Detailed Rationale

CRISIL Ratings has downgraded its rating on the bank facilities of Meghmani Pigments (MP; part of the Meghmani LLP group) to ‘CRISIL A/Stable’ from ‘CRISIL A+/Stable’.

 

The rating action follows a deterioration in the operating performance, with a sharp reduction in operating income at consolidated level by ~30% in fiscal 23 and further moderation of ~14-15% is expected in current fiscal. The operating margins are also expected to moderate to below 10% in current fiscal from 10.7% in fiscal 23 and 29% in fiscal 22 owing to loss of operating leverage with fall in realisation. The ratings, however, continue to reflect the extensive experience of the promoters in the chemical industry, the group's established market position in the pigment segment and stable market position in the paracetamol segment. The ratings also take into consideration operational synergies within the group entities, and a healthy financial risk profile. These strengths are partially offset by large working capital requirement and susceptibility to volatility in raw material prices.

 

For 9M FY24, the revenues on a consolidated basis stood at about Rs 581 crores with about 60% of revenues from the paracetamol segment (~Rs 340 crores) with the balance coming from the pigments and the chemical segment (~Rs 240 crores).  For the full fiscal, company expects to record consolidated revenues of ~Rs. 750 crore, a year on year decline of ~15% from fiscal 2023 despite slight improvement in volumes across both the segments. The decline will primarily be on account of sharp decline in realizations across both paracetamol as well as pigment segments. Going forward, with EU-GMP approval (expected by quarter 1 of next fiscal) and increased presence in export markets in paracetamol segment, revival in demand in pigment segment and sharp pick up in thermo black segment, revenues are expected to bounce back to fiscal 2023 levels in fiscal 2025 and grow at 7-9% annually over the medium term.

 

The expected de-growth in fiscal 2024 comes on the back of a 32% decline in revenues witnessed in fiscal 2023 to Rs. 873 crore from Rs. 1,280 crore recorded in fiscal 2022. This de-growth in fiscal 2023 was driven by correction in realizations across both paracetamol and pigment segment and also correction in volume in paracetamol segment by ~30% yoy in fiscal 2023 as covid demand waned off.

 

Margins for 9M 2024 had moderated to ~6.5% owing to sharp fall in realizations across both its product segments. This impacted the operating leverage even as gross margins improved by ~350-400 bps owing to decline in raw material prices. However the margins are expected to improve going forward with improving capacity utilization levels and correction in realizations esp. in pigment segment and sharp pickup in thermo black segment going forward. For fiscal 2023, operating margins moderated to 10.7% from 29.1% in FY22 owing to correction in realizations of paracetamol segment which had reached historically high levels in fiscal 2022. This impacted gross margins by ~1100 bps. Gross margins for fiscal 2023 stood at ~30% as against 41% in fiscal 2022. 

 

Group’s financial risk profile remains strong with debt free balance sheet as on date as against networth of ~Rs 700 crores estimated for fiscal 2024 (FY2023: Rs 691 crores). Steady accretion to reserves and limited partner withdrawals (Net withdrawal of Rs. 7 crore in FY23 as against profits of Rs. 35 crore) of Rs 10-15 crores annually over the near to medium term with further bolster the capital structure going forward. With majority of capex over, debt levels are also not expected to go up. Debt protection metrices continue to remain strong with interest coverage expected above 15-16 times over the medium term.

Analytical Approach

For arriving at the ratings, CRISIL Ratings has combined the business and financial risk profiles of Meghmani Pigments, ML, and Ashish Chemicals (AC). This is because the entities, collectively referred to as the Meghmani LLP group, have common promoters and management and are in the same line of business. Besides, the firms have fungible cash flow and significant financial synergies.

 

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 in the pigment segment and improved market position in the paracetamol segment: The group manufactures pigments that have diverse applications in industries such as textiles, paints, and inks. It is the largest manufacturer of the Violet 23 pigment in India and caters to speciality applications in violet as well as red pigments. In the pharmaceutical sector, ML is among the top manufacturers of paracetamol and is expected to improve sales further, owing to healthy demand from current customers, addition of clients and newly expanded paracetamol capacity. EU-GMP inspection has been concluded for its paracetamol facility and there has been no major observations. With EU-GMP approval expected by the first quarter of next fiscal, volumes in the regulated European Union market is expected to go up over the medium term. In the ink segment, AC benefits from its longstanding relationships with large printing solution players overseas.

 

Extensive experience of the promoters: The strong presence of the promoters in the domestic and international chemical business and operational linkages with the larger group should continue to support the business risk profile. The oldest firm of the group, AC, was set up in 1977. Currently, the Meghmani group has more than 15 manufacturing facilities in Gujarat and is the largest producer of copper phthalocyanine blue and beta blue pigments in the world. In the agrochemical segment, the product range covers the entire value chain: intermediates, technical, and formulations.

 

Healthy financial risk profile: Networth is estimated at Rs ~700 crore and nil gearing as on March 31, 2024. Debt protection metrics are healthy, with interest coverage ratios estimated at over 15-16 times in fiscal 2024. Healthy margin, steady cash accrual, and moderate capex should continue to improve the already strong financial risk profile over the medium term.

 

Weaknesses:

Stretched working capital cycle: Operations are working capital-intensive, with gross current assets estimated at 249 days as on March 31, 2024, driven by high receivables and inventory estimated at 129 and 105 days, respectively. The incremental working capital requirement, due to high debtors and inventory holding period as a policy for higher level of customer service, however, is being met by accrual, leading to modest reliance on external debt.

 

Susceptibility to volatile raw material prices: Raw materials for both the paracetamol and pigment segments include crude and benzene (para nitro chloro benzene) derivatives, prices of which are volatile. While the group can partly pass on increase in input prices to clients, during times of a slowdown and in case of extreme volatility, profitability would remain susceptible to fluctuations in input costs as has been witnessed over the past 2 fiscals.

Liquidity: Strong

Liquidity is also strong supported by expected annual cash accruals in the range of Rs. 50-80 crore, nil repayment obligations and annual capex requirements of Rs. 5-10 crore.  Further at a consolidated level, company has working capital lines of Rs. 240 crore against which utilization has been moderate at 22% for 12 months ended December 2023 which provides additional cushion.

Outlook: Stable

CRISIL Ratings believes the Meghmani LLP group’s business risk profile to remain stable over the medium term with improvement in capacity utilization levels in both paracetamol and pigment divisions. Strong financial risk profile is also expected to sustain in the absence of any major capex plans.

Rating Sensitivity Factors

Upward factors

• Improvement in operating performance driven by swift ramp up of new capacities, supporting double digit revenue growth and operating margins of 13-15%.
• Sustenance of healthy financial risk profile.

 

Downward factors

• Significant moderation in operating performance with operating margins sustaining below 8% on a sustained basis impacting cash generation.
• Large debt funded capex or acquisitions leading to deterioration in financial risk profile.
• Sustained large withdrawals, impacting debt metrics

About the Group

Meghmani Pigments was set up as a partnership firm, Alpanil Industries, in 1992 and got its current name in 2009. It manufactures high-performance carbazole dioxazine pigment Violet 23 and high-performance quinacridone pigments, such as Violet 19.

 

Ashish Chemicals was set up as a partnership firm by Mr Ashish Soparkar and Mr Jayantibhai Patel in 1977. It manufactures dispersion blue additives for printing ink.

 

Meghmani LLP (formerly, Meghmani Unichem LLP) was established in 2010 by Mr Maulik Jayantibhai Patel and Mr Kaushal Ashish Soparkar. The firm manufactures paracetamol and increased its capacity from 7,500 MTPA to 24,000 MTPA. Commercial production commenced in October 2011. ML also manufactures pigment red 122, whose capacity of 600 tpa began operations in November 2014. ML also has facilities for the production of Violet-23 with a capacity of 600 MTPA.

 

The Meghmani group comprises the flagship company, Meghmani Organics Ltd (rated 'CRISIL A+/Negative/CRISIL A1'),Epigral Ltd (rated 'CRISIL AA-/Stable/CRISIL A1+), Meghmani Industries Ltd (rated 'CRISIL A+/Stable/CRISIL A1), Navratan Speciality Chemicals LLP (rated 'CRISIL BBB/Stable/CRISIL A3+'), and the firms of the Meghmani LLP group.

Any other information: Not Applicable