| KLJ Polymers and Chemicals Limited | ||||||
| Ratings reaffirmed at 'CRISIL AA-/Stable/CRISIL A1+'; rated amount enhanced for Bank Debt | ||||||
| Rating Action | ||||||
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| 1 crore = 10 million | ||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings’ ratings on the bank facilities and commercial paper of KLJ Polymers and Chemicals Limited (KPCL; part of KLJ group) continues to reflect sustained improvement in business risk profile of the KLJ group driven by healthy product diversity, increasing proportion of specialty products in the plasticizer segment and healthy growth across business segments with expansion in operating profitability. The group has generated revenue of over Rs 7800 crore in fiscal 2022 increased from Rs 5278 crore in fiscal 2021 on account of increase in realization across products, recovery in demand and favorable demand-supply situation. The improvement was backed by gradual demand recovery from end users such as cables, auto, and footwear industries, and continued supply mismatches due to few capacity closures in KLJ group’s key product segments in domestic market.
Upcoming new capacities in plasticizer and polymer compounds will support healthy double digit growth in the medium term. Uninterrupted sourcing of raw materials amidst global shortages, backward integration into PAN project, increasing proportion of specialty products and ramp up of new capacities will help sustain operating margins to 8-10% range over the medium term. Financial risk profile will continue to remain comfortable driven by high networth levels of Rs. 3000-4000 crores in fiscals 2022 and 2023, limited dependence on external debt and healthy cash surplus of Rs. 300 crores.
Inventory gains emanating from volatility in crude oil prices and demand-supply mismatches in its key products led to all-time high operating margin of 15.2% and 12% in fiscal 2021 and fiscal 2022, respectively. Going forward, operating margin is likely to normalize back to 8-10% from fiscal 2023 onwards on account of benefits accruing from their backward integration for production of PAN, the key raw material for the group. Local sourcing of other raw materials and cost rationalization measures will also help sustain the margin profile over the medium term.
Despite debt funded capex, KLJ group’s financial risk profile is expected to remain healthy, marked by interest coverage ratio and gearing estimated at 13.4 times for fiscal 2023 and 0.21 time as on March 31, 2023. Cash accruals are expected to improve substantially over the medium term driven by operating profitability of over Rs. 700 crores annually. This is likely to be used to fund the capex and meet working capital requirement. Liquidity, in the form of cash surplus of over Rs 300 crore and unutilized bank limit of Rs 200 crore as on May-22, should support financial flexibility in the event of unforeseen pressure on the operating performance.
The group’s external debt outstanding is estimated to range between Rs 500-600 crores as on March 31, 2022, mainly comprising working capital borrowing. However, it has been supporting its caustic soda project in Qatar and has provided corporate guarantee of USD 67 million (around Rs 507 crores). The Qatar project has commenced operations in January 2020 and is expected to reach 80-90% capacity utilisation by April 2022 and is not expected to require any financial support from the group over the medium term
The ratings continue to reflect the group's leadership position in the plasticisers business, with a strong presence in the compounding and trading segments, healthy operating efficiency supported by the proximity to ports, and a strong relationships with suppliers. The ratings also factor in a robust financial risk profile. These strengths are partially offset by susceptibility to volatility in raw material prices and foreign exchange (forex) rates, large working capital requirement and project implementation and stabilisation risk. |
Analytical Approach For arriving at the ratings, CRISIL Ratings has combined the business and financial risk profiles of KLJ Plasticizers, KLJ Organic Ltd (KLJ Organic), KLJ Polymers & Chemicals Ltd (KLJ Polymers), KLJ Resources Ltd (KLJ Resources), KLJ Polymers Pvt Ltd (wholly owned subsidiary of KLJ Polymers & Chemicals Ltd) and KLJ Petroplast (wholly owned subsidiary of KLJ Plasticizers). That’s because all these companies, collectively referred to as the KLJ group, have common promoters and management, are in the same business, and have strong operational and financial linkages.
CRISIL Ratings has also factored in the equity commitment and guarantee provided by the KLJ group in its 40% joint venture (JV), KLJ Organic-Qatar WLL. However, CRISIL Ratings has not combined the real estate interests of the KLJ group's promoters, as the business is unrelated to the group's core business (chemicals). Moreover, the management does not leverage the chemicals business to fund its real estate interests. Any funding support from the chemicals business to the real estate business will be a key monitorable.
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:
The group is a leading manufacturer of plasticizers in south Asia with an installed capacity of 3.7 lakh ton per annum (TPA) as on May 31, 2022. Its leadership position is supported by the large variety of plasticizers it offers, including phthalate, maleate, specialty and flame-retardant. Its strong market position is underpinned by the large scale of operations (group turnover of around Rs 7,800 crore in fiscal 2022) and diverse customer base. Plasticizers are generally used by compounding units, and end-user industries are varied, including footwear, cables, flexible polyvinyl chloride (PVC) films, leather, vinyl flooring, medical equipment, adhesives, perfumes, automobile parts, rubber belts and tube compounds.
Further, with the enhanced capacity through KLJ Petroplast, the group will focus on selling high-margin non-phtalate plasticisers (currently around 25% of plasticiser sales). Also, backward integration through captive PAN capacity will help in further reducing operating costs and strengthening competitiveness in the plasticisers segment, which should result in overall improvement in profitability.
The production facilities are at Silvassa in Dadra and Nagar Haveli; Bharuch in Gujarat; and Thailand. All the facilities are close to ports. Crude oil derivatives, key raw materials, are mainly imported. Proximity to ports provides logistical advantages. Furthermore, KLJ Organic's Bharuch plant receives its chlorine supply through pipelines, ensuring secured supply at low freight cost. The group also has a strong in-house research and development division that focuses on improving the throughput and proportion of value-added specialty products. Further, with reduction in domestic supply, the group has been able to sell its products at a premium while products such as benzyl chloride are seeing increasing demand from international markets, which has resulted in higher realisations in the fiscal 2022 and is expected to benefit profitability in the near term. However, the operating margin in fiscals 2023 and 2024 is expected to return to normal levels at 8-10% considering the initiation of plasticiser capacities and stabilisation of prices. Increasing contribution from specialised products and contribution from backward integration from fiscal 2024 should improve the operating margin over the medium to long term. Return on capital employed (RoCE) is expected to remain over 20% in the medium term.
The networth is sizeable and the adjusted gearing comfortable. As on March 31, 2022, the networth is estimated at over Rs 3000 crore. Cash accruals are expected to improve substantially over the medium term driven by operating profitability of over Rs. 500 crores annually. As a result, the debt metrics are expected to remain comfortable with adjusted total outside liabilities to tangible networth (TOLTNW) ratio estimated to remain below 1 as on March 31, 2022, and also likely to remain below 1 time over the medium term, on account of steady cash accrual and phased drawdown of debt. Liquidity is strong, as reflected in healthy cash accrual, small-term debt obligation, low utilisation of the fund-based limit, and high current ratio.
Weaknesses:
Chemicals, such as phthalic anhydride, alcohols, and oxo-alcohols, used to manufacture plasticizers are crude derivatives and are generally imported (the group imports more than 50% of its raw material). The group maintains a large inventory because of the long lead time for importing raw material. Inventory remained at 50-100 days during the five fiscals through 2021. Prices of raw materials are volatile because of sharp fluctuations in crude oil prices which led to considerable volatility in the operating margins ranging from 5% to 15% over the last 10 fiscals. Improving domestic sourcing of raw materials and backward integration will mitigate these risks to a certain extent, however margins are expected to remain susceptible over the medium term
The business is working capital intensive, driven by the policy of maintaining inventory of 2-3 months to ensure timely servicing of customer requirement, and receivables of around 2 months. Gross current assets were at 125-180 days over the three fiscals through 2022.
The group has undertaken a large capex programme with project cost of Rs 841 crores over fiscals 2022 and 2023. The group plans to enhance its plasticizer and polymer compounds capacity by 3,00,000 MT and 45,456MT respectively, as well as install PAN capacity of 1,04,000 MT. While commercial operations for polymer compounds capacity commenced from December 2021, the plasticizers and PAN plants are expected to be fully commercialised by December 2022. Timely commencement of commercial operations, within budgeted costs, will remain key rating sensitivities. The plant is also susceptible to initial stabilisation issues with capacity utilisations remaining a key monitorable. |
Liquidity: Strong Liquidity remains strong, derived from credit enhancement available in the form of an unconditional and irrevocable corporate guarantee by KPP's parent, KPL. KPL is likely to provide financial support in the event of an exigency in a timely manner. KPP is expected to complete capex of around Rs 785 crore by fiscal 2024, which is being funded through term loan of Rs 475 crore and rest from KPL in the form of unsecured promoter loans and equity infusion.
The KLJ group has sufficient liquidity with unencumbered cash and bank balance above Rs 300 crore as on May 31, 2022. |
Outlook: Stable CRISIL Ratings believes the credit profile of KLJ Group will benefit with increasing scale through expansion and improving efficiencies through backward integration over the medium term. The company is also expected to sustain its healthy financial risk profile, supported by steady cash generation, and phased implementation of its large capex over the medium term. |
Rating Sensitivity factors Upward factors
Downward factors
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About the Group The KLJ group, founded by Mr. K L Jain in 1967, began operations by manufacturing PVC compounds. In 1985, the group integrated backwards into manufacturing plasticizers. It is a leading manufacturer of plasticizers and chlorinated paraffin wax (CPW) in south Asia, with capacity of over 350,000 tpa. Five of its companies manufacture plasticizers, PVC compounds and CPW, while one trade in paraffin, base oils and solvents.
Set up in 1997 as a partnership firm, KLJ Plasticizers manufactures various plasticizers at its unit in Silvassa. It was reconstituted as a public limited company in July 2008. The Silvassa unit is the single-largest manufacturing facility for plasticizers in India. The group commenced operations for manufacturing benzyl products in 2017 with capacity of 15,000 TPA.
The group has set up a manufacturing facility for producing chlor-alkali in Qatar in collaboration with Qatar Industrial Manufacturing Company. The project is fully backward integrated, with a capacity to produce paraffin and chlorine, the two key raw materials for CPW. The KLJ group owns around 40% equity stake in the JV through KLJ Organic and has given corporate guarantee of USD 67 million (around Rs 507 crore) as on March 31, 2020. The plant commenced operations in April 2019.
For the FY-2022, gross turnover was Rs 7834 crore and profit before tax Rs 885 crore, against Rs 5278 crore and Rs 828 crore, respectively, during the corresponding period in the previous fiscal. |
Key Financial Indicators* - KLJ Group
*As per provisional financial numbers for fiscal 2022
Key Financial Indicators* - KPCL
* As per provisional financial numbers for fiscal 2022 |
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)
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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. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annexure - Details of Bank Lenders & Facilities | ||||||||||||||||||||||||||||||||||||||||||||||||
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This Annexure has been updated on 01-Jul-22 in line with the lender-wise facility details as on 11-Feb-22 received from the rated entity.
Criteria Details
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