| Meghmani Organics Limited | ||||||
| Rating outlook revised to 'Negative'; Ratings Reaffirmed | ||||||
| Rating Action | ||||||
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| Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings. | ||||||
| 1 crore = 10 million | ||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has revised its rating outlook on the long-term bank facilities of Meghmani Organics Limited (MOL) to ‘Negative’ from ‘Stable’ and reaffirmed the rating at ‘CRISIL AA-’; the rating on short-term bank facilities is reaffirmed at ‘CRISIL A1+’.
The revision in outlook factors in the expected deterioration in the operational performance of the company this fiscal due to the ongoing macro-economic headwinds witnessed in both the agro-chemical and pigment segments which shall result in decline in operating margin. However, the ratings continue to reflect MOL’s established market position in the agrochemicals segment, and diversified revenue in terms of products and end-user industries, as well as adequate operating efficiencies, stemming from integrated nature of operations. The ratings are also supported by its healthy financial flexibility and extensive experience of promoters in the agro-chemical and pigment segment. These strengths are partially offset by moderating debt protection metrics following deterioration in operational performance, large working capital requirement and exposure to risks inherent in the agrochemicals sector.
Revenue for Q1Fiscal 2024 stood at Rs. 426 crore, a yoy decline of 46%, owing to 47% decrease in agro-chemical segment which accounts for 71% of total revenue (88% sales is from exports) and 45% decrease in pigment segment which accounts for the balance 29% of total revenues (79% from exports). Decline in agro-chemical segment was owing to subdued demand conditions in global markets and significant price corrections owing to dumping by Chinese manufacturers. This resulted in muted capacity utilization level which fell to 61% in Q1Fiscal2024 from an average utilization of 75% in fiscal 2023. The de-growth in pigment segment is also due to weak demand in global market as it is a discretionary product used in textiles/paints etc. Apart from this, China imposed ADD (14-18%) on green and blue pigments (phthalocyanine) in November 2022 which has resulted in over supply in global markets causing price erosion. As a result, the capacity utilization level of this segment also fell to 42% in Q1Fiscal2024 (60% in fiscal2023). Given these challenges, MOL has reported EBITDA losses of Rs. 22 crore (-5.2%) during Q1Fiscal24 as against operating profit of Rs. 132 crore (16.8%) during the same period pervious fiscal. For agrochem division, company has reported EBITDA of Rs.0.6 Crores in Q1Fiscal2024 with margin of 0.2% as against Rs.126 Crores in Q1Fiscal2023. The pigment segment on the other hand reported negative EBITDA of Rs.8Crores in Q1Fiscal2024 as against EBIDTA of 25 crore (11%) in Q1Fiscal 2023. For the full year fiscal 2023, MOL clocked revenues of Rs.2553 Crores representing a flattish growth of ~2.2% owing to the onset of challenging global macro-economic scenario from third quarter of last fiscal and operating profit of Rs 342 crore during last fiscal. Higher-than-anticipated deterioration in the operating performance shall be a key rating sensitivity factor going forward.
Owing to subdued business environment, company has deferred its Phase II expansion in TiO2 plant and Agro-chemical segment. Overall capex estimated for fiscal 2024 is ~Rs. 165 crore which is expected to be majorly funded by debt. MOL has a strong capital structure with low gearing of 0.5 times as on March 31, 2023. Although net cash accruals for Fiscal2024 might not be sufficient to meet repayment obligations of ~Rs. 135 crore, it has sufficient headroom to avail additional loans owing to low gearing. Also, company maintains buffer of ~Rs. 40-50 crore in its WC limits of ~Rs. 310 crore (utilized at an average of ~86% over past 12 months) which provides additional cushion. Debt protection metrics are expected to moderate in Fiscal2024 with interest coverage falling to below 4-4.5 times (Fiscal2023: 6.6times) but improve thereafter. Net Cash Accruals to Total Debt shall also moderate to ~0.10-0.12 times in Fiscal2024 (0.3 times in fiscal 2023) but thereafter improve with normalization in business activities. Normalization of business environment translating into improvement in operational performance and debt protection metrics will remain a key rating monitorable over the near to medium term. |
Analytical Approach For arriving at the ratings, CRISIL Ratings has combined the business and financial risk profiles of MOL and all its subsidiaries, together referred to as the Meghmani group, as all the entities are under a common management and have operational linkages and fungible cash flow.
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: Established market position in the pigments and agrochemical industries The Meghmani group has an established market position in its principal business segments: pigments and agrochemicals. It is the largest producer of copper phthalocyanine (CPC) blue and is among the top 3 pigment blue players globally and enjoys long-standing relationship with key customers. In agrochemicals also, the group is among the largest manufacturer of pesticides in India having presence across the value chain in both technical and formulations. The group has more than 30 brands of various pesticides formulations in India. MOL, through the acquisition of Kilburn Chemicals under NCLT order, has also ventured into the manufacture of TiO2 which is a white pigment primarily used in paints and coatings industry. There is a large demand supply gap in India in this segment due to limited number of players.
Diversified revenue profile The group has a diversified revenue stream with an estimated ~71% coming from agrochemicals division with balance ~29% coming from pigments division in Q1fiscal 2024. Revenue diversity is further augmented by presence in both domestic (~15%) and international markets (~85%). Besides, post commissioning of the MPP plant, product portfolio for the agrochemical division will improve further.
Integrated operations, leading to cost advantages The Meghmani group has integrated backwards into manufacturing CPC blue, resulting in considerable savings. In its agrochemicals business, the group has facilities for manufacturing cypermethric acid chloride, meta phenoxy benzaldehyde and meta phenoxy benzyl alcohol, which are key intermediates in crop-protection products, thus reducing reliance on import. Once the MPP plant is commissioned, the company will also have capability to manufacture more technicals. CRISIL Ratings believes healthy integration of production facilities will support the Meghmani group over the medium term
Healthy financial flexibility and extensive experience of promoters The Meghmani group is one of the largest pigment manufacturers globally and a major player in the agro-chemicals space. The group has been in the pigments, dyes and dye intermediates, and agrochemicals industry since 1977. They have a strong track record of running these businesses successfully while also growing them at a brisk pace. The financial flexibility of the company is further supported by a strong capital structure with gearing remaining below 0.5 times as on March 31, 2023. This provides the company with sufficient headroom to raise additional loans to tide over challenging situations. The company also has undrawn sanctioned term loans of ~Rs. 125 crore as on March 31, 2023 which would be used for meeting its capex requirements.
Weaknesses: Large working capital requirement MOL has large working capital requirements as its key businesses are seasonal. A large proportion of agrochemical sales in the domestic market and pigment sales in the overseas market are made in the second and fourth quarters, respectively, of the fiscal. Although export partially offsets dependence on the seasonal domestic agrochemicals market, it exerts pressure on working capital management as the group has to provide credit of 3-4 months to overseas clients, resulting in large receivables. CRISIL Ratings believes the Meghmani group’s working capital requirement will remain large because of the nature of its business.
Exposure to risks inherent in the agrochemicals sector The demand for agrochemicals is driven by agricultural production, which depends on monsoon. A substantial area under cultivation in India is still not well irrigated and depends on the monsoon to meet water requirement. Surplus or inadequate rainfall could affect the Meghmani group’s domestic revenue and profitability. Furthermore, the agrochemicals industry is regulated by specific and separate registration processes in different countries. Changes in the export and import policy of these countries will affect Indian agrochemical exporters such as the Meghmani group. Ban on any key molecules will also be a monitorable.
Moderating debt protection metrics Owing to subdued operating performance, the debt protection metrics such as interest coverage and debt/EBITDA are expected to moderate significantly this fiscal. Debt/EBITDA which stood at ~2.4 times in fiscal 2023 is expected to go over 6 times in fiscal 2024 while interest coverage is expected to moderate to below 4 times from above 6.5 times last fiscal. However, the same is expected to improve back to previous levels with the revival in global demand scenario. Pick up in operational performance resulting in improvement of debt protection metrics would remain a key rating monitorable. |
Liquidity: Strong The group's liquidity is expected to be supported by its strong financial flexibility and healthy capital structure providing sufficient headroom to raise additional funds in case of exigencies. The company also has undrawn term loan lines of Rs. 125 crore as on March 31, 2023 for meeting capex requirements. Furthermore, 20-30% unutilized WC lines of Rs 310 crores provide additional cushion. Although net cash accruals for Fiscal2024 might not be sufficient to meet repayment obligations of ~Rs. 135 crore, it has sufficient headroom to avail additional loans owing to low gearing |
Outlook: Negative CRISIL Ratings believes that continuance of subdued operating performance for a couple of more quarters resulting in sub optimal cash generation would impact its financial risk profile. However, fund raising ability & unutilised bank lines in case of financial exigencies will continue to support the liquidity profile of the company. |
Rating Sensitivity factors Upward factors:
Downward factors:
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About the Company The Meghmani group was established in 1986, promoted by Mr, Jayanti Patel, Mr. Ashish Soparkar, Mr, Natwarlal Patel, Mr, Ramesh Patel, and Mr, Anand Patel. The group manufactures green and blue pigment products, which are used to manufacture printing ink, plastic, paints, textiles, leather, and rubber. It also manufactures a wide variety of commonly used pesticides for crop and non-crop applications. The latter includes insect control in wood preservation and food grain storage. |
Key Financial Indicators (Consolidated)
For the first 9 months of fiscal 2023, on a consolidated basis, MOL had revenues of Rs. 1979 crore and PAT of ~Rs 184 crore as compared to revenues of Rs 1686 crore and PAT of ~Rs 202 crore in the corresponding period of the previous fiscal. The PAT for 9M 23 is lower as the company has recognized a loss of Rs 44 crores in Q3 of fiscal 2023 due to the fire incident at Dahej SEZ finished goods facility. |
Any other information: Not applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
@ Interchangeable between WCDL/EPC/PCFC/PSFC. Interchangeable between Overdraft/ Short Term Loan// Export & Local Bills Discounted/ Export Invoice Financing $ Interchangeable between Working Capital demand loan (WCDL)/Export Packing Credit (EPC)/ Preshipment Credit in Foreign Currency (PCFC)/PSCFC ^ Interchangeable between CC/WCDL/EPC/Foreign Usance Bills Discounting (FUBD)/Foreign Bills Purchased (FBP)/PCFC/Post Shipment Credit in Foreign Currency (PSCFC)/Inland Bills Purchased/Discounted * Interchangeable between CC/WCDL/FDCL/EPC/PCFC/PSCFC/LC (Sub limit: BG: Rs 2 cr; LER: Rs 5 cr) # Interchangeable between WCDL/ PCFC/PSCFC/Purchase Invoice Discounting (PID)/FCWCL/LC (sub limit of WCDL: Rs 20 cr) |
Annexure – List of entities consolidated
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| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Annexure - Details of Bank Lenders & Facilities | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Criteria Details
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