Rating Rationale
July 02, 2020 | Mumbai
KLJ Organic Limited
Rated amount enhanced
 
Rating Action
Total Bank Loan Facilities Rated Rs.288 Crore (Enhanced from Rs.197.75 Crore)
Long Term Rating CRISIL A+/Stable (Reaffirmed)
Short Term Rating CRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has reaffirmed its 'CRISIL A+/Stable/CRISIL A1+' ratings on the bank facilities of KLJ Organic Limited (KLJ Organic; part of the KLJ group).
 
On April 28, 2020, CRISIL had revised its outlook on the long-term bank facilities of KLJ Organic to 'Stable' from 'Positive' and reaffirmed the 'CRISIL A+/CRISIL A1+' ratings.
 
The outlook revision reflected the impact of the measures taken by the central and state governments towards containment of the Covid-19 pandemic and slowdown in the economic growth rate on the company's business risk profile. The measures include lockdown until May 31, 2020, temporary closure of non-critical establishments and interstate transportation and advisory against visiting areas of mass gatherings. These could result in lower-than-expected revenue for the company in fiscal 2021. Furthermore, operating margin is estimated to have declined 170 basis points year-on-year to 4.3% in fiscal 2020 because of a sharp fall in raw material prices, leading to notional mark-to-market (MTM) inventory loss of Rs 74 crore in the last quarter. However, easing of lockdown measures from June 8, 2020 should limit the impact with performance expected to recover in the second half of fiscal 2021.
 
Further, the KLJ group has sufficient liquidity in the form of bank limit and equity and debt mutual funds to cover the fixed cost of Rs 6.5 crore per month and letter of credit repayments due in April and May 2020. The operating margin is expected at 3-5% over the medium term but will be susceptible to fluctuations in crude oil prices.
 
The financial risk profile should remain healthy: annual cash accrual, expected at above Rs 140 crore per fiscal, should fund the proposed capital expenditure (capex) of Rs 70 crore per annum and meet the working capital requirement over the medium term. Though interest coverage should moderate to 7.72 times in fiscal 2021 from 8.31 times in fiscal 2020 because of reduced profitability, it will remain comfortable. Adequate risk management practices and accretion to networth have resulted in steady improvement in total outside liabilities to tangible networth (TOLTNW) ratio to less than 1 time. Liquidity, in the form of cash surplus of around Rs 150 crore and unutilised limit of Rs 190 crore, should support financial flexibility in the event of any unforeseen pressure on the operating performance. 
 
The ratings continue to reflect the KLJ group's leadership position in the plasticisers business, with a strong presence in the compounding and trading segments, healthy operating efficiency, supported by proximity to ports, and strong relationships with suppliers. The ratings also factor in the robust financial risk profile, backed by sizeable networth and low TOLTNW. These strengths are partially offset by the group's susceptibility to volatility in raw material prices and foreign exchange (forex) rates and large working capital requirement.

Analytical Approach

For arriving at the ratings, CRISIL has combined the business and financial risk profiles of KLJ Organic, KLJ Plasticizers Ltd (KLJ Plasticizers), KLJ Polymers & Chemicals Ltd (KLJ Polymers), KLJ Organic Thailand Ltd, KLJ Resources Ltd (KLJ Resources) and Prithvi Sound Products Company Pvt Ltd (Prithvi Sound), collectively referred to as the KLJ group, as they have common promoters, management and business, along with strong operational and financial linkages.
 
CRISIL 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 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
* Strong market position
The KLJ group is a leading manufacturer of plasticisers in South Asia, with installed capacity of over 350,000 tonne per annum as on March 31, 2020. The group's leadership position is supported by the large variety of plasticisers it offers, including phthalate, maleate, specialty and flame-retardant. The group also has a healthy presence in the polymer compounds and chlorinated paraffin segments. Its strong market position is underpinned by the large scale of operations (annual turnover of more than Rs 5,300 crore) and diverse clientele. Plasticisers are generally used by compounding units, and the group's end user industries are varied and include footwear, cables, flexible polyvinyl chloride (PVC) films, leather, vinyl flooring, medical equipment, adhesives, perfumes, automobile parts, rubber belts and tube compounds.
 
* Healthy operating efficiency, supported by proximity to ports, and strong relationships with suppliers
The KLJ group has production facilities in Silvassa, Dadra and Nagar Haveli; Bharuch, Gujarat; and Thailand. All its facilities are close to ports, providing logistical advantages. Crude oil derivatives, the key raw materials, are mainly imported. 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.
 
* Strong financial risk profile and liquidity
Networth is sizeable and adjusted gearing is comfortable. As on March 31, 2020, networth is estimated at above Rs 1,600 crore and adjusted debt (including the guaranteed portion under the Qatar JV) at Rs 595 crore. The Qatar unit commenced operations in April 2019. The company plans to increase its benzyl chloride capacity through a mix of debt (of around Rs 70 crore) and internal accrual over the next two fiscals. Cash accrual should be sufficient to meet the debt obligation over the medium term.
 
The TOLTNW ratio, estimated at 0.61 time as on March 31, 2020, is likely to improve over the medium term, as internal cash accrual will be utilised to reduce debt. Liquidity is strong, as reflected in healthy cash accrual, small debt obligation, low utilisation of the fund-based limit and high current ratio.
 
Weaknesses
* Susceptibility to volatility in raw material prices and forex rates
Chemicals, such as phthalic anhydride, alcohols and oxo-alcohols, used to manufacture plasticisers are crude derivatives and are generally imported (the KLJ group imports more than 50% of its raw material). Crude oil prices are susceptible to sharp fluctuations. The KLJ group maintains a large inventory because of the long lead time for importing raw material. Inventory ranged at 45-80 days over the five fiscals through 2020. A sharp decline in raw material prices in the fourth quarter of fiscal 2020 resulted in inventory loss (MTM) of Rs 74 crore.
 
* Large working capital requirement
Operations are working capital-intensive, as reflected in gross current assets of 110-170 days over the three fiscals through 2020, driven by the group's policy of maintaining inventory of two-three months to ensure timely servicing of customer requirement, along with receivables of around two months.
Liquidity Strong

Liquidity is strong, indicated by healthy current ratio of 2.05 times, unutilised bank lines of around Rs 190 crore (with bank limit utilisation averaging 48%) and unencumbered cash and bank balance of above Rs 150 crore as on March 31, 2020. The group has healthy financial flexibility, with low TOLTNW ratio estimated at 0.61 time as on March 31, 2020. Expected cash accrual of Rs 146 crore and Rs 172 crore in fiscals 2021 and 2022, respectively, should sufficiently cover debt obligation of Rs 9 crore and Rs 18 crore, respectively.

Outlook: Stable

CRISIL believes the KLJ group's profitability is susceptible to fluctuations in crude prices and to the extent of inventory holding and exchange rates, which are likely to restrict improvement in the operating margin over the medium term. 

Rating Sensitivity Factors
Upward Factors
* Higher-than-expected improvement in the operating performance, especially revenue, and sustenance of profitability at 5-6%, with increased proportion of specialty compounds or new products
* Sustenance of a healthy financial risk profile, with adjusted debt to earnings before interest, taxes, depreciation and amortisation ratio of below 2 times and stable liquid surplus

Downward Factors
* Delay in improvement in the credit metrics because of large capex, acquisition or funding support to associates and JVs, with the TOLTNW ratio above 1 time
* Substantial decline in business performance, profitability and cash accrual
* Extension of lockdown beyond the first quarter of fiscal 2021 because of the Covid-19 pandemic, resulting in higher-than-expected decline in operating performance.

About the Group

The KLJ group, founded by Mr KL Jain in 1967, began operations by manufacturing PVC compounds. In 1985, the group backward-integrated into manufacturing plasticisers. It is a leading manufacturer of plasticisers and chlorinated paraffin wax (CPW) in South Asia, with capacity of over 350,000 tonne per annum. Four of its companies manufacture plasticisers, PVC compounds and CPW, while two trade in paraffin, base oils and solvents.
 
Set up in 1997 as a partnership firm, KLJ Plasticisers manufactures various plasticisers 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 plasticisers in India. The group commenced operations for manufacturing benzyl products in 2017, with capacity of 15,000 tonne per annum.
 
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 capacity to produce caustic soda and chlorine, the two key raw materials for CPW. The KLJ group owns around a 40% equity stake in the JV through KLJ Organic. The plant commenced operations in April 2019.

Key Financial Indicators*
Particulars Unit 2020^ 2019
Revenue Rs crore 5,347 4,383
Profit After Tax (PAT) Rs crore 143 161
PAT Margin % 4.3 6.0
Adjusted Debt /Adjusted Networth Times 0.37 0.54
Adjusted Interest Coverage Times 8.31 8.08
*CRISIL-adjusted numbers
^Estimates

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments and are included (where applicable) in the Annexure -- Details of Instrument in this Rating Rationale. For more details on the CRISIL complexity levels, please visit www.crisil.com/complexity-levels.
Annexure - Details of Instrument(s)
ISIN Name of Instrument Date of Allotment Coupon Rate (%) Maturity Date Issue Size (Rs.Cr) Complexity Level Rating Assigned with Outlook
NA Bank Guarantee NA NA NA 1 NA CRISIL A1+
NA Cash Credit NA NA NA 60 NA CRISIL A+/Stable
NA Letter of Credit NA NA NA 130 NA CRISIL A1+
NA Proposed Long Term Bank Loan Facility NA NA NA 4.75 NA CRISIL A+/Stable
NA Term Loan NA NA Dec-2021 12.5  NA CRISIL A+/Stable
NA Term Loan NA NA Oct-2025 70  NA CRISIL A+/Stable
NA Foreign Exchange Forward NA NA NA 9.75  NA CRISIL A1+
 
Annexure - List of Entities Consolidated
Names of entities consolidated Extent of consolidation Rationale for consolidation
KLJ Plasticizers Ltd Full Common management, bankers and business, with strong operational and financial linkages.
KLJ Polymers & Chemicals Ltd Full
KLJ Organic Ltd Full
KLJ Resources Ltd Full
KLJ Organic (Thailand) Ltd Full
Prithvi Sound Products Company Pvt Ltd Full
Annexure - Rating History for last 3 Years
  Current 2020 (History) 2019  2018  2017  Start of 2017
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund-based Bank Facilities  LT/ST  157.00  CRISIL A+/Stable/ CRISIL A1+  28-04-20  CRISIL A+/Stable  26-04-19  CRISIL A+/Positive  26-04-18  CRISIL A+/Positive  25-04-17  CRISIL A+/Stable  CRISIL A/Stable 
Non Fund-based Bank Facilities  LT/ST  131.00  CRISIL A1+  28-04-20  CRISIL A1+  26-04-19  CRISIL A1+  26-04-18  CRISIL A1+  25-04-17  CRISIL A1+  CRISIL A1 
All amounts are in Rs.Cr.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Bank Guarantee 1 CRISIL A1+ Bank Guarantee 1 CRISIL A1+
Cash Credit 60 CRISIL A+/Stable Cash Credit 35 CRISIL A+/Stable
Foreign Exchange Forward 9.75 CRISIL A1+ Letter of Credit 125.75 CRISIL A1+
Letter of Credit 130 CRISIL A1+ Proposed Long Term Bank Loan Facility 19.38 CRISIL A+/Stable
Proposed Long Term Bank Loan Facility 4.75 CRISIL A+/Stable Term Loan 16.62 CRISIL A+/Stable
Term Loan 82.5 CRISIL A+/Stable -- 0 --
Total 288 -- Total 197.75 --
Links to related criteria
CRISILs Approach to Financial Ratios
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating criteria for manufaturing and service sector companies
Rating Criteria for Chemical Industry
CRISILs Criteria for Consolidation
Criteria for rating entities belonging to homogenous groups

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