| Meghmani Dyes and Intermediates LLP | ||||||
| Ratings Reaffirmed | ||||||
| Rating Action | ||||||
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| 1 crore = 10 million | ||||||
| Refer to annexure for Details of Instruments & Bank Facilities | ||||||
| Detailed Rationale |
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CRISIL has reaffirmed its 'CRISIL A+/Stable/CRISIL A1' ratings on the bank facilities of Meghmani Dyes and Intermediates LLP [MDIL; part of the Meghmani Industries Limited (MIL)-MDIL group]. |
| Analytical Approach |
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For arriving at its ratings, CRISIL has combined the business and financial risk profiles of MIL and MDIL. That is because both these entities, together referred to as the MIL-MDIL group, are in the same business and have common promoters and management, and financial fungibility. Besides, the significant financial synergies, as observed in the past, are likely to continue. |
| Key Rating Drivers & Detailed Description |
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Strengths: * Established market position and healthy revenue diversity The group has a long established presence of nearly four decades in the dyes segment. In the OBA segment, the group has developed strong capabilities to manufacture customised products with application in diverse industries such as detergents, textiles, and paper. Besides, it has healthy market presence in pendimethalin atrazine and hexaconazole. The market position is also supported by a strong distribution network comprising 21 depots, 500 dealers, and 2,500 sub-dealers. There is also healthy revenue diversity across both products and areas of operations. Each of the three product segments contributes to around 33% of revenue. Besides, 55-60% of sales are from exports. * Healthy financial risk profile Networth was healthy estimated at over Rs 900 crore as on March 31, 2020. Besides, adequate cash generation and moderate capex in fiscal 2020 enabled the group to reduce debt and further improve gearing to less than 0.10 time as on March 31, 2020. While revenue is expected to moderate in fiscal 2021 due to the pandemic impact, healthy profitability should enable cash accrual of over Rs 120 crore. The group is planning to incur capex of Rs 120-130 crore across fiscals 2021 and 2022, which is expected to be largely funded by internal accrual. Hence, financial risk profile will continue to be healthy; gearing should remain below 0.2 time over the medium term. Further, liquidity remains strong, with build-up in cash surplus to over Rs 100 crore as of July 2020 Weaknesses * Working capital-intensive operations Gross current assets (GCAs) have been 250-300 days during the five fiscals ended March 31, 2020, because of extended credit terms to overseas clients, policy to maintain large inventory, and the seasonal nature of operations. However, incremental working capital requirement has been prudently managed through a mix of cash accrual and supplier credit with low reliance on external debt. Nevertheless, given the large GCAs and increasing scale of operations, continued prudent working capital management will be critical. * Exposure to risks associated with volatility in input prices and forex rates There is significant forex exposure as 55-60% of sales are from exports and 40-45% of raw materials are imported. Besides, reliance on input supplies from China is moderately high. Prices of key raw materials such as H-acid and vinyl sulphone (in dyes), diaminostilbenedisulfonic acid (DASDA in OBA) and many agrochemical molecules have witnessed significant fluctuation in the past due to supply constraints in China. Given the limited ability to pass on input price increases, the operating margin is susceptible to any adverse price movements. For instance, the margin declined to 11.7% in fiscal 2018 from 18-19% in the previous two fiscals. However, the group has taken various measures such as backward integration and tie-ups with local suppliers to counter supply issues in China, apart from revising prices to partly pass on input cost hike. It also uses forward contracts to hedge forex exposure. Nevertheless, given the sizeable forex exposure and limited pricing flexibility, the margin will remain partly susceptible to these risks. Ability to sustain profitability will remain critical. * Exposure to inherent risks in the agrochemical sector The domestic agrochemicals sector is highly dependent on the monsoon and the level of farm income, thus exposing players' revenue to volatile seasonal trends. Surplus or inadequate rainfall also threatens profitability and leads to build-up in working capital requirement. Furthermore, the segment is regulated by registration processes that vary in different countries. Changes in the export and import policies of these countries will affect Indian agrochemical players. Besides, they are exposed to risks of product bans. Liquidity: Strong The group enjoys strong liquidity, driven by expected cash accrual of more than Rs 120 crore per annum in fiscals 2021 and 2022 and cash and equivalents of over Rs 100 crore as on July 2020. The fund-based limit of MIL was utilised at around 20% while that of MDIL was negligibly utilised, as on March 31, 2020; utilisations were negligible as of June 2020 too. Modest long-term repayment obligation of Rs 6 crore per fiscal and capex of Rs 120-130 crore over fiscals 2021 and 2022 can be comfortably funded through internal accrual. With gearing below 0.2 time, the group has sufficient gearing headroom, to raise additional debt if required. Bank lines are expected to meet the incremental working capital requirement. |
| Outlook: Stable |
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The MIL-MDIL group's business risk profile should continue to benefit from revenue diversity, steady demand prospects, and various measures to improve profitability. The financial risk profile is expected to remain healthy owing to steady cash generation and moderate capex plans, notwithstanding large working capital requirement. |
| Rating Sensitivity factors |
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Upward factors * Healthy growth in revenues along with stable operating margin of over 15-16% * Sustenance of healthy financial risk profile and liquidity through prudent capex spends and working capital management Downward factors * Significant moderation in revenues with operating margin deteriorating to less than 11-12% on a sustained basis. * Weakening of financial risk profile because of large debt-funded capex or acquisition, or significant stretch in working capital cycle |
| About the Group |
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MDIL was set up in 1979 by the same promoters, as a partnership firm, Meghmani Dyes and Intermediates, to manufacture reactive dyes and OBAs. It was reconstituted as a limited company, Meghmani Dyes and Intermediates Ltd, in 1999. In 2015, as a part of organisational changes, the management merged Meghmani Dyes and Intermediates Ltd and its subsidiary, Synergy Chlorination Pvt Ltd, with Unison Industries Ltd (Unison). Unison's name was later changed to MDIL and it was reconstituted as a limited liability partnership. |
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Any other information: Not applicable |
| Note on complexity levels of the rated instrument: CRISIL complexity levels are assigned to various types of financial instruments and are included (where applicable) in the Annexure -- Details of Instrument in this Rating Rationale. For more details on the CRISIL complexity levels, please visit www.crisil.com/complexity-levels. |
| Annexure - Details of Instrument(s) | ||||||||||||||||||||||||||||||||||||||||||||||||
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| 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 various bank facilities | ||||||||||||||||||||||||||||||||||||||||||||||||
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