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 revenues have grown to Rs. 373.3 crores in H1FY25 from Rs 326.6 crores during a similar period of FY 24. The overall business profile remains supported by the strong performance in the organic and CSM segments.

 

The financial risk profile of the groups has remained strong driven by strong net worth, improving capital structure and adequate debt protection metrics. Strong net worth of Rs. 777.2 crore as on Sept 30, 2024.

 

The group is undertaking major debt funded capex for battery chemical business in Neogen Ionics Limited (NOL) which is expected to moderate financial risk profile over medium term. As on September 30, 2024, due to debt availed for capex in NOL, debt levels have increased to Rs.503.3 Crores from Rs.461.7 Crores as on Sept 30, 2023.

 

This has led to gearing remaining at 0.65 times as on Sept 30,2024 and on account of debt funded capex, gearing is expected to increase over medium term. Further the group has healthy unencumbered cash and cash equivalents including investments of Rs 29.7 crore as on September 30, 2024. Liquidity is expected to remain strong, backed by strong cash flows, low utilization of fund-based working capital limits and healthy cash and cash equivalents which are expected to remain in the business over the medium term.

 

For major debt funded capex for battery chemical business , Group has signed a manufacturing technology license agreement with Mitsubishi Ionics Solutions Corporation (MUIS).MUIS is a JV between Mitsubishi Chemical Corporation (MCC) and UBE Corporation and is a group company of The Mitsubishi Chemical Group. The MCC is a leading manufacturer of electrolytes which find its application in batteries. Considering support of MUIS CRISIL expect minimum Implementation risk.

 

The ratings continue to reflect an established market position in the specialty chemical segment, healthy operating efficiency, and a moderate financial risk profile. These strengths are partially offset by large working capital requirement, 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, Neogen Chemicals Japan Corporation Limited and Neogen Ionics Limited) and Joint venture 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:

• Strong business risk profile marked by established market position and healthy operating efficiency: The group has a strong market position in developing the bromine and lithium derivatives because of integrated operations and a strong clientele. The product portfolio is diversified, catering to many business segments including pharmaceuticals, agrochemicals, others etc.

 

Further, group has entered into an agreement with MU Ionic Solutions Corporation, Japan to design electrolyte manufacturing plant. MU Ionic Solutions (MUIS) is a JV between Mitsubishi Chemical Corporation (MCC) and UBE Corporation.

 

Ongoing capacity addition in lithium-ion battery material segment should support growth over medium to long term.

 

The group is one of the Leading manufacturers of Bromine and Lithium-based specialty chemicals since 1989. It has a track record of over three decades and demonstrated technical capability in healthy ramp up of operations. The group has diverse product portfolio and final products find its application in industries like Pharmaceuticals, agrochemicals Flavors and electronic chemicals etc. Research and development initiatives have enabled the shift in focus to more niche, high value-added products, from bulk bromine-based compounds. Furthermore, the battery business group expected to have first mover advantage and necessity to have well mix of product offerings which will further bolster the business risk profile. Future performance will be supported by additional revenue from battery business, improving export demand and offering healthy revenue visibility. Further ramping up of these diversified business segments leading to significant contribution to overall operating profits should further improve the business risk profile of the group and would remain a key monitorable over the medium term.

 

• Moderate financial risk profile: Neogen has moderate financial risk profile, as reflected in the moderate capital structure and debt protection metrics. Gearing and Interest coverage was at 0.65 time and  3 times respectively as on 30th Sept 2024

 

Considering recent fund raise of Rs.253 Crores, Gearing and total outstanding liabilities to adjusted networth expected to remain around 1 as on March 31, 2025. Considering, expected larger capex improvement in debt protection metrics will remain key rating sensitive factors.

 

• Extensive industry experience of the promoters: The extensive experience of the promoter and the proven track record in developing new products has helped them to steadily ramp up their scale of business and timely increase the installed capacity to cater to the increasing demand. Longstanding extensive industry experience of the promoters is expected to support the business risk profile, over the medium term.

 

Weaknesses:

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

 

• Exposure to foreign exchange volatility and changes in government regulations: Group derives around 27% 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 the business risk profile of the group.

 

• Large working capital requirement: Gross current assets (GCA) were 414 days as on March 31, 2024 (325 days as on March 31, 2023), driven by debtors and inventory of 200 and 282 days, respectively. Receivable’s cycle is driven by credit of up to 90 and 120 days provided to domestic and global customers, respectively.  Inventory level was higher since group maintain inventory to tackle delay in shipments and supply disruptions. Diverse product profile and many products without dedicated reactor capacity has also led to higher inventory. Inventory cycle is expected to remain on similar levels over medium term.

 

• 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

Liquidity is backed by healthy cash accrual against debt obligation, moderate bank limit utilisation, though elongated working capital cycle, and healthy cash and bank balance. The company had accruals of over Rs 36 crore in H1FY25. The group is likely to maintain annual accrual of over Rs 70 crore over the medium term. Average utilisation of bank limits was 67.5% during the 12 months through Oct -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 4 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