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 pigments and agrochemicals segments, 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 fiscal 2022 grew by ~52% year on year to Rs. 2499 crore. The growth was driven by a sharp increase in sales of agrochemicals by 66.3% to Rs 1739 Crores in fiscal 2022 from Rs 1045 Crores in fiscal 2021. The growth was driven by 40.8% increase in realizations as well as 18.2% increase in sales volume. The pigments business contributed ~30% of the revenue at ~ Rs 755 crores (30.6% growth from fiscal 2021) as compared to ~Rs 578 crores in fiscal 2021. The growth was driven by 65.3% increase in realizations even as volumes declined by 20.9%. For the first half of fiscal 2023, the top line grew by 38% year on year to Rs. 1,438 crores with agrochem division contributing ~Rs. 1034 crores (71.9%) and pigment division contributing Rs. 405 crores. Revenue growth momentum is expected to sustain over the medium term as well driven by commissioning of a multi-purpose plant (MPP) during quarter 3 of current fiscal and commencement of a new product line for Titanium Di-Oxide (TiO2) in the pigments division by fiscal 2024. Estimated cost for these projects stands at around Rs. 950-1,000 crore (~Rs. 350 crore for MPP project and ~Rs. 600 crore for TiO2 project) expected to be funded in a prudent mix of debt and internal accruals. The MPP plant with a revenue potential of around Rs 600 crore per annum would help the agrochemical division cross revenues of Rs. 2,000 crore over the near term. The TiO2 plant (Phase I of capacity 16500 TPA) is likely to be commissioned in Q3FY23 and Phase II (doubling the capacity from 16500 TPA to 33000 TPA) is likely to be commissioned  by fiscal 2024 and this will also add significant scale to the pigments division.

 

The operating margins moderated to 17% in fiscal 2022 from 19.3% in fiscal 2021 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 9.3% in fiscal 2021 from 18.1% in fiscal 2021. Operating margins in the agrochem division also moderated by ~230 bps to 22.4% primarily owing to increase in raw material prices. During the first half of fiscal 2023, overall margins dipped to 15.2% owing further dip in agrochem margins to 19.6% while pigment division margins showed slight improvement to 10.5%. Over the medium term, operating margins are expected to stay between 15-18% 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. 1,455 crore and low gearing of 0.34 time as on March 31, 2022. Although debt levels are expected to go up over the medium term on account of the aforementioned expansion projects, gearing is not expected to exceed 0.5-0.6 times and debt protection metrics like debt to Earnings before Interest, depreciation, tax and amortization (EBIDTA) is expected to be maintained under 2 times.   Net cash accruals of over Rs.275-350 crore per annum over next 2 fiscals will be sufficient to meet modest repayment obligations of Rs 62 crore and Rs 75 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 70% coming from agrochemicals division with balance 30% coming from pigments division in fiscal 2022. 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 15-18%

 

• 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 croreup-to fiscal 2024, with MPP plant of Rs, 350 crore under implementation and expansion of TiO2 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 2.0 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 torisks 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 Rs275-350 crore annually, which will suffice to service long term debt obligations of Rs62 crore in fiscal 2023 and Rs 75 crore in fiscal 2024 and part fund capex requirements. The company has also tied up additional long term loans for its capex requirements. Liquidity is also enhanced by way of moderately utilized working capital limits and unencumbered cash and cash equivalents of Rs,59 crore as on September 30, 2022. 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:

• Sustenance of healthy performance marked by double digit revenue growth, while maintaining operating margins at over 16%
• 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 revenue growth and operating margins deteriorating to less than 10-12%
• Significant delay in commissioning of new capacities or higher than expected debt availed for funding the capex leading to deterioration in debt metrics - debt/EBITDA deteriorating to over 2.4-2.6 times.

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)* -

Particulars	Unit	FY 2022	FY 2021
Revenue	Rs Cr	2499	1637
Profit after Tax (PAT)	Rs Cr	304	186
PAT Margin	%	12.2	11.4
Adjusted Debt/Adjusted Networth	Times	0.34	0.23
Interest Coverage	Times	47.3	28.5

*Excludes Meghmani Finechem Ltd

 

For the first 6 months of fiscal 2023, on a consolidated basis, MOL had revenues of Rs. 1429 crore and PAT of Rs 175 crore as compared to revenues of Rs1046 crore and PAT of Rs134 crore in the corresponding period of the 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	150.0	NA	CRISIL AA-/Stable
NA	Cash Credit$	NA	NA	NA	50.0	NA	CRISIL AA-/Stable
NA	Cash Credit!	NA	NA	NA	80.0	NA	CRISIL AA-/Stable
NA	Cash Credit*	NA	NA	NA	35.0	NA	CRISIL AA-/Stable
NA	Cash Credit#	NA	NA	NA	35.0	NA	CRISIL AA-/Stable
NA	Letter of Credit and Bank Guarantee	NA	NA	NA	65.0	NA	CRISIL A1+
NA	Letter of Credit and Bank Guarantee	NA	NA	NA	10.0	NA	CRISIL A1+
NA	External Commercial Borrowing	NA	NA	NA	74.0	NA	CRISIL AA-/Stable
NA	Rupee Term Loan	NA	NA	Sep-24	52.0	NA	CRISIL AA-/Stable
NA	Rupee Term Loan	NA	NA	Aug-27	98.0	NA	CRISIL AA-/Stable
NA	Rupee Term Loan	NA	NA	July-27	174.0	NA	CRISIL AA-/Stable

@. Interchangeable between WCDL/EPC/PCFC/PSFC. Interchangeable between Overdraft/ Short Term Loan// Export %26amp; 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)