Detailed rationale

CRISIL Ratings has downgraded its ratings on the bank facilities of NACL Industries Ltd (NACL; a part of the NACL group) to ‘CRISIL BBB-/Negative/CRISIL A3’ from ‘CRISIL BBB+/Stable/CRISIL A2’.

 

The downgrade reflects the belief of CRISIL Ratings that NACL group’s business performance for fiscal 2025 will be significantly weaker than expected due to slower-than-expected recovery in performance in the first half of fiscal 2025 while liquidity continues to remain under pressure. The group reported consolidated revenue of Rs 765 crore and net loss of Rs 5.94 crore in the first half of fiscal 2025 which is much weaker than the expectations of CRISIL Ratings. Liquidity also remains stretched on account of modest accrual which is expected to be insufficient to meet the debt obligation in fiscal 2025. Furthermore, the liquidity was also impacted by the constraints placed by some of the lenders on availing working capital limits which is expected to impact future revenue growth while constraining the financial flexibility of the group.

 

However, these are partly mitigated by expected fund infusion of Rs 50 crore by the group through preferential issue of warrants and shares. Timely infusion of funds by the promoter and investors, revival in business performance in the subsequent quarters along with the ability of the management to raise funds or bank loans in a timely manner remain monitorable.

 

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

Analytical approach: Consolidated

CRISIL Ratings has combined the business and financial risk profiles of NACL and all its subsidiaries and associate companies. This is because all these entities, collectively referred to as the NACL group, are in the same line of business and have common promoters and strong business and financial linkages. Also, NACL holds a 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 and detailed description

Strengths:

• Established market presence: Supported by an experienced management team, NACL has built a strong market presence in the agrochemicals segment over the past three decades. The management has established healthy relationships with customers across geographies, comprising established players in India and export markets, 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 upcoming demand could enhance growth over the medium term. The expertise of the promoters, their strong understanding of market dynamics and healthy relationships with customers and suppliers should 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 overall gearing of 1.6 times. Networth moderated to Rs 511 crore on account of the losses in fiscal 2024, but reliance on working capital borrowing was high. Reliance on creditors and external debt for funding the working capital requirement is expected to remain high over the medium term. Consequently, the capital structure is expected to remain leveraged while the debt service coverage metrics are expected to remain subdued. Equity infusion of Rs 50 crore is expected to support the financial risk profile to some extent. However, timely infusion of funds and disbursement of working capital limits will remain monitorable.

 

Weaknesses:

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

 

• Exposure 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. Also, 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 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 also be impacted by regulatory changes, such as export and import policies, registration policies and product and environment safety requirements in India and abroad.

Liquidity: Stretched

Liquidity is expected to remain stretched as the annual cash accrual is expected to be lower than the debt obligation in the ongoing fiscal. Liquidity is also stretched because of the restriction placed by a few lenders on full utilisation of working capital limits. The fund infusion by the promoter of Rs 40 crore and Rs 10 crore from another investor is expected to support liquidity to some extent, but the timely infusion of the funds will remain critical. The 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 group and stretched liquidity with restrictions on availing the working capital limits.

Rating sensitivity factors

Upward factors

• Substantial and sustainable increase in revenue and operating margin, leading to net cash accrual more than Rs 70 crore
• Improvement in the liquidity position of the group
• Improvement in the financial risk profile, especially debt protection metrics

 

Downward factors

• Revenue declining to less than Rs 1,600 crore and operating margin dropping below 6%
• Further impact on the liquidity profile due to restrictions imposed on utilisation of limits
• Any further provision towards doubtful debtors or write-offs impacting the credit risk profile

About the group

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

 

NSCL, established in April 2020, set up a manufacturing unit at Dahej Industrial Zone. The unit has installed capacity of 6,000 tonne per annum for manufacturing agrochemical technical and intermediate for domestic as well as export markets. Ms K Lakshmi Raju is the promoter.

 

For the six months through September 2024, the group reported consolidated total income and net loss of Rs 771.44 crore and Rs 5.90 crore, respectively, against Rs 959.66 crore and Rs 33.98 crore, respectively, in the corresponding period of the previous fiscal.

Any other information: Not Applicable