Detailed Rationale

Crisil Ratings upgraded its rating on the long-term bank facilities of Pondy Oxides and Chemicals Ltd (POCL) to ‘Crisil A/Stable’ from ‘Crisil A-/Stable’.

 

The upgrade in ratings reflects the improved business risk profile of the company supported by anticipated revenue growth of ~25-30% in fiscal 2026 driven by higher order volumes from customers. The incremental volumes will be delivered through the new manufacturing plant in Thervoykandigai, Tamil Nadu with a capacity of 72000 MT to be commissioned in two phases. Phase 1 is commissioned and expected to start commercial operations in April 2025. The overall capex undertaken for Phase I is ~Rs 90 crore and POCL has funded the same through proceeds of preferential issue, Qualified Institutional Placement and internal accruals. Phase II (36000 MTPA of lead recycling capacity) is expected to be commissioned in another 6 months post commencement of commercial operations of phase I. This new plant is lean, automated and it has integrated all operations of lead recycling under one roof which results in reduction of overall cost through operational efficiencies. The new plant has sufficient land space available for further expansion where POCL has plans to add other non ferrous verticals and plastics in future. The capex for Phase II and other non-ferrous metal verticals is estimated at ~Rs 70 crore and is expected to be funded by internal accruals and QIP proceeds of Rs 175 crore which was raised in the month of December 2024.

 

The revenues for the company is expected to see healthy growth in fiscal 2025, with the company estimated to achieve on-year increase of ~30% supported by higher volumes in the lead segment. POCL is likely to report topline of ~Rs 2,000 crore and operating margin of 5.0-5.1% in fiscal 2025.

 

The rating also factors in the improving financial risk profile, supported by better accruals and sizeable equity raise of Rs 245 crore over last 15 months (further ~Rs 62 crore expected with conversion of warrants before August 2025), which has been used to fund the capex plans and meet the working capital requirements.  The total outside liabilities to adjusted networth ratio is estimated to be lower than 0.35 times as on March 31, 2025. The ratio should improve in fiscal 2026, aided by higher accruals and conversion of warrants. Steady accretion to reserves should support the financial risk profile in the absence of any sizeable debt-funded capital expenditure (capex) plans over the medium term.

 

The rating also reflects the established position of the company in the lead recycling industry, long term relationship with key customers, diversified procurement and supply base, moderate entry barriers and established manufacturing capabilities. These strengths are partially offset by exposure to stiff competition from both unorganised and organised players, susceptibility to fluctuations in raw material prices impacting profitability and risks associated with changes in government policies.

Analytical Approach

Crisil Ratings has combined the business and financial risk profiles of POCL and its subsidiary, POCL Future Tech Pvt Ltd, and Harsha Exito Engineering Pvt. Ltd as they have significant managerial, operational, and financial linkages.

 

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: The business risk profile should remain supported by well-entrenched relationship with key customers, diversified procurement and supply base, moderate entry barriers and established manufacturing capabilities. The company has well-established relationships with large battery OEM’s such as Amara Raja Energy and Mobility Ltd (‘Crisil AA+/Stable/Crisil A1+’), Sebang Global Battery Company Ltd and Glencore International AG (rated BBB+/Stable by S&P Global), which have reputed market positions. Furthermore, the relationship with these customers span over 10-15 years, ensuring steady inflow of orders.

 

The company also has a well-diversified supplier and procurement base, with over 270 suppliers and procurement from above 90 countries. The import of lead scrap in India is subject to licensing from the Ministry of Environment, Forest and Climate Change, while setting up of lead recycling plants require permissions from the central and state pollution boards, resulting in entry barriers for new entrants. Also, POCL is focusing on copper and plastic verticals, enabling diversification. Over last few months, copper segment has picked up and it is expected to reach ~8% of revenue in fiscal 2026. Moreover, the company has well-established manufacturing facilities, providing it with a logistical advantage. Its Sriperumbudur plant in Tamil Nadu is close to the Chennai port while its Chittoor plant in Andhra Pradesh is near to Amara Raja unit.

 

POCL had also acquired Harsha Exito Engineering Pvt Ltd facility in Thervoykandigai, Tamil Nadu which consisted of 25 acres of land bank along with other amenities and utilities with close proximity to the Chennai port. POCL has set up its new lead recycling unit   at this location with a capacity of 72000 MT per annum in two phases with Phase I (36000 MTPA of lead recycling capacity) expected to start commercial operations in April 2025. Phase II (36000 MTPA of lead recycling capacity) is expected to be commissioned in another 6 months post starting of commercial operations of phase I for which the infrastructure is already in place. Further addition of copper recycling capacity is expected at this facility with sufficient land space is available. POCL has also acquired land in Mundra to the extent of 23 acres for future expansion. This is expected to be taken up post commercialization and stabilization of operations at the new plant.

 

• Comfortable financial risk profile: Financial risk profile has been comfortable, with networth of Rs 395 crore and debt of Rs 145 crore as on September 30, 2024, resulting in gearing under 0.4 time. Majority of the debt is used for working capital purposes while long-term debt is nil. Debt protection metrics are estimated to be comfortable for fiscal 2025 with interest coverage ratio of over 6 times and total outside liabilities to tangible networth estimated close to 0.35 times as on March 31, 2025.

 

POCL has completed capex of Rs ~90 crore for Phase I which was funded primarily by proceeds of Preferential issue, QIB and internal accruals in Feb-2024. Further the capex needs of cumulative Rs. 140-160 crore over the next two fiscal years, is expected to be funded largely from equity raised via QIP of Rs 175 crore concluded in Dec-2024 and internal accruals. Financial risk profile is expected to further improve with better performance leading to higher accruals and conversion of warrants leading to equity infusion.

 

Weaknesses:

• Stiff competition from both unorganised and organised players: POCL faces stiff competition from organised and unorganised players in this business, as the products sold by them have low value addition. The company mitigates this impact by selling value added products that provide higher margins.

 

• Risks associated with change in government policies related to tightened environmental norms: Companies in the lead metal industry must adhere to rigorous pollution control norms. With norms getting tightened and environmental activism taking center stage, players are exposed to risks on the grounds of environmental concerns. Thus, change in government policies may continue to impact the operations and will remain a monitorable.

Liquidity: Strong

Liquidity is strong supported by steady annual cash generation of over Rs.60 crore expected for fiscal 2025, cash surpluses of Rs 157 crore as on Dec-2024 and moderate utilization of bank limits (56 % for 12 months ending December 31, 2024). Going forward, the net cash accrual is expected to be over ~Rs 100 crore from fiscal 2026 with the new capacity getting commissioned leading to higher volumes. The company does not have any long term debt on its books. Incremental working capital needs can be met from existing available working capital limits and cash accruals.

Outlook: Stable

POCL will continue to benefit from its established position in the lead metal, lead alloys and other nonferrous metals business and from its longstanding relationship with customer. The company is also expected to sustain its comfortable financial risk profile, supported by steady cash generation and low reliance on debt.

Rating sensitivity factors

Upward factors:

• Sustained healthy revenue growth over the medium term, supported by better customer diversification, and operating margin above 7% on a sustained basis, while maintaining a healthy financial risk profile
• Diversification and material contribution from verticals apart from lead

 

Downward factors:

• Reasonable degrowth in revenues and operating margin dropping below 4% on a sustained basis
• Moderation in debt protection metrics due to large, debt-funded capex or acquisition, or elongation of working capital cycle
• Adverse changes in government regulations

About the Company

Incorporated in March 1995, POCL manufactures lead and lead alloys, which are supplied to customers that produce batteries. Its production units are strategically located; Sriperumbudur and Thervoykandigai facility in (Tamil Nadu), are located with proximity to Chennai Port and Chittoor in Andhra Pradesh that is near the Amara Raja plant. The company’s core product is lead and lead alloys, which are mainly used in making lead-acid batteries. The company has smelting facilities and can manufacture various types of lead metal, lead alloys and other nonferrous metals as per customer needs.

Key Financial Indicators (Consolidated)

As on/for the period ended March 31	Unit	2024	2023
Operating income	Rs crore	1543	1543
Reported profit after tax (PAT)	Rs crore	32	75^
PAT margin	%	2.1	5.1
Adjusted debt/adjusted networth	Times	0.58	0.63
Interest coverage	Times	4.24	7.74

^includes exceptional item; excluding the same the PAT would be lower by Rs 28.5 crore

Any other information: Not applicable