| Pondy Oxides and Chemicals Limited | ||||||
| ‘CRISIL A-/Stable/CRISIL A2+’ assigned to Bank Debt | ||||||
| Rating Action | ||||||
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| 1 crore = 10 million | ||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has assigned its ‘CRISIL A-/Stable/CRISIL A2+’ ratings to the bank facilities of Pondy Oxides And Chemicals Limited (POCL).
The rating reflects the strength in POCL’s business model, which is derived from its strong business risk profile, supported by well entrenched relationships with key customers, diversified procurement and supply base, moderate entry barriers and established manufacturing capabilities. The rating also factors in the comfortable financial risk profile supported by adequate debt protection metrics, as the company largely uses debt for its working capital, while holding minimal term debt obligations. These strengths are partially off-set 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.
CRISIL Ratings expects POCL to report a top line of Rs 1350-1450 crore (around Rs 1000 crore in fiscal 2021) and operating margin of over 6% (2.5% in fiscal 2021) in fiscal 2022. The increase in top line is driven by healthy growth in volumes and realisations coupled with a lower base of last year, while improvement in operating margin is on the back of completion of augmentation of its smelting facilities which will help in operating margins reverting to fiscal 2019 levels. In the first half of fiscal 2022, company has reported top line of Rs 644 crore and operating margin of over 6%.
Operating performance moderated in fiscals 2020 and 2021, which is largely attributed to augmentation of its smelting capacities which led to lower operating margins in the range of 2.5-3.5% during these two years, against a range of 5-7% between fiscals 2015 and 2019. The impact was further exacerbated by disruptions caused by the pandemic and delays in procurement of raw materials due to disruptions in shipping lines and cargos. These events led to delay in fulfilling customer orders which prevented the company from fully passing on the raw materials prices increases to end customers. With smelting units back on track, company will be able to revert to its earlier levels of operating margins of over 6-7%.
Financial risk profile is comfortable with networth of over 151 crore and debt of Rs 146 crore resulting in gearing of under 1 time as of fiscal 2021. With improvement in profitability in fiscal 2022 and no significant debt funded capex, financial risk profile is expected to strengthen with interest cover of over 6.5 times, and net cash accruals to adjusted debt (NCATD) of over 0.3 times. |
Key Rating Drivers & Detailed Description Strengths:
POCL enjoys a strong business risk profile which is supported by its well-entrenched relationships with key customers, diversified procurement and supply base, moderate entry barriers and established manufacturing capabilities. The company has well established relationships with its customers such as Amara Raja Batteries Limited (Amara Raja: Rated CRISIL AA+/Stable/CRISIL A1+), Sebang Global Battery Company Limited and Glencore International AG (Rated BBB+/Stable by S&P Global) which have strong market positions. Furthermore, relations 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 over 90 countries. The import of Lead scrap in India is subject to licensing from the Ministry of Environment and Forest, while setting up of Lead recycling plants require permissions from central and state pollution boards which results in entry barriers for new entrants. Moreover, it also has well established manufacturing facilities providing it logistical advantage. Its Sriperumbudur plant in Tamil Nadu is close to Chennai port while its Chittoor plant in Andhra Pradesh is close to the Amara Raja unit.
Financial risk profile is comfortable with networth of over Rs 151 crore and debt of Rs 146 crore as on March 31, 2021, resulting in gearing of under 1 time. Majority of the debt is used for working capital purposes while long term debt is modest at close to Rs 17 crore as on March 31, 2021. Debt protection metrics were adequate in fiscal 2021 despite the disruptions last fiscal, reflected in interest cover of over 5 times and total outside liabilities to tangible networth of close to 1 time. With improvement in profitability in fiscal 2022 and no significant debt funded capex, financial risk profile is expected to strengthen with interest cover of over 6.5 times, and net cash accruals to adjusted debt (NCATD) of over 0.3 times.
Weaknesses:
POCL faces stiff competition from both organised as well unorganised players in this business, as the products sold by them are low value addition in nature. However, to offset some of the impact, company sells Lead alloys which provide scope for higher margins.
Company had stable operating margin of 5-7% between fiscals 2015 and 2017. However, operating margin was impacted in fiscals 2020 and 2021 due to augmentation of its smelting facilities and high volatility in raw material prices which was not passed on to customers. Though, margins have reverted to earlier levels of over 6% in the first half of fiscal 2022 and the company has secured better commercial terms with its customers. Volatility in operating margins will remain a key monitorable.
Companies in Lead metal industry have to adhere to rigorous pollution control norms. With norms getting tightened and environmental activism taking centre stage, players are exposed to risks on the grounds of environmental concerns. Thus, change in government policies impacting POCL’s operations will be a monitorable. |
Liquidity: Adequate Liquidity is adequately reflected by significant gap between cash accruals and repayment obligations. Company’s accruals of Rs 50-70 crore over fiscals 2022 to 2024 will be sufficient to meet debt repayment obligations of Rs 0.5 to 4.5 crore, while also meeting capex and incremental working capital requirements. Bank limit utilisation was moderate at 62% on average over the 12 months through October 2021. |
Outlook: Stable CRISIL Ratings believes POCL will continue to benefit from its established position in the Lead metal, Lead alloys, and other nonferrous metals business and from its long-standing relationships with customers. |
Rating Sensitivity factors Upward factors:
Downward factors:
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About the Company Incorporated in March 1995, POCL is engaged in manufacturing of Lead and Lead alloys which are supplied to customers who are engaged in manufacturing of batteries. The company has production units which are strategically located; Sriperumbudur which is close to Chennai Port and Chittoor in Andhra Pradesh which is close to the Amara Raja plant. The company’s core product is Lead and Lead alloys, which find applications mainly in manufacture of Lead-Acid Batteries. The company has smelting facilities and has the ability to manufacture various types of Lead metal, Lead alloys and other Nonferrous Metals as per the requirement of their customers. |
Key Financial Indicators
CRISIL Adjusted |
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. The CRISIL Ratings' complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL Ratings' complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments. |
Annexure - Details of Instrument(s)
# Interchangeable with cash credit, export packing credit, packing credit loan in foreign currency, foreign bill purchase, foreign bill discounting, packing credit loan in foreign currency, bill discounting and other long-term facilities |
| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||
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| All amounts are in Rs.Cr. | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annexure - Details of Bank Lenders & Facilities | ||||||||||||||||||||||||||||
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This Annexure has been updated on 14-Jan-2022 in line with the lender-wise facility details as on 13-Jan-2022 received from the rated entity.
Criteria Details
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