Detailed Rationale

Crisil Ratings has downgraded its ratings on the bank loan facilities of NACL Industries Ltd (NACL; part of the NACL group) to ‘Crisil BB+/Negative/Crisil A4+’ from ‘Crisil BBB-/Negative/Crisil A3’.

 

The downgrade reflects the significantly weak business performance of the group in the third quarter of fiscal 2025, as reflected in net loss of Rs 36 crore for the quarter. This, along with continued pressure on liquidity owing to constraints placed by lenders on working capital limit, and higher debt obligation will continue to impact growth and financial flexibility. The negative outlook reflects the expected weakening in business performance over the medium term because of funding restrictions placed by bankers.

 

Promoter has infused equity of Rs 35 crore to support operations and Rs 10 crore is expected to be infused by an investor, subject to requisite approvals. The group’s management plans to raise funds via issuance of non-convertible and compulsorily convertible debentures to fund working capital requirement. The promoter may also infuse unsecured loans to support the operations.

 

Timely infusion of funds by the promoter and investors, revival in business performance and ability of the management to raise funds or bank loans in a timely manner will remain monitorables.

 

The ratings reflect the strong market presence and brand of NACL in the agrochemicals industry, supported by the extensive experience of the management, its established clientele, geographic diversification in revenue and a moderate financial risk profile. These strengths are partially offset by large working capital requirement, and susceptibility to competition, regulatory changes and seasonality inherent in the agrochemicals sector.

Analytical Approach

Crisil Ratings has combined the business and financial risk profiles of NACL and its subsidiaries and associate companies. This is because these entities, collectively referred to as the NACL group, are in the same business and have common promoters and strong business and financial linkages. Also, NACL holds 26% stake in Nasense Labs Pvt Ltd and has been consolidated accordingly.

 

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 presence: Supported by an experienced management team, NACL has built strong market position in the agrochemicals segment over the past three decades. The management has established healthy relationships with customers across geographies, comprising established players such as Syngenta Asia Pacific Pte Ltd, Saraswati Agro Chemicals India Pvt Ltd and Nissan Chemical Corporation. NACL sells a wide range of insecticides, fungicides, herbicides and plant growth regulators. Its ability to develop products to meet demand may enhance growth over the medium term. The promoters’ expertise, strong understanding of market dynamics and healthy relationships with customers and suppliers will continue to support the business.

 

• Moderate financial risk profile: The financial risk profile remained moderate with higher debt of around Rs 789 crore as on March 31, 2024, resulting in gearing of 1.6 times. Networth moderated to Rs 511 crore on account of loss in fiscal 2024, but reliance on working capital borrowing was high. The group will continue to rely heavily on creditors and external debt for funding the working capital cycle over the medium term. Consequently, capital structure will remain leveraged while the debt service coverage metrics will likely remain subdued. The promoter has infused equity of Rs 35 crore to support the operations of the company and is expected to infuse additional Rs 10 crore, subject to requisite approvals.

 

Timely infusion of funds and disbursement of working capital limit will remain monitorables.

 

Weaknesses:

• Large working capital requirement: The working capital cycle was stretched in fiscal 2024 because of a weak industry scenario, prompting the company to provide extended credit to customers. Gross current assets were at 258 days as on March 31, 2024, driven by receivables of around 159 days (134 days a year earlier). The company offers extensive credit in the domestic formulations business and must maintain adequate inventory owing to sizeable stocks keeping units, import of raw materials and seasonality in operations. The working capital cycle is managed efficiently through a mix of cash accrual and bank borrowing. Nevertheless, operations will remain working capital intensive, especially in the biological segment. Prudent working capital management will be monitorable.

 

• Susceptibility to competition, regulatory changes and seasonality in the agrochemicals sector: The domestic agrochemical formulations industry has numerous organised players with regional presence. As NACL is into generic molecules, it faces intense competition from organised as well as unorganised players in the domestic market. The domestic agrochemicals sector is dependent on the monsoon and the level of farm income. Fortunes of this sector are, therefore, linked to the quantum, timing and distribution of rainfall in a year, exposing the players’ revenue to seasonal trends. Besides, surplus or inadequate rainfall could impact the profitability of players and lead to build-up in the working capital requirement. The business performance of NACL, like that of other agrochemical manufacturers, may be impacted by regulatory changes, such as export and import policies, registration policies and product and environment safety requirements.

Liquidity: Stretched

Liquidity was constrained by continued losses and is expected to remain stretched as annual cash accrual is expected to be insufficient to cover debt obligation this fiscal. Moreover, a few lenders have placed restriction on full utilisation of working capital limit. The fund infusion of Rs 40 crore by the promoter and Rs 10 crore from an investor will likely support liquidity but timely infusion of the funds will remain critical. Current ratio was 1.13 times as on March 31, 2024.

Outlook: Negative

The outlook is Negative on account of weaker-than-expected performance of the NACL group and its stretched liquidity, with restrictions on availing working capital limits.

Rating Sensitivity Factors

Upward factors:

• Steady increase in revenue and operating margin leading to net cash accrual more than Rs 70 crore
• Improvement in the liquidity of the group on account of sizeable fund infusion
• Strengthening of the financial risk profile, especially debt protection metrics

 

Downward factors:

• Revenue declining to less than Rs 1,400 crore resulting in sizeable cash losses.
• Weakening of liquidity due to restrictions on utilisation of limits
• Any further provision towards doubtful debtors or write-offs

About the group

NACL, incorporated in 1986, manufactures and exports crop protection technicals (active ingredients) and formulations. The company manufactures pesticides, insecticides, herbicides, fungicides and other plant growth chemicals. The formulations business is mainly in the domestic market, and the company sells through a large retail dealer network. It also has a range of branded formulations. The company has two manufacturing units at Srikakulam and Ethakota in Andhra Pradesh and a research and development centre in Telangana. Ms K Lakshmi Raju is the promoter and Mr M Pavan Kumar manages the operations.

 

NACL Spec-Chem Ltd, set up in April 2020, has a manufacturing unit in Dahej Industrial Zone. The unit has installed capacity of 6,000 TPA for agrochemical technicals and intermediates for domestic as well as export markets. Ms K Lakshmi Raju is the promoter.

 

For the nine months through December 2024, the group reported total income and net loss of Rs 1,040.51 crore and Rs 42.13 crore, respectively, against Rs 1,326.58 crore and Rs 49.88 crore, respectively, in the corresponding period of the previous fiscal.

Any other information: Not Applicable