthy at 2.13 times as on March 31, 2022. High cash and bank balance of around Rs 44 crore as on November 33, 2022 along with low leverage provides further cushion to liquidity and flexibility to raise additional debt (if required).