Rating Rationale
July 05, 2024 | Mumbai
Neogen Chemicals Limited
Ratings reaffirmed at 'CRISIL A/Stable/CRISIL A1'
 
Rating Action
Total Bank Loan Facilities RatedRs.680 Crore
Long Term RatingCRISIL A/Stable (Reaffirmed)
Short Term RatingCRISIL A1 (Reaffirmed)
Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings.
1 crore = 10 million
Refer to Annexure for Details of Instruments & Bank Facilities

Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL A/Stable/CRISIL A1’ ratings on the bank loan facilities of Neogen Chemicals Limited (NCL; part of Neogen group).

 

The group’s performance was impacted in H2 fiscal 2024 on account of moderation in the raw material prices which resulted in lower realization. Further, there was slow demand from some of the key end user industries. While accruals were lower than expected, the group’s financial risk profile continued to remain strong.

 

Further, the Group is undertaking a major debt funded green field capex in Neogen Ionics Limited (NOL-Wholly owned subsidy of NCL) which is expected to result in healthy revenue growth over the medium term in staggered manner.

 

This capex is being done at Pakhajan, Dahej Gujarat wherein total outlay for capex is Rs.1610.2 crores. Group has already received sanction from banks under project finance route and tenure of the loan is more than 10 years with availability of interest capitalization during construction and moratorium on interest for initial years. D:E Ratio for said project is 71:29. Group has already taken approval from its shareholders for raising equity up to Rs.500 Crores against which Rs.253 Crores already raised in November 2023. This supports financial flexibility.

 

This capex will result in Neogen ‘s group’s entry into lithium electrolyte, salts and additives segment catering to batter industry. Group will be taking capex in phased manner. Overall, draw down of the loan will be linked to demand scenario. New business segment’s will cater to different markets and end-user industries which will have lean working capital cycle compared to its existing business.

 

CRISIL Ratings will continue to monitor the construction progress, subsequent ramp-up in operations

and any long-term tie-ups with battery manufacturers which can support steady revenue profile over longer tenure.

 

The ratings continue to reflect an established market position in the specialty chemical segment, healthy operating efficiency, and a Strong financial risk profile. These strengths are partially offset by large working capital requirements, exposure to foreign exchange volatility and to changes in government regulations.

Analytical Approach

For arriving at its ratings, CRISIL Ratings has consolidated the business and financial risk profiles of NCL with its wholly owned subsidiaries (BuLi Chemicals India and Neogen Ionics Limited) and Dhara Fine Chem Industries. Together these are referred to as Neogen Group.

 

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:

  • Extensive experience of promoters: The promoters have been involved in bromine and lithium chemistries for over three decades. Over their extensive tenure, the promoters have developed a sound understanding of the local and global market dynamics and established strong relations with suppliers and customers.

 

  • Established market position and healthy operating efficiency bromine and lithium chemistry: The extensive experience of the promoter and the proven track record in developing bromine and lithium derivatives continues to support the business risk profile. Research and development initiatives have enabled the shift in focus to more niche, high value-added products, from bulk bromine-based compounds in the 1990s. Constant efforts to control the cost of production per unit have helped maintain a healthy operating margin, despite the competition.

 

  • Healthy financial risk profile: The financial risk profile is driven by comfortable capital structure and strong debt protection metrics. With debt funded capex, the debt increased to Rs 394 crore as on March 31, 2024. However, adjusted gearing has remained at 0.52 time as on March 31, 2024. Group is undertaking green field project for manufacturing electrolyte and salt. Over the medium term, debt protection metrics expected moderate but it will remain healthy. Any larger-than-expected debt-funded capex or acquisition could impact the capital structure and debt protection metrics, and hence, will be a key monitorable.

 

Weaknesses:

  • Susceptibility of operations to adverse movements in raw material prices and regulatory risk: The operating income and profitability is vulnerable to adverse movements in the prices of raw material, lithium, and bromine. In the past, group has witnessed decline in revenue due to sharp decline in lithium and bromine prices.

 

The group derives around 27% (48% in FY 23) of its revenue from exports to multiple geographies and hence exposed volatility in foreign exchange rates. However, the risk is partially mitigated by imports of around 45-50% providing a natural hedge and monthly price reset arrangements with its customers to pass through foreign exchange movements. Bromine, being a corrosive and hazardous material, is subject to environmental and other government regulations. Any adverse change in these regulations, in any of the markets it operates, could impact on the business risk profile of the group.

 

  • Working capital intensive nature of operations: Gross current assets (GCA) were 448 Days as on March 31, 2024 (307 days as on March 31, 2023), driven by debtors and inventory of 149 and 240 days, respectively. Receivable’s cycle is driven by credit of up to 90 and 120 days provided to domestic and global customers, respectively. During fiscal 2024, higher domestic sales has resulted in increased debtors as on March 31, 2024.  The inventory level was high since group maintains inventory to mitigate risk associated with delay in shipments and supply disruptions. The diverse product profile and many products without dedicated reactor capacity has also led to higher inventory. The inventory cycle is expected to remain at similar levels over medium term. Group’s working capital cycle

 

  • Exposure to risks related to project implementation and timely completion: Group is exposed to project stabilization risk for ongoing electrolyte and salt manufacturing green field project. However, the group's track record of calibrated expansion strategy with a prudent funding mix of debt and equity, promoters experience and technology tie up with MU Ionic Solutions Corporation, Japan aid the business risk profile. CRISIL Ratings will continue to monitor said project.

Liquidity: Strong

NCA is expected to improve over Rs.100 crore per fiscal over the medium term against debt obligation in the range of 30-40 crore per fiscal over the medium term. Average utilization of bank lines has been moderate at 74% over the past 12 months ended May 24.

Outlook: Stable

CRISIL Ratings believes the business risk profile is expected to benefit from its established market position, enhanced capacities and new products & customers being introduced

Rating Sensitivity factors

Upward Factors:

  • Higher than expected increase in revenue and earnings before interest, depreciation, taxes and amortization (EBITDA) increasing above 18% leading to higher-than-expected cash accruals and debt to EBIDTA of below 3 times
  • Sustained financial risk profile backed by healthy capital structure, healthy ramp up of operations and strong debt protection metrics.
  • Timely completion of milestones of ongoing capex along with ramp up of installed capacities

 

Downward Factors:

  • Deterioration in the credit risk profile of the group, due to higher-than-expected debt, delay in ramp up of operations or any significant cost overruns, thereby impacting the financial risk profile.
  • Higher than expected debt-funded capex or acquisition, weakening financial risk profile with debt-to-EBIDTA remaining above 6 times on sustained basis.
  • Lower than expected revenue growth on account of weaker demand or slower than expected ramp up in new installed capacity and dip in operating margin resulting in weaker cash accruals

About the Group

NCL was incorporated in 1989, promoted by Mr. Haridas Kanani. The company manufactures bromine and lithium-based organic and organo-metallic compounds, used in the pharmaceutical, agricultural chemicals, and engineering industries. The manufacturing units are at Mahape in Navi Mumbai, Maharashtra, Vadodara in Gujarat, Dahej SEZ Gujrat, Patancheru,Telangana and Pakhajan Gujrat . The company made an IPO in May 2019 and is currently listed on the Bombay Stock Exchange and the National Stock Exchange Company acquired BuLi Chemicals India Pvt. Ltd (BuLi Chem) on May 5th 2023.

 

Neogen Ionics Limited is WOS of the Neogen Chemicals Limited who will be undertaking green filed capex for manufacturing electrolyte and Salts.

Key Financial Indicators (Consolidated)

As on / for the period ended March 31

 

2024

2023

Operating income

Rs crore

698

686

Reported profit after tax

Rs crore

36

50

PAT margins

%

5.1

7.2

Adjusted Debt/Adjusted Net worth

Times

0.52

0.76

Interest coverage

Times

2.79

3.86

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL Ratings` 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.

CRISIL Ratings will disclose complexity level for all securities - including those that are yet to be placed - based on available information. The complexity level for instruments may be updated, where required, in the rating rationale published subsequent to the issuance of the instrument when details on such features are available.

For more details on the CRISIL Ratings` complexity levels please visit www.crisilratings.com. 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) Complexity Levels Rating Assigned with Outlook
NA Cash Credit NA NA NA 30 NA CRISIL A/Stable
NA Letter of Credit NA NA NA 37.5 NA CRISIL A1
NA Long Term Bank Facility NA NA NA 215.5 NA CRISIL A/Stable
NA Term Loan NA NA Mar-2029 12 NA CRISIL A/Stable
NA Term Loan NA NA Mar-2029 86 NA CRISIL A/Stable
NA Term Loan NA NA Mar-2028 78 NA CRISIL A/Stable
NA Term Loan NA NA Mar-2029 13 NA CRISIL A/Stable
NA Working Capital Facility NA NA NA 8 NA CRISIL A/Stable
NA Working Capital Facility NA NA NA 75 NA CRISIL A/Stable
NA Working Capital Facility NA NA NA 25 NA CRISIL A/Stable
NA Working Capital Facility NA NA NA 75 NA CRISIL A/Stable
NA Working Capital Facility NA NA NA 25 NA CRISIL A/Stable

Annexure – List of entities consolidated

Names of Entities Consolidated

Extent of Consolidation

Rationale for Consolidation

Dhara Fine Chem Industries

Full

90% subsidiary of company

Neogen Ionics Limited

Full

wholly owned subsidiaries

Buli Chemicals India Private Limited

Full

wholly owned subsidiaries
Annexure - Rating History for last 3 Years
  Current 2024 (History) 2023  2022  2021  Start of 2021
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund Based Facilities LT 642.5 CRISIL A/Stable 05-01-24 CRISIL A/Stable   -- 07-10-22 CRISIL A-/Positive 27-01-21 CRISIL A-/Stable CRISIL BBB+/Positive
      --   --   -- 14-09-22 CRISIL A-/Positive 25-01-21 CRISIL A-/Stable CRISIL BBB+/Stable
      --   --   -- 10-08-22 CRISIL A-/Positive   -- --
      --   --   -- 07-01-22 CRISIL A-/Stable   -- --
Non-Fund Based Facilities ST 37.5 CRISIL A1 05-01-24 CRISIL A1   -- 07-10-22 CRISIL A2+ 27-01-21 CRISIL A2+ CRISIL A2
      --   --   -- 14-09-22 CRISIL A2+ 25-01-21 CRISIL A2+ --
      --   --   -- 10-08-22 CRISIL A2+   -- --
      --   --   -- 07-01-22 CRISIL A2+   -- --
All amounts are in Rs.Cr.
Annexure - Details of Bank Lenders & Facilities
Facility Amount (Rs.Crore) Name of Lender Rating
Cash Credit 30 DBS Bank India Limited CRISIL A/Stable
Letter of Credit 37.5 State Bank of India CRISIL A1
Long Term Bank Facility 215.5 State Bank of India CRISIL A/Stable
Term Loan 78 Kotak Mahindra Bank Limited CRISIL A/Stable
Term Loan 86 HDFC Bank Limited CRISIL A/Stable
Term Loan 13 Axis Bank Limited CRISIL A/Stable
Term Loan 12 Axis Bank Limited CRISIL A/Stable
Working Capital Facility 75 State Bank of India CRISIL A/Stable
Working Capital Facility 25 HDFC Bank Limited CRISIL A/Stable
Working Capital Facility 75 Axis Bank Limited CRISIL A/Stable
Working Capital Facility 8 DBS Bank Limited CRISIL A/Stable
Working Capital Facility 25 Kotak Mahindra Bank Limited CRISIL A/Stable
Criteria Details
Links to related criteria
CRISILs Approach to Financial Ratios
Rating criteria for manufaturing and service sector companies
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating Criteria for Chemical Industry
CRISILs Criteria for rating short term debt
CRISILs Criteria for Consolidation

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