Rating Rationale
June 28, 2019 | Mumbai
NOCIL Limited
Ratings Reaffirmed
 
Rating Action
Total Bank Loan Facilities Rated Rs.200 Crore
Long Term Rating CRISIL AA/Stable (Reaffirmed)
Short Term Rating CRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has reaffirmed its 'CRISIL AA/Stable/CRISIL A1+' ratings on the bank facilities of NOCIL Limited (NOCIL).
 
Operating performance of NOCIL remained comfortable in fiscal 2019 despite moderation in revenue growth to 7.8% year-on-year. This is due to healthy operating profitability of 27% and nil debt outstanding for fiscal 2019. Growth of the automobile industry was impacted in the second-half of fiscal 2019 due to regulatory price hikes, leading to rising cost of ownership as well as liquidity constraints in the system which resulted in moderation in growth of domestic demand in fiscal 2019. This was offset by healthy growth of 25% year-on-year in exports driven by increasing share of business with key customers. CRISIL expects NOCIL will continue to post higher than industry growth at 10-12% per annum over medium term, driven by start of new capacities to cater new orders, higher share of business with its key customers resulting in further improvement in product and geographic diversity. The impact of the recent decline in the automobile industry sales and sustenance of better than industry growth of NOCIL will be key monitorables.
 
Operating margin is expected to remain healthy at current level backed by sound efficiency, better product mix, and cost optimisation benefits. Furthermore, NOCIL has completed phase 1 of the ongoing capacity expansion programme (of Rs 425 crore) while phase 2 will be completed by the third quarter of fiscal 2020. NOCIL continues to enjoy benefits from anti-dumping duty on 6 out of its 22 products. Any change in the government's stance post July 2019 could impinge on profitability and will be a key rating sensitivity factor.
 
Financial risk profile remains strong in the absence of any debt obligation. Bank lines remain unutilised, and net cash accrual should be sufficient to meet capital expenditure (capex) requirements and support working capital.
 
The ratings continue to reflect NOCIL's healthy business and financial risk profiles, and its strong focus on research and development (R&D). The strengths are partially offset by the company's high revenue dependence on the tyre industry, vulnerability to intense competitive pressure from Chinese rubber chemical manufacturers, and exposure to risks associated with the ongoing capacity expansion programme.

Analytical Approach

CRISIL 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) and 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.
 
Commissioning of 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.
 
* Strong focus on R&D
Driven by strong R&D capabilities, NOCIL has developed a process for producing a key intermediate, and has also set up and stabilised a green field production facility in Dahej. With commencement of production at the new facility in fiscal 2014, the company reported significant improvement in operating efficiencies and operating margin. The company's R&D prowess is also reflected in its large basket of 22 rubber chemicals as well as increasing contribution of value-added products. Benefits derived from the strong R&D facilities should continue to support business risk profile.
 
* Robust financial risk profile
Financial risk profile is robust, with networth of over Rs 1,100 crore as on March 31, 2019, and a debt-free balance sheet.  Given the company's healthy business risk profile and improving exports, annual net cash accrual will remain sufficient to fund the working capital requirement over the medium term. Also, the ongoing capex of Rs 425 crore (about 50% of estimated networth) between fiscals 2019 and 2020 is being funded via accruals. Hence, reliance on borrowings is expected to remain minimal. Any additional capital expenditure and its funding will remain a key rating sensitivity factor over the medium term.
 
Weaknesses
* High revenue dependence on the tyre industry
NOCIL derives almost two-thirds of its revenues from the tyre sector, which in turn, is largely dependent on the automotive sector, which tends to display cyclical trends. 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
The domestic rubber chemicals sector faces steep competition from imports primarily from China, and Korea. These players have an advantage of large capacities (in excess of their demand) 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 are available to the company till July 2019. Any changes in the government stance post July 2019 can have an impact on the operating profitability of NOCIL and will be a key monitorable.   
 
* Stabilisation and ramp up-related risks of new capacities
The company has been operating at near to full capacity utilisation. Furthermore, considering the long-term demand potential from the domestic and global tyre industry, NOCIL had planned the capex in Navi Mumbai and Dahej. Although the capex is about to be 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

Liquidity is healthy. Bank lines largely remain unutilised. Cash and cash equivalents are about Rs 147 crore as on March 31, 2019. Also, the ongoing capex of Rs 425 crore (about 50% of estimated networth) between fiscals 2019 and 2020 is being funded via accruals. Hence, reliance on borrowings is expected to remain minimal. 

Outlook: Stable

CRISIL believes NOCIL will maintain its robust financial risk profile with near debt-free balance sheet over the medium term. Furthermore, continued strong market position and buoyant growth outlook of the tyre industry should help ramp up the enhanced capacities.

Upside scenario
* 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 and
* Sustenance of robust financial risk profile and material build-up of liquid surpluses

Downside scenario
* Weaker than expected operating performance
* 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 33.78% stake in the company as of March 31, 2019, 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.

Key Financial Indicators
Particulars Unit 2019 2018
Revenue from operations Rs crore 1043 975
Profit after tax (PAT) Rs crore 185 170
PAT margin % 17.7 17.4
Adjusted debt/adjusted networth Times 0.00 0.00
Current Ratio Times 4.4 3.9

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments.
Annexure - Details of Instrument(s)
ISIN Name of instrument Date of allotment Coupon rate (%) Maturity date Issue size (Rs.Cr) Rating assigned with outlook
NA Cash Credit NA NA NA 95.00 CRISIL AA/Stable
NA Letter of credit & Bank Guarantee NA NA NA 55.00 CRISIL A1+
NA Proposed Letter of Credit & Bank Guarantee NA NA NA 25.00 CRISIL A1+
NA Proposed Cash Credit Limit NA NA NA 25.00 CRISIL AA/Stable
 
Annexure - List of Entities Consolidated
Names of Entities Consolidated Extent of Consolidation
PIL Chemicals Limited Full
Annexure - Rating History for last 3 Years
  Current 2019 (History) 2018  2017  2016  Start of 2016
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund-based Bank Facilities  LT/ST  120.00  CRISIL AA/Stable      27-03-18  CRISIL AA/Stable    --    --  -- 
Non Fund-based Bank Facilities  LT/ST  80.00  CRISIL A1+      27-03-18  CRISIL A1+    --    --  -- 
All amounts are in Rs.Cr.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Cash Credit 95 CRISIL AA/Stable Cash Credit 120 CRISIL AA/Stable
Letter of credit & Bank Guarantee 55 CRISIL A1+ Letter of credit & Bank Guarantee 80 CRISIL A1+
Proposed Letter of Credit & Bank Guarantee 25 CRISIL A1+ -- 0 --
Proposed Cash Credit Limit 25 CRISIL AA/Stable -- 0 --
Total 200 -- Total 200 --
Links to related criteria
CRISILs Approach to Financial Ratios
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating criteria for manufaturing and service sector companies
Rating Criteria for Chemical Industry
CRISILs Criteria for Consolidation

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