Detailed Rationale

CRISIL Ratings' ratings on the bank facilities of NOCIL Limited (NOCIL) continue to reflect NOCIL's healthy business risk profile marked by its leading market position in the rubber chemicals industry in India and established clientele as well as robust financial risk profile marked by nil debt. The strengths are partially offset by high revenue dependence on the tyre industry, exposure to competition from imports and risks associated with the ramp up of expanded capacities.

 

Revenue is expected grow by 35-40% in fiscal 2022 aided by a low base of fiscal 2021 along with revival in the demand from the global tyre industry, which contributes to around 65% of NOCIL’s revenue. Ramp up of newly added capacities, consistent price hikes taken while retaining competitive edge, focus on increasing share from export markets and benefits accruing from continued diversification of vendor base by global customers by following China+1 strategy will also drive the revenue growth over the medium term.

 

Operating profitability is expected to stabilise with correction in inflationary trend in raw material prices and will also be supported by improving capacity utilisation of its new capacities. Efficient cost control measures in the form of price hikes in light of current inflationary pressure from raw material prices as well as strong operating efficiencies will also benefit in safeguarding their margins over the medium term. 

 

Financial risk profile remains strong in the absence of any debt obligation. The company is expected to generate healthy cash surpluses over the medium term, which will further help in the sustenance of strong credit metrics.  Bank lines remain largely unutilised, and net cash accrual should be sufficient to meet capital expenditure (capex) requirements and support working capital.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of NOCIL and its wholly owned subsidiary, PIL Chemicals Ltd.

 

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:

• Healthy business risk profile:

NOCIL’s healthy business risk profile is marked by its leading market position in the rubber chemicals industry in India (with over 40% market share) stand its established clientele. The company is also among the few players globally with a wide product basket of 22 rubber chemicals. Furthermore, it has been able to maintain healthy relationships with major domestic and global tyre manufacturers for over 40 years, backed by its ability to meet their stringent quality requirements. NOCIL, therefore, has good international presence. In fiscal 2021, exports contributed 34% of the total revenue. Increasing share of business from overseas customers and change in global sourcing scenario to include China+1 strategy is resulting in increase of share of exports, which improved from 30% in fiscal 2019 to 34% in fiscal 2021, and is expected to further improve over the medium term.

 

Commercialisation of the new capacities, at a time when global customers are diversifying their vendor base away from Chinese specialty chemical manufacturers, will benefit NOCIL to ramp up its new capacities faster and gain market share in global supply chain of rubber chemicals in the medium term. Substantial increase in market share in rubber chemicals in the medium term will be key rating driver.

 

• Robust financial risk profile:

Financial risk profile is robust, with net worth of Rs 1,284 crore as on March 31, 2021, and a debt-free balance sheet.  Given the company’s healthy business risk profile and improving exports, the cash accruals will remain sufficient to fund the working capital requirement over the medium term. Also, no major capex is expected to happen over the medium term. Hence, reliance on borrowings is expected to remain minimal. Liquidity is healthy, as reflected in unutilised bank lines of Rs.100 crores and liquid surplus of Rs. 115 crores (as on March 31, 2021). CRISIL Ratings believes that going ahead, any large capital expenditure in the future will be funded prudently, resulting in sustenance of a strong financial profile.

 

Weaknesses:

• High revenue dependence on the tyre industry:

NOCIL derives almost two-thirds of its revenues from the tyre industry. The commercial vehicle (CV) industry, which contributes a sizeable proportion to tyre demand in value terms, is the most cyclical, and also resorted to large scale imports of tyres from China and South East Asian countries in the recent past, until an anti-dumping duty was levied on imported tyres in fiscal 2018. While this has led to pick up of demand for the domestic tyre manufacturers and augurs well for input suppliers such as NOCIL, its performance nevertheless partly remains exposed to the demand pattern of the automotive sector.

 

• Competition from imports and risks associated with ramp up of expanded capacities:

The domestic rubber chemicals sector faces steep competition from imports primarily from China, and Korea. These players have an advantage of large capacities and government support. In view of significant injury to the domestic industry as a result of dumping by these countries, the Government of India has levied an anti-dumping duty on import of such products in April 2014. The benefits of the duty were available to the company till July 2019. The government stance post July 2019 has an impact on the operating profitability of NOCIL and remains a key monitorable.   

 

Considering the long-term demand potential from the domestic and global tyre industry, the company carried out capacity expansions in Navi Mumbai and Dahej. Although the capex is almost completed, ramp up of the facilities remains critical. With a slowdown in domestic demand, timeliness in receipt and supply of orders to new customers and geographies is crucial for ramping up the facilities.

Liquidity: Strong

Liquidity is healthy. The entire fund- based facilities remain unutilised. Also, the capex of Rs 475 crore between fiscals 2019 and 2021 was funded via accruals and no major capex are announced over the medium term. Hence, reliance on borrowings is expected to remain minimal.

Outlook: Stable

CRISIL Ratings believes NOCIL will maintain its robust financial risk profile with a largely debt-free balance sheet over the medium term. Furthermore, continued strong market position should help ramp up the enhanced capacities.

Rating Sensitivity Factors

Upward factors:

• Significant and sustained improvement in scale of operations, backed by increased share of exports and value-added products, leading to sustained increase in global market share along with steady profitability margin over 18%-20% on sustained basis and
• Sustenance of robust financial risk profile and material build-up of liquid surpluses

 

Downward factors:

• Weaker than expected operating performance leading to operating profitability below 15% on a sustained basis
• Increase in debt on account of more-than-expected debt-funded capex / acquisition or dividend payout

About the Company

NOCIL, part of the Arvind Mafatlal group, is India’s largest rubber chemicals manufacturer. The promoters held 33.88% stake in the company as of September 30, 2021, and the remaining stake was held by public and others, including mutual funds and insurance companies.

 

The company follows an integrated approach wherein it manufactures intermediates as well as a wide range of final products across two manufacturing facilities in Navi Mumbai and Dahej. NOCIL manufactures four categories of products:

• Accelerators: These help increase the speed of vulcanisation to improve productivity
• Anti-degradants/anti-oxidants: These are the ingredients in rubber compounds that deter ageing or inhibit degradation caused due to oxygen attack of rubber products, thereby enhancing their service life
• Pre-vulcanisation inhibitors: These help prevent premature vulcanisation of synthetic and natural rubbers during processing, thus reducing scrap
• Post-vulcanisation stabilisers: These improve the thermal stability of cross links in rubber products

 

For the six months ended September 2021, the company's operating income was Rs 720 crore and PAT was Rs 77 crore against Rs 328 crores and Rs 29 crore, respectively, in the corresponding period of the previous fiscal. (Figures are not comparable on account of the pandemic-induced lockdowns in H1FY21).

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs.Crore)	Complexity Level	Rating assigned with outlook
NA	Cash Credit*	NA	NA	NA	90	NA	CRISIL AA/Stable
NA	Letter of Credit & Bank Guarantee	NA	NA	NA	30	NA	CRISIL A1+
NA	Letter of Credit & Bank Guarantee@	NA	NA	NA	30	NA	CRISIL AA/Stable
NA	Letter of Credit & Bank Guarantee**	NA	NA	NA	35	NA	CRISIL A1+
NA	Proposed Cash Credit Limit	NA	NA	NA	10	NA	CRISIL AA/Stable
NA	Proposed Letter of Credit & Bank Guarantee	NA	NA	NA	5	NA	CRISIL A1+

*Fully interchangeable with non-fund based working capital limits

**Fully interchangeable with fund based working capital limits

@Interchangeable with Rs. 30 crore fund based limits and forward of Rs. 5 crores