Rating Rationale
July 31, 2020 | Mumbai
Nirma Limited
Long-term rating removed from 'Watch Developing'; short-term rating reaffirmed
 
Rating Action
Total Bank Loan Facilities Rated Rs.5400 Crore
Long Term Rating CRISIL AA/Negative (Removed from 'Rating Watch with Developing Implications'; Rating Reaffirmed)
Short Term Rating CRISIL A1+ (Reaffirmed)
 
Rs.400 Crore Non Convertible Debentures CRISIL AA/Negative (Removed from 'Rating Watch with Developing Implications'; Rating Reaffirmed)
Rs.900 Crore Perpetual Non Convertible Debentures CRISIL AA-/Negative (Removed from 'Rating Watch with Developing Implications'; Rating Reaffirmed)
Rs.1500 Crore Commercial Paper CRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has removed its rating on the long term bank facilities and long term debt instruments of Nirma Limited (Nirma) from 'Rating Watch with Developing Implications' and reaffirmed the rating at 'CRISIL AA', 'CRISIL AA-' and assigned a 'Negative' outlook. The rating on the short-term facility and commercial paper has been reaffirmed at 'CRISIL A1+'.

The rating action follows the announcement of the completion of acquisition of Nu Vista Ltd (NVL) (formerly known as Emami Cement Ltd) by Nuvoco Vistas Corporation Ltd (NVCL; rated 'CRISIL AA/CRISIL AA-/Negative/CRISIL A1+'). The Negative outlook signifies the possibility of weakening of financial risk profile of Nirma on account of the incremental debt taken to fund the NVL acquisition. The group has deleveraging plans by end of fiscal 2021 or early fiscal 2022, which shall improve financial flexibility of the Nirma group.

Although the leverage (net debt to EBITDA [earnings before interest tax depreciation and amortisation]) in Nirma has increased over 3.5 times with the transaction, with limited capital expenditure (capex) planned over the medium term and stable cash flows backed by cost initiatives and backward integration cash flow shall be utilised towards leverage correction. Furthermore, likely equity issuance in NVCL, will support deleveraging of Nirma's balance sheet through redemption of the preference shares issued to Nirma by NEPL. Any delay in the issuance will be a key rating sensitivity factor.

However, due to lockdown (following Covid-19) in the last two months, cash flows have moderated in line with the impact on the entire industry. The company's production facilities operated at lower capacity utilisation due to logistics-related issues and subdued demand. However, the impact is likely to be moderate on the back of diverse revenue streams and limited labour availability issues. Liquidity is supported by unutilised working capital limit of around Rs 600 crore, which shall be adequate to cover fixed cost and debt obligation in the near term. A sustained long period of subdued utilisation can significantly deteriorate cash flows and will remain a monitorable. On the other hand, a faster reversal to normalcy may contain the extent of deterioration in cash flows.

The divestment of stake held by Nirma in NVCL to NEPL, was completed in fiscal 2020. Though NVCL is no longer a subsidiary of Nirma, financial oversight from the Nirma group would continue on NVCL.

The ratings continue to reflect Nirma's healthy and diversified business risk profile, backed by its established market position in the domestic soda ash and soaps and detergent (S&D) businesses. These strengths are partially offset by vulnerability of the soda ash segment to price fluctuations. Sustained improvement in financial risk profile will be a key rating sensitivity factor over the medium term.

Analytical Approach

For arriving at the ratings, CRISIL has combined the business and financial risk profiles of Nirma, Karnavati Holding Inc, USA (holding company of Searles Valley Minerals Inc, USA, soda ash operations) and its subsidiaries, as it is wholly-owned by Nirma. This is because all these entities, belong to the Nirma group, are in the same business and have a common management.

Furthermore, CRISIL has accorded 50% equity content to the perpetual NCDs issued in July 2017. This implies that in CRISIL's analysis of the capital structure and financial ratios, 50% of the principal amount is treated as equity and the remaining as debt. CRISIL has rated the perpetual NCDs one-notch lower than the other traditional long-term bonds, in line with its criteria for rating corporate sector hybrids. This is based on the instrument's feature that allows flexibility to defer distribution payments and the likelihood of deferral, if required.

The rationale for an 'intermediate equity content' stems from the long tenure of the instrument, presence of a strong and legally binding replacement capital covenant (RCC) that enhances permanence of equity, and its subordinate position in the capital structure with flexibility to defer dividend distribution, if called upon. Furthermore, the instrument has similar characteristics as debt, including high fixed coupon, step-up of coupon up to 200 basis points (bps; 100 bps equals 1 percentage point), and first-call option after five years.

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 market position in the domestic soda ash and S&D businesses, supported by significant backward integration
Nirma is among the largest players in the domestic S&D segment. Though it has lost market share in recent years, because of intense competition in the detergent business, strong brand equity and high sales penetration should help the company maintain its market position. Backward integration is a major strategic strength. The company manufactures key raw materials, including soda ash and linear alkyl benzene (LAB), which are used to make detergents. Captive production of raw materials ensures timely and adequate supply, and facilitates greater control over quality and raw material cost. With new products, such as bromine and the expansion of soda ash and caustic capacities coupled with diversified operations, the cyclicality in products is expected to be de-risked.

* Diversity in business risk profile and geographic presence
Nirma has diversified its revenue profile through a wider geographical reach. For India operations too, revenue and profitability are well diversified, across soda ash soaps and detergents, caustic soda and other industrial chemicals. Though demand is likely to be impacted due to Covid-19 in the interim, the consumer segment is expected to see faster recovery. Soda ash, used in the glass segment, on the other hand, is likely to witness lower demand due to gradual recovery following subdued demand from the auto and real estate segment. While overall revenue is likely to be impacted in fiscal 2021, CRISIL expects that with a pick-up in demand over the medium term, growth in revenue shall be supported by ramping up of capacity of caustic soda, bromine, refined bi-carbonate, purified phosphoric acid, and healthy demand for other products.

Operating margin benefits from integrated operations and has been stable at 24-25% over the three fiscals through March 2019 (at standalone level). Consolidated margin stood at 19.8% for fiscal 2019 and was affected by the earthquake in California in fiscal 2020 and the last 10 days of the pandemic-induced lockdown. In the first quarter of fiscal 2021, Nirma, on a standalone basis, clocked EBITDA of about Rs 260 crore supported by healthy demand from the consumer segment and robust realisations amid lower raw material prices for LAB. In fiscal 2021, however, consolidated EBITDA margin is likely to be impacted by the pandemic; and the extent of the impact shall remain a key monitorable.

Weaknesses:
* Constrained financial risk profile with high leverage
The leverage has increased over 3.5 times post transaction closure from 2.4 times as on March 31, 2019 owing to debt of Rs 1800 crore  raised in Nirma to fund the NVL acquisition and refinancing of the NCDs that matured in February 2020. 

The acquisition enterprise value of Rs. 5,265 crore had been funded through debt of around Rs 1,330 crore at NVCL, equity infusion of around Rs 1,161 crore from NEPL, private equity investment of Rs 500 crore at NVCL, standalone debt of Rs 2,044 crore at NVL and rest through Nuvoco's accruals. The equity infusion of Rs. 1,161 crore from NEPL has been funded through Rs. 400 crore NCDs borrowed at NEPL and rest from Nirma through issuance of preference shares.  The contribution from Nirma was funded through debt of Rs 740 crore. In addition, NVCL has also repaid ICDs from Nirma through additional equity infusion of Rs. 439 crore from NEPL, which in turn has been funded through proceeds from Nirma. Additionally Nirma has provided and unconditional and irrevocable corporate guarantee for NEPL`s debt.  Given that NEPL doesn't have significant operations and Nirma has guaranteed the debt, CRISIL has also factored the same in the assessment of Nirma's credit profile. The repayment of additional standalone debt at Nirma and the guaranteed debt at NEPL is expected to be primarily met through the deleveraging plans of the group.

The ratings also factor in the deleveraging plan which shall improve financial flexibility of the Nirma group. Promoters plan to delever the Nirma group through equity issuance or fund infusion at NVCL by end of fiscal 2021 or early fiscal 2022. The proceeds from the equity issuance will be utilized to reduce the debt at NEPL and Nirma, thereby leading to improved financial flexibility. Any delay in the deleveraging plans will remain a key rating sensitivity factor.

* Vulnerability of the soda ash segment to price fluctuations and cyclicality
In the past few years, the revenue mix has changed significantly towards soda ash, caustic soda and LAB, thereby increasing the susceptibility to fluctuation in prices, which are linked to global markets.
Liquidity Strong

Liquidity is strong, primarily driven by Nirma's financial flexibility to raise short- and long-term debt at short notice, and at competitive rates. Liquidity position is supported by unutilised working capital limits of about Rs 600 crore which shall be adequate to cover fixed cost and debt obligation in the near term. Also, cash accrual from business should cover the expected maturing debt of Rs 1,200 crore over the next two fiscals through fiscal 2022.

Outlook: Negative

The Negative outlook signifies the possibility of weakening of financial risk profile of Nirma on account of the incremental debt taken to fund the NVL acquisition.

Rating Sensitivity Factors
Upward factors
* Larger-than-expected cash accrual and reduction in debt levels, resulting in net debt to EBITDA of less than 1.5 times on a sustained basis.
* Significant improvement in business performance, driven by increase in market share and sustenance of healthy operating profitability.

Downward factors
* Delay in improvement in net debt to EBITDA ratio to around 2 times before March 31, 2022, because of:
* Lower-than-expected cash accrual
* Delay in deleveraging plans
* Significant debt-funded growth plans.

About the Company

Nirma, set up by Dr Karsanbhai K Patel in 1980 to manufacture detergents, has expanded operations to soaps, chemicals and processing of minerals. It has plants in Searles Valley (USA); Mehsana, Ahmedabad, Vadodara, and Bhavnagar (Gujarat).

The largest soda ash manufacturer in India, Nirma acquired the California-based natural soda ash producer, Searles Valley Minerals Inc, in fiscal 2008, which has manufacturing facilities in Argus, Trona, and Westend (USA).

Key Financial Indicators*
Particulars Unit 2019 2018
Revenue Rs.Cr 8807 8159
Profit After Tax (PAT) Rs.Cr 807 659
PAT Margin % 9.2 8.1
Adjusted debt/adjusted networth Times 0.6 0.7
Interest coverage Times 4 3.2
*CRISIL-adjusted consolidated financials.

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL 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. For more details on the CRISIL complexity levels, please visit www.crisil.com/complexity-levels.
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
INE091A08149 Perpetual Non Convertible Debentures 6-Jul-17 9.50 6-Jul-77 900 Highly
Complex		 CRISIL AA-/Negative
INE091A07182 Non Convertible Debentures 2-Jun-20 7.75% 2-Jun-23 310 Simple CRISIL AA/Negative
NA Non Convertible Debentures# NA NA NA 90 NA CRISIL AA/Negative
NA Commercial Paper NA NA 7-365 days 1500 Simple CRISIL A1+
NA Cash Credit*^$ NA NA NA 1500 NA CRISIL AA/Negative
NA Letter of credit & Bank Guarantee NA NA NA 400 NA CRISIL A1+
NA Term Loan Aug-16 NA Jul-26 1500 NA CRISIL AA/Negative
NA Proposed Long Term
Bank Loan Facility		 NA NA NA 500 NA CRISIL AA/Negative
NA Term Loan Feb-20 NA Feb-25 250 NA CRISIL AA/Negative
NA Term Loan Mar-20 NA Feb-25 450 NA CRISIL AA/Negative
NA Term Loan Mar-20 NA Sep-25 200 NA CRISIL AA/Negative
NA Term Loan Feb-20 NA Dec-25 600 NA CRISIL AA/Negative
*Interchangeable with letter of credit and bank guarantee to the extent of Rs 445 crore
^Interchangeable with inland/import letter of credit to the extent of Rs 50 crore
$Interchangeable with bank guarantee to the extent of Rs 40 crore
#yet to be issued
 
Annexure - List of Entities Consolidated
Name of the Company Type of Consolidation Rationale
Karnavati Holding Inc. Full consolidation Subsidiary
Searles Valley Minerals Inc. Full consolidation Subsidiary
Searles Valley Minerals Europe Full consolidation Subsidiary
Searles Domestic Water Company LLC Full consolidation Subsidiary
Trona Railway Company LLC Full consolidation Subsidiary
Annexure - Rating History for last 3 Years
  Current 2020 (History) 2019  2018  2017  Start of 2017
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Commercial Paper  ST  1500.00  CRISIL A1+  27-05-20  CRISIL A1+  22-02-19  CRISIL A1+  29-09-18  CRISIL A1+  14-11-17  CRISIL A1+  CRISIL A1+ 
        02-04-20  CRISIL A1+      08-01-18  CRISIL A1+  03-07-17  CRISIL A1+   
        19-03-20  CRISIL A1+               
        28-02-20  CRISIL A1+               
Non Convertible Debentures  LT  310.00
31-07-20  		CRISIL AA/Negative  27-05-20  CRISIL AA/Watch Developing  22-02-19  CRISIL AA/Stable  29-09-18  CRISIL AA/Stable  14-11-17  CRISIL AA/Negative  CRISIL AA/Negative 
        19-03-20  Withdrawal      08-01-18  CRISIL AA/Negative  03-07-17  CRISIL AA/Negative   
        28-02-20  CRISIL AA/Watch Developing               
Perpetual Non Convertible Debentures  LT  900.00
31-07-20  		CRISIL AA-/Negative  27-05-20  CRISIL AA-/Watch Developing  22-02-19  CRISIL AA-/Stable  29-09-18  CRISIL AA-/Stable  14-11-17  CRISIL AA-/Negative  -- 
        02-04-20  CRISIL AA-/Watch Developing      08-01-18  CRISIL AA-/Negative  03-07-17  CRISIL AA-/Negative   
        19-03-20  CRISIL AA-/Watch Developing               
        28-02-20  CRISIL AA-/Watch Developing               
Fund-based Bank Facilities  LT/ST  5000.00  CRISIL AA/Negative  27-05-20  CRISIL AA/Watch Developing  22-02-19  CRISIL AA/Stable  29-09-18  CRISIL AA/Stable  14-11-17  CRISIL AA/Negative  CRISIL AA/Negative 
        02-04-20  CRISIL AA/Watch Developing      08-01-18  CRISIL AA/Negative  03-07-17  CRISIL AA/Negative   
        19-03-20  CRISIL AA/Watch Developing               
        28-02-20  CRISIL AA/Watch Developing               
Non Fund-based Bank Facilities  LT/ST  400.00  CRISIL A1+  27-05-20  CRISIL A1+  22-02-19  CRISIL A1+  29-09-18  CRISIL A1+  14-11-17  CRISIL A1+  CRISIL A1+ 
        02-04-20  CRISIL A1+      08-01-18  CRISIL A1+  03-07-17  CRISIL A1+   
        19-03-20  CRISIL A1+               
        28-02-20  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*^$ 1500 CRISIL AA/Negative Cash Credit*^$ 1500 CRISIL AA/Watch Developing
Letter of credit & Bank Guarantee 400 CRISIL A1+ Letter of credit & Bank Guarantee 400 CRISIL A1+
Proposed Long Term Bank Loan Facility 500 CRISIL AA/Negative Proposed Long Term Bank Loan Facility 500 CRISIL AA/Watch Developing
Term Loan 3000 CRISIL AA/Negative Term Loan 3000 CRISIL AA/Watch Developing 
Total 5400 -- Total 5400 --
*Interchangeable with letter of credit and bank guarantee to the extent of Rs 445 crore
^Interchangeable with inland/import letter of credit to the extent of Rs 50 crore
$Interchangeable with bank guarantee to the extent of Rs 40 crore
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 Fast Moving Consumer Goods Industry
CRISILs Criteria for Consolidation
CRISILs Criteria for rating short term debt

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