Detailed Rationale

CRISIL Ratings has assigned its ‘CRISIL AA/Stable/CRISIL A1+’ ratings to the bank facilities and commercial paper programme of Laxmi Organic Industries Ltd (LOIL).

 

The rating reflects LOIL’s healthy business risk profile backed by strong market position across two verticals, essentials and specialty chemicals, diversified end user industries base resulting in low customer concentration risk and its healthy financial risk profile. These strengths are partially offset by susceptibility to fluctuations in input prices and exposure to risk pertaining to timely execution of the large capital expenditure (capex) being undertaken.

 

LOIL’s revenue improved by ~8% to Rs 1,489 crore in the first half of fiscal 2025 from Rs 1,381 crore in the corresponding period of the previous fiscal, led by 15.9% growth in revenue from specialties segment to Rs 475 crore (from Rs 410 crore) and 4.40% in essentials segment to Rs 1,014 crore (from Rs 971.3 crore). The modest growth in the essentials segment was owing to planned maintenance undertaken by the company during the first quarter of fiscal 2025. As a result, domestic revenue (~70% of essentials revenue) fell by 5% to Rs 968 crore in the first half of fiscal 2025 (from Rs 1,022 crore). Revenue from export grew sharply by ~40% to Rs 521 crore (from Rs 371 crore) supported by growth in the markets of America, Asia Pacific, and the Middle East, though there was some degrowth in Europe and Africa.

 

In fiscal 2025, revenue is expected at over Rs 3,000 crore (2,834 crore in fiscal 2024) supported by continued steady demand and growth in end-user industries, such as printing and packaging, colour and pigments, and industrial solutions. Over the medium term, revenue is expected to grow by 15-20% on-year driven by expected incremental revenue from new capacity additions at Dahej and Lote, which are expected to commence production from the second half of fiscal 2026, ramp-up of the recently commenced fluorochemicals capacity and continued growth momentum from demand.

 

Operating margin improved to 9.8% in the first half of fiscal 2025 from 8.4% in the corresponding period of the previous fiscal aided by falling raw material prices (acetic acid and ethanol), higher operating leverage, lower power cost and favorable product mix. The operating margin is expected to slightly improve to 10.0-10.5% in fiscal 2025 led by higher operating leverage, and is expected at 11-13% over the medium term driven by ramp-up of capacities, which will likely translate to higher operating profit.

 

The company is undertaking capex of Rs 1,100 crore (between fiscals 2025 and 2028) for expanding capacities in both specialty and essentials segments. The capex is divided into two phases. Phase I capex of Rs 800-850 crore will be for doubling diketene derivatives capacity, expansion of ethyl acetate capacities by 70,000 MTPA and diversifying the essentials portfolio by setting up new capacities of n-butyl acetate of ~70,000 MTPA. Majority of phase I capex is expected to be completed by the second half of fiscal 2026, and revenue will likely increase. In Phase II, Rs 300-350 crore is expected to be deployed towards specialty chemicals and essential segments in fiscals 2027 and 2028. The ongoing capex is expected to be funded through internal accrual and minimal debt of around Rs 300 crore.

 

LOIL’s financial risk profile continues to remain healthy, supported by comfortable capital structure and debt protection metrics. The company’s tangible net worth stood at Rs 1,855 crore as on September 30, 2024 (Rs 1,797 crore as on March 31, 2024), and low debt of Rs 195 crore ensures gearing is comfortable at 0.10 time as on September 30, 2024 (0.08 time as on March 31, 2024). The net worth has benefitted by multiple equity raises by the company at the time of listing in fiscal 2021 and through qualified institutional placement (QIP) in fiscal 2024. LOIL has been able to fund its capex as well as reduce its debt by way of fund raises. Gearing is expected to sustain at comfortable levels (under 0.50 times) over the medium term despite partly debt funded capex. Adjusted interest coverage, while moderating slightly owing to higher interest expense, remained healthy at ~16 times in the first half of fiscal 2025 (19 times corresponding period in previous fiscal). Net cash accrual, expected over Rs 250 crore in fiscal 2025, along with liquid surplus of ~Rs 200 crore as on October 30, 2024 (Rs 443 crore as on March 31, 2024), will be adequate to cover capex of Rs 300-350 crore this fiscal.

Analytical Approach

For arriving at its rating, CRISIL Ratings has combined the business and financial risk profiles of LOIL and its subsidiaries as the entities have similar businesses.

 

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 with healthy market share in key product segments: LOIL is a leading manufacturer of ethyl acetate, acetic acid derivatives which are key solvents across industries (essentials business) and diketene derivatives products (speciality chemicals business). The company has a track record of more than 35 years in the ethyl acetate segment and has weathered the seasonality inherent in the sector. It is also the seventh-largest manufacturer of ethyl acetate globally, with a capacity of over 242,000MTPA, according to the management. In the essentials segment, LOIL commands ~34% market share in ethyl acetate and its closest competitor is Jubilant Ingrevia Ltd (rated ‘CRISIL A1+’). In the diketene derivatives segment, LOIL meets close to 55% of domestic demand. LOIL operates in segments that have high entry barriers. The essentials business requires cost competitiveness while the specialties business has high entry barriers due to complex chemistries and high capital investment towards technology and research and development (R&D) infrastructure.

 

• Well-diversified end user base and low customer concentration risk: LOIL caters to diverse end users with its products finding applications in various high-growth industries, including pharmaceuticals, agrochemical, dyes and pigments, inks and coatings, paints, printing and packaging, flavors and fragrances, adhesives and other industrial applications. No single segment contributes more than 30% of revenue. Also, no single customer contributed to more than 10% of revenue in the first half of fiscal 2025 rendering limited dependence on a customer. This also ensures less vulnerability in revenues.

 

• Healthy financial risk profile: Capital structure was strong supported by gearing of 0.10 time as on September 30, 2024 (0.08 time as on March 31, 2024). Gearing is expected to sustain at a healthy level over the medium term as the company follows a conservative financial policy to maintain gearing below 0.4-0.5 times. Debt was modest  at Rs 195 crore as on September 30, 2024, out of which term debt was Rs 82 crore while short-term debt was Rs 114 crore. Reliance on working capital debt has been low over the past five fiscals as the company has inventory and receivables of 40-50 days and 70-80 days, respectively, and payables of 120-140 days. The term debt was fully repaid in October 2024. Total outside liabilities to tangible networth (TOLTNW) ratio was adequate at 0.57 time as on March 31, 2024, is expected at a similar level over the medium term. Adjusted interest coverage and net cash accrual to total debt (NCAAD) ratios were comfortable ~16 times and 1.02 times, respectively, in the first half of fiscal 2025 (35 times and 1.5 times, respectively, in fiscal 2024), and expected above 15 times and 0.9-1.5 times over the near-to-medium term. Despite significant capex and cost overrun in some expansions, LOIL was able to maintain a strong financial risk profile mainly due to its ability to raise funds from the market via QIP and initial public offering (IPO). Any debt funded acquisition or large debt funded capex besides current ongoing capex will remain a monitorable.

 

Weaknesses:

• Susceptibility to volatility in foreign exchange (forex) rates and raw material prices: Fluctuation in raw material prices (acetic acid and ethanol) have a direct bearing on revenue. For example, in fiscal 2022, acetic acid prices rose sharply due to which revenue of LOIL also increased. Post fiscal 2022, when acetic acid prices moderated, revenue growth moderated despite volume growth. Ethyl acetate (part of the essentials segment, which contributes ~67% of revenue) is a commodity product, and thus, is vulnerable to volatility in raw material prices, which are governed by global supply-demand dynamics. Also, the price of acetic acid is cyclical as it is linked to natural gas prices. Similarly, the price of ethyl alcohol, derived from sugarcane molasses/grain, is cyclical. LOIL is vulnerable to forex fluctuations as it imports raw materials (acetic acid and ethyl alcohol). However, the company’s exports provide a natural hedge to some extent. Furthermore, LOIL uses forward contracts to mitigate the risk.

 

• Exposure to project implementation risks: The company is undertaking capex of ~Rs 1,100 crore during fiscal 2025 to 2028 at its Dahej and Lote facilities, which will be largely deployed towards doubling its diketene derivatives capacities and expanding and diversifying its essentials product portfolio. It recently completed capex of ~Rs 550 crore for transferring the assets and technology acquired from Miteni SpA, an Italian manufacturer, whose assets were acquired in June 2019. The capex was planned for completion in fiscal 2022 for Rs 250-300 crore but was finally executed in fiscal 2024 with cost overrun of nearly Rs 250 crore, which moderated the return on capital employed (RoCE). Given the sizeable capex being undertaken currently, any significant time or cost overrun may constrain the RoCE, liquidity and financial risk profile of the company. Hence, timely execution of capex without any significant cost overrun will remain key monitorable.  

Liquidity: Strong

LOIL has healthy liquid surplus of Rs 200 crore as on October 2024. The company is expected to generate net cash accrual of over Rs 250 crore in fiscal 2025 and Rs 300-400 crore annually over the medium term. It does not have any term debt obligation for fiscals 2025 and 2026 and paid off all long-term debt in October 2024. Debt is yet to be raised for ongoing capex, and future repayments should the company resort to part debt funding of capex are expected to be manageable. Furthermore, around 59% of the company’s bank limit (fund and non-fund based) remain unutilized in the past nine months, which also cushions the liquidity.

Outlook: Stable

CRISIL Ratings believes LOIL’s credit profile is expected to remain stable aided by its strong market share across essential and specialties segment, robust demand and expected improvement in profitability and thereby cash generation from LOIL’s ongoing value-added capex and higher operating leverage. Financial risk profile is likely to remain comfortable over the medium term, supported by healthy cash generation.

Rating sensitivity factors

Upward Factors

• Significant increase in scale of operations leading to increase in operating margins and ROCE over 20% on sustained basis
• Sustenance of strong financial risk profile, robust debt metrics and healthy liquidity

 

Downward factors

• Sluggish revenue growth and decline in operating margin below 8-9% on a sustained basis
• Sizeable additional debt-funded capex or acquisitions or stretched working capital cycle materially impacting the debt metrics
• Significant delay in commissioning new projects resulting in major cost overrun

About the Company

LOIL is a Mumbai-based company, promoted by Mr Vasudeo Goenka. It was incorporated in 1989 and commenced manufacturing acetic acid at Mahad, Maharashtra, in 1991. It has diversified into other products and now primarily manufactures ethyl acetate, acetic acid and diketene derivative products (DDP). DDP is a specialty chemical group, the technology and business of which was acquired by LOIL from Clariant Chemicals India Ltd (Clariant) in 2010. Pursuant to the Clariant acquisition, the company acquired the technology and know-how of 18 products from Clariant, of which the company is producing 16 products under the specialty intermediates product portfolio. Through R&D efforts, in addition to the products acquired from Clariant, LOIL has added 30 new products to the specialty intermediates portfolio over the last decade and expanded its product portfolio to over 50 products. Recently, the company forayed into fluorochemicals (commercial production began from the second half of this fiscal).

 

The company serves over 620 customers across North America, South America, the UK, Europe, Africa, Asia and Australia. Revenue contribution from export was close to 30% of sales in fiscal 2024 and Europe remained a key export revenue contributor at 32%, followed by America (26%), the Middle East (14%), Africa (8%) and rest of the world (19%). It serves a diverse set of customers from industries such as pharmaceuticals, adhesives, inks and paints, coatings, printings, packaging, dyes and pigments, automotive, flavors and fragrances.

Any other information: Not Applicable