Rating Rationale

Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AA/Stable/CRISIL A1+’ ratings on the bank facilities and debt instruments of Nirma Limited (Nirma). Further, rating on non-convertible debentures of Rs 310 crore has been withdrawn upon maturity and on receipt of repayment confirmation from the debenture trustee. The withdrawal is in line with CRISIL Ratings’ policy on withdrawal of ratings.

The rating reaffirmation takes into account healthy business profile, strong financial profile as well as the intent of the management to use its balance sheet headroom for sizeable inorganic/organic expansions in the near term. Specifically, CRISIL Ratings has factored into its rating, the intent of the management to diversify its business and undertake large acquisitions aggregating Rs 5,000-7,000 crore in domestic or overseas markets. Alternatively, company may also look to grow its business aggressively and undertake large capital expenditure (capex) of similar size. While company has not made any announcement, such expansion or acquisitions if undertaken and funded largely through debt (as seen in the past) can result in increase in financial leverage (net debt to earnings before interest, tax, depreciation and amortization [EBITDA]) up to 2.5 times. While this remains within the leverage thresholds for the current rating level, however the ratings will remain sensitive to the quality of assets acquired in terms of its cash generation ability and management’s plan around de-leveraging in such an eventuality. That said, the company benefits from the presence of an experienced management, with past track record of successfully consummating inorganic expansions and subsequent deleveraging of its balance sheet post acquisitions, which is reflected in the rating.

During fiscal 2023, operating performance improved further. Standalone revenue grew ~30% (~26% on consolidated basis) owing to rise in realisations across key products. Standalone operating margin rose further to ~26% (versus 23% in fiscal 2022), owing to better product mix and adequate pass through of rise in input costs. Profitability of the overseas subsidiary (Searles Valley Minerals Inc, USA – SVM), though, moderated during the year owing to presence of yearly contracts that had to be honored at stated prices despite rise in input cost during the year. However, the renewal of contracts in January 2023 repriced at better prices and subsequent softening of input costs would likely result in margin expansion in the overseas business.

Further, healthy cash accruals owing to strong revenue growth and margin expansion over the past three fiscals resulted in high liquidity and led to significant deleveraging of the balance sheet. The net debt to EBITDA improved to 0.5 time in fiscal 2023 from 1.1 times in fiscal 2022 and peak level of 2.8 times in fiscal 2020.

The ratings also factor in diversified business risk profile of Nirma, backed by its established market position in the domestic soda ash, soaps and detergent businesses. Moreover, forward and backward integration, coupled with various cost initiatives, helps the company in commanding healthy profit margin. These strengths are partially offset by vulnerability of the business to price fluctuations owing to the commoditized nature of the chemicals business and shall be monitorable. Similarly, any sizeable debt funded acquisition or expansion shall be monitorable in context of impact on business profile as well as increase in financial leverage and its sustainability thereof.