| Meghmani Organics Limited | ||||||
| Ratings reaffirmed; Rated amount enhanced for Bank Debt | ||||||
| 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 reaffirmed its ‘CRISIL AA-/Stable/CRISIL A1+’ ratings on the bank facilities of Meghmani Organics Limited (MOL).
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 healthy operating efficiencies, stemming from integrated nature of operations. The ratings are also supported by its healthy financial risk profile and comfortable debt protection metrics. These strengths are partially offset by large working capital requirement and exposure to risks inherent in the agrochemicals sector.
Revenue for 9-month fiscal 2023 grew by ~17% year on year to Rs. 1979 crores from Rs. 1686 crores during the corresponding period previous fiscal. The growth was driven by a sharp increase in revenues from the agrochemical division by ~30% to Rs 1480 Crores in 9 months fiscal 2023 from Rs 1133 Crores during the corresponding period previous fiscal. Revenue from the pigment division stood at Rs 512 crores; 6.5% degrowth from Rs. 548 crores recorded during 9-month fiscal 2022. The de-growth is attributable to slowdown in demand of pigments at a global level. The pigments segment registered a significant degrowth in Q3FY23 with recorded revenues at Rs 107 crores as compared to Rs 201 crores in Q3FY22. Revenue growth momentum in the agrochem segment is expected to sustain over the medium term driven by commissioning of a multi-purpose plant (MPP) during quarter 3 of current fiscal. Commencement of a new product line for Titanium Dioxide (TiO2) in the pigments division in January 2023 should aid the pigment division once the demand picks up in this segment. The MPP plant commissioned in Q3FY23 which has a revenue potential of around Rs 600 crore per annum would help the agrochemical division cross revenues of Rs. 2,000 crores over the near term. The first phase of TiO2 plant (Phase I of capacity 16500 TPA) has be commissioned in Q4FY23 and Phase II (doubling the capacity from 16500 TPA to 33000 TPA) is likely to be commissioned by Q3 of fiscal 2024. This will also add significant scale to the pigments division. Company has also announced additional capex of Rs 375 crores for captive power plant. This together with planned capex for crop nutria of Rs 300 crores, phase II of TiO2 plant and annual maintenance will result in total outlay of ~Rs. 950-1000 crore upto fiscal 2026. Same is to be funded through a prudent mix of debt and internal accruals.
The operating margins moderated to 13.3% in 9M fiscal 2023 from 14.9% in 9M fiscal 2023 owing to sharp increase in crude linked raw material costs esp. in the pigment division. This resulted in operating margins of the pigment division falling to 5.3% in 9M fiscal 2023 from 9.5% in 9M fiscal 2022. During 9M fiscal 2023, operating margins in the agrochem division were similar at 19.5% as compared to 19.4% in 9M fiscal 2022. Over the medium term as pigments segment normalizes, operating margins are expected to bounce back and stay between 15-17% largely driven by stable margins of 18-20% in agro segment even as margin in the pigment segment might continue to witness some pressure.
MOL’s financial risk profile is strong, marked by healthy net worth of Rs. 1,639 crore and low gearing of 0.46 time as on December 31, 2022. Although debt levels are expected to go up over the medium term on account of the expansion projects, gearing is not expected to exceed 0.6 times and debt protection metrics like debt to Earnings before Interest, depreciation, tax and amortization (EBIDTA) is expected to be maintained under 2.5 times. Net cash accruals of over Rs.250-300 crore per annum over next 2 fiscals will be sufficient to meet modest repayment obligations of Rs 75 crore and Rs 120 crore over the corresponding period and also fund part of the capex requirements. While the company has a strong track record of successfully commissioning large expansion projects earlier, commercialization and ramp up of the new capacities 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 75% coming from agrochemicals division with balance 25% coming from pigments division in 9M fiscal 2023 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 and operating profitability will remain healthy at 15-17%
Healthy financial risk profile The Meghmani group’s financial risk profile is supported by adequate networth and gearing. MOL has planned a capex of around Rs, 950-1,000 crore up-to fiscal 2026, with captive power plant of Rs, 375 crores under implementation, crop nutria project of Rs 300 crores and expansion of TiO2 (Phase II) under implementation. While additional debt is expected to be taken for these projects, CRISIL Ratings believes funding will be prudent. Peak debt/EBIDTA is not expected to exceed 2-2.2 times. Gearing is also not expected to exceed 0.5-0.6 time despite debt addition while other debt protection metrics like interest cover too will remain at healthy levels.
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. |
Liquidity: Strong The group's liquidity is strong. It is supported by improving cash generation, expected at over Rs 250-300 crore annually, which will suffice to service long term debt obligations of Rs75 crore in fiscal 2023 and Rs 120 crore in fiscal 2024 and part fund capex requirements. The company has also tied up additional long-term loans for its capex requirements. Furthermore, 20-30% unutilized WC lines of Rs 310 crores and cash and cash equivalents of Rs.79 crore as on December 31, 2022, provide additional cushion. Liquid surpluses are gradually expected to come down owing to its utilization for the expansion projects. |
Outlook: Stable CRISIL Ratings believes that MOL will benefit from higher scale of operations post commissioning of projects for products with strong demand. This coupled with healthy geographic diversification and diversified product profile and steady double-digit margins will support its healthy business risk profile. Financial risk profile is expected to remain healthy, despite higher debt levels for funding sizeable capex, supported by healthy cash generation, and progressive debt repayment. |
Rating Sensitivity factors Upward factors:
Downward factors:
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About the Group 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 |
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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$ 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)
Criteria Details
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