Detailed Rationale

CRISIL Ratings has downgraded its ratings on the bank facilities of Meghmani Organics Limited (MOL; part of the Meghmani group) to ‘CRISIL A+/Negative/CRISIL A1’ from ‘CRISIL AA-/Negative/CRISIL A1+’.

 

The rating action follows a deterioration in operational performance during the third quarter of the current fiscal and slower-than-expected recovery over the medium term. Consolidated revenue declined 7% sequentially to Rs 352 crore from Rs 379 crore in the second quarter and Rs 426 crore in the first. Performance in the third quarter remained under pressure owing to continued macro-economic headwinds in both the agrochemicals and pigment segments. The company incurred operating loss of Rs 8 crore in this quarter (same as the second quarter). The agrochemicals division reported operating profit of Rs 5 crore (2.1%) against Rs 25 crore (9.3%) in the second quarter, whereas the pigment division reported breakeven EBIDTA (earnings before interest, taxes, depreciation, and amortization) of Rs 0.9 crore against loss of Rs 3 crore. This was led by a further decline in gross margin during the third quarter, after witnessing some improvement during the previous quarter, owing to a further drop in realizations.

 

The ratings, however, continue to reflect the established market position of MOL in the agrochemicals segment, diversified revenue in terms of products and end-user industries, and adequate operating efficiency due to integrated nature of operations. The ratings are also supported by healthy financial flexibility and extensive experience of the promoters in the agrochemicals and pigment segments. 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 the nine months of fiscal 2024 moderated ~42% to Rs 1,156 crore from Rs 1,979 crore in the corresponding period previous fiscal on account of a ~48% de-growth in the agrochemicals segment to Rs 804 crore (Rs 1,480 crore for the nine months of fiscal 2024) and ~34% de-growth in the pigment segment to Rs 336 crore (Rs 512 crore). Decline in the agrochemicals segment was owing to lower price realization and subdued demand in global markets, and significant price correction owing to a supply deluge by Chinese manufacturers starting from the fourth quarter of fiscal 2023. This led to a fall in the capacity utilization levels to 64% in the nine months of fiscal 2024 from ~76% in the same period in fiscal 2023. The de-growth in pigments was also due to the weak global demand as it is a discretionary product used in textiles/paints. Apart from this, China imposed anti-dumping duty (14-18%) on green and blue pigments (phthalocyanine) in November 2022, which resulted in oversupply in the global markets and led to price erosion.  As a result, the capacity utilization level of this segment also fell sharply to 39% from 62%.

 

Given these challenges, MOL reported profit after tax (PAT) loss of Rs 88 crore during the nine months of fiscal 2024. With high-cost inventory expected to have been absorbed and realizations likely stabilizing, margin is expected to improve over the medium term with expected improvement in demand. A higher-than-anticipated deterioration in operating performance shall be a key rating sensitivity factor.

 

Due to the challenging business environment, the company curtailed its annual capital expenditure (capex) plan of Rs 450 crore to Rs 230 crore in the first quarter of fiscal 2024.

 

Capital structure is strong, with healthy gearing of 0.5-0.6 time as on December 31, 2023. Although net cash accrual for fiscal 2024 will remain negative, liquidity remains comfortable with a cash surplus of Rs 45-50 crore, which will be sufficient to meet a balance debt obligation of Rs 42 crore during the fourth quarter. Furthermore, the company is expected to receive Rs 40-45 crore by March 2024 from Epigral Ltd (erstwhile, Meghmani Finechem Ltd) towards redemption of compulsorily convertible preference shares (CCPS) that it holds (~Rs 30 crore already received till date). Also, insurance proceeds of Rs 40-45 crore in lieu of the fire at the Dahej plant in Gujarat last fiscal is expected to be realized during March-April 2024. Buffer of Rs 130-150 crore in its fund based working capital limit of ~Rs 400 crore (utilized at an average of ~80% in the past 12 months) provides additional cushion. Owing to sizeable decline in scale of operations and increased emphasis on efficient working capital management, cash flow from operations is expected to be over Rs 200 crore for fiscal 2024.

 

Debt protection metrics will temporarily weaken due to moderation in operational performance. Normalization of business environment, translating into improvement in operational performance and debt protection metrics, will remain a key rating sensitivity factor over the medium term.

Analytical Approach

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 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 longstanding relationships with key customers. In agrochemicals too, 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 pesticide formulations in India. MOL, through the acquisition of Kilburn Chemicals under an NCLT (National Company Law Tribunal) order, has also ventured into manufacturing TiO2, which is a white pigment used in the paints and coatings industry. There is a large demand-supply gap in India in this segment due to fewer players.

 

Diversified revenue profile

About 70% of the group's revenue came from the agrochemicals division and the remaining from pigments in the nine months of fiscal 2024. Revenue diversity is further augmented by presence in both the domestic (~15%) and international markets (~85%). Besides, after commissioning of the multi-purpose plant and stabilization of phase I of the TiO2 facility, the product portfolio will improve further. The company is also venturing into the crop nutrition segment, which is liquid nano urea used for fertilizing. MOL became the first private player to foray into nano liquid urea.

 

Integrated operations leading to cost advantages

The group has integrated backwards into manufacturing CPC blue, resulting in considerable savings. In its agrochemicals business, it 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. Besides, with the commercialization of the multi-purpose plant, the group has also developed capabilities to manufacture more technicals. Healthy integration of production facilities will support business risk profile over the medium term.

 

Strong financial flexibility and extensive experience of the promoters

Financial flexibility is supported by a robust capital structure, with gearing remaining at 0.5-0.6 time as on December 31, 2023. This provides sufficient headroom to avail of additional loans to tide over challenging situations. The group also has undisbursed sanctioned limit of Rs 97 crore (as on December 31, 2023; in subsidiaries, Kilburn Chemicals and Meghmani Crop Nutrition Ltd) to meet capex requirements.

 

Weaknesses:

Large working capital requirement

Operations are working capital intensive as the 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 stretched receivables. 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 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 policies of these countries will affect Indian agrochemical exporters such as the Meghmani group. Ban on any key molecules will also be monitorable.

 

Moderating debt protection metrics

Owing to subdued operating performance, interest coverage and debt/Ebitda ratios are expected to moderate significantly in fiscal 2024. Debt/Ebitda ratio, which stood at ~2.4 times in fiscal 2023, is expected to significantly deteriorate this fiscal. However, it is expected to improve to previous levels with revival in global demand. Pick-up in operational performance improving debt protection metrics will remain monitorable.

Liquidity: Adequate

Liquidity is expected to be supported by strong financial flexibility and a healthy capital structure providing sufficient headroom to raise additional funds in case of exigencies. The company also had undrawn term loan of Rs 97 crore as on December 31, 2023, for meeting capex requirement. About 25-35% of unutilized working capital limit of Rs 400 crore provides additional cushion. Although net cash accrual for fiscal 2024 might not be sufficient to meet debt obligation of ~Rs 136 crore (Rs 94 crore repaid during the nine months of this fiscal), liquidity is augmented by unencumbered cash and bank balance of Rs 45-50 crore as of December 2023. Furthermore, MOL is expected to receive Rs 40 crore from Epigral Ltd towards the redemption of CCPS, which will further aid liquidity.

 

ESG profile

CRISIL Ratings believes the environment, social, and governance (ESG) profile of MOL supports its credit risk profile.

 

The agrochemicals sector has a high environmental impact owing to high greenhouse gas (GHG) emissions, extensive water usage and significant hazardous waste generation through core operations. The sector has a social impact because of its large workforce and given the impact of its nature of operations on the health and well-being of its workers and on the local community.

MOL has been focusing on mitigating its environmental and social risks.

 

Key ESG highlights

• The share of renewable energy in the total energy consumption has declined by around 250 basis points year-on-year to around 25.8% in fiscal 2023. However, the company is working towards increasing the usage of renewable energy, and its share in the overall energy consumption is expected to improve over the medium term.
• Intensity of GHG emissions reduced by nearly 8% on-year in fiscal 2023.
• The lost time injury frequency rate (LTIFR) increased in fiscal 2023 but is still in line with the sector average.
• The governance structure of MOL is characterised by 50% of the board comprising independent directors, a split between the positions of Chairman and Chief Executive Officer, extensive financial and non-financial disclosures and robust internal control systems.

 

There is growing importance of ESG among investors and lenders. The company’s commitment to ESG and integrating sustainability principles throughout its organization and value chain will play a key role in enhancing stakeholder confidence and access to capital markets.

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 and unutilized bank limit in case of financial exigencies will continue to support the liquidity profile of the company.

Rating Sensitivity Factors

Upward factors

• Sustenance of healthy performance marked by double-digit revenue growth, while maintaining operating margins at over 10-12%.
• Strong cash generation and prudent funding of capex and working capital leading to sustained healthy debt protection metrics.

 

Downward factors:

• Significant moderation in cash generation due to sluggish demand conditions and lower-than-expected operating margin.
• Slower-than-expected recovery in operating performance leading to debt/Ebitda sustaining at over4-4.25 times.

About the Company

The Meghmani group was established in 1986 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 in 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)

Particulars	Unit	FY 2023	FY 2022
Revenue	Rs Cr	2553	2499
PAT	Rs Cr	238	304
PAT margin	%	9.3	12.2
Adjusted debt/adjusted networth	Times	0.50	0.34
Interest coverage	Times	6.6	47.3

For the 9 months of fiscal 2024, on a consolidated basis, revenue was Rs 1,157 crore and PAT ~Rs (88) crore, against Rs 1,979 crore and ~Rs 184 crore, respectively, in the corresponding period previous fiscal.

Any other information: Not Applicable

Annexure - Details of Instrument(s)

ISIN	Name of Instrument	Date of Allotment	Coupon Rate (%)	Maturity Date	Issue Size (Rs.Cr)	Complexity levels	Rating Assigned with Outlook
NA	Cash Credit@	NA	NA	NA	250.0	NA	CRISIL A+/Negative
NA	Cash Credit$	NA	NA	NA	70.0	NA	CRISIL A+/Negative
NA	Cash Credit!	NA	NA	NA	115.0	NA	CRISIL A+/Negative
NA	Cash Credit*	NA	NA	NA	70.0	NA	CRISIL A+/Negative
NA	Cash Credit#	NA	NA	NA	70.0	NA	CRISIL A+/Negative
NA	Letter of Credit and Bank Guarantee	NA	NA	NA	100.0	NA	CRISIL A1
NA	Letter of Credit and Bank Guarantee	NA	NA	NA	25.0	NA	CRISIL A1
NA	External Commercial Borrowings	NA	NA	NA	49.0	NA	CRISIL A+/Negative
NA	Rupee Term Loan	NA	NA	Aug-2027	135.0	NA	CRISIL A+/Negative
NA	Rupee Term Loan	NA	NA	July-2027	128.0	NA	CRISIL A+/Negative
NA	Long term Unsecured Loan	NA	NA	Aug-2024	29.0	NA	CRISIL A+/Negative
NA	Long term Unsecured Loan	NA	NA	Jan-2026	50.0	NA	CRISIL A+/Negative
NA	Non-Fund Based Limit	NA	NA	NA	3.0	NA	CRISIL A1

@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)