| Pondy Oxides and Chemicals Limited | ||||
| Rating reaffirmed'; rated amount enhanced for Bank Debt | ||||
| Rating Action | ||||
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| Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings. | ||||
| 1 crore = 10 million | ||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has reaffirmed its ‘CRISIL A-/Stable’ rating on the long-term bank facilities of Pondy Oxides & Chemicals Ltd (POCL).
The rating continues to reflect the strong business model of POCL, which is derived from its robust business risk profile, diversified procurement and supply base, moderate entry barriers and established manufacturing capabilities. The rating also factors in comfortable financial risk profile, supported by adequate debt protection metrics, as the company largely uses working capital debt, while holding minimal term debt obligation. 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.
Revenue is projected at about Rs 1,450 crore and operating margin at over 5% in fiscal 2023, aided by the expected growth in volumes but declining realisations as a result of lower raw material costs. Top line was reported at Rs 1,039 crore and operating margin at over 5.2% for the first nine months of fiscal 2023.
POCL has embarked on a diversification plan with focus on Aluminum (commercial production already started) and Plastics. Significant revenue contribution is expected from these verticals. The diversification and ramp up in these verticals will be a key monitorable. Also, the margin may strengthen over the medium term as the company diversifies into other verticals such as aluminum and plastics. Also, acquisition of Harsha Exito Engineering Pvt Ltd provides asset base for further expansion and diversification.
Financial risk profile has been comfortable, with networth of Rs 198 crore and debt of Rs 107 crore, resulting in gearing of under 0.6 time as on March 31, 2022. Financial risk profile should remain healthy supported by stable profitability in fiscal 2023, acquisition of Harsha Exito Engineering Pvt Ltd admitted in National Company Law Tribunal route and the absence of any large, debt-funded capital expenditure (capex). |
Analytical Approach CRISIL Ratings has combined the business and financial risk profiles of POCL and its subsidiary –POCL Future Tech 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 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. Clientele comprises reputed players such as Amara Raja Batteries Ltd (Amara Raja; ‘CRISIL AA+/Stable/CRISIL A1+’), Sebang Global Battery Company Ltd and Glencore International AG (Rated BBB+/Positive by S&P Global). 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.
Further, POCL is focusing on aluminum and plastic verticals enabling diversification. It has already started commercial production for aluminum. POCL is expected to garner revenue from aluminum and plastic verticals fiscal 2024 onwards. Also, POCL is also exploring scaling up copper vertical. The diversification and revenue contribution from these verticals will be a key monitorable.
POCL has well-established manufacturing facilities providing it logistical advantage. Its Sriperumbudur plant in Tamil Nadu is close to the Chennai port while its Chittoor plant in Andhra Pradesh is close to the Amara Raja unit. POCL has emerged as a successful bidder for Harsha Exito Engineering Pvt Ltd admitted in National Company Law Tribunal (NCLT). This provides the company with developed asset base for expansion in terms of land bank, factory building and sheds etc.
Comfortable financial risk profile Financial risk profile should remain supported by steady profitability and the absence of any large, debt-funded capex. Reported networth was Rs 218 crore and debt at ~Rs 27 crore as on September 30, 2022, resulting in gearing of under 0.6 time; total outside liabilities to tangible networth ratio was about 0.6 time. Majority of the debt is used for working capital purposes while long-term debt is negligible as on March 31, 2022. Debt protection metrics were adequate in fiscal 2022, reflected in interest coverage ratio of over 8 times; the interest coverage ratio is projected at more than 10 times and net cash accrual to adjusted debt ratio at about 0.3 time in fiscal 2023.
Weaknesses Stiff competition from both unorganised and organised players and susceptibility to fluctuations in raw material prices 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, the company sells lead alloys, which provide scope for higher profitability.
The operating margin has been 5-7% between fiscals 2015 and 2017. However, it 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). But, margins have reverted to levels of over 5% in fiscal 2022 and for the first nine months of fiscal 2023. Volatility in the operating margin will remain a key monitorable.
Risks associated with change in government policies related to tightened environmental norms Companies in the 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 operations will be a key monitorable. |
Liquidity: Adequate Liquidity should remain supported by the ample surplus available in cash accrual and bank lines. Cash accrual is projected at Rs 50-80 crore per annum for fiscals 2023 to 2025, against yearly debt repayment obligation of Rs 0.5 crore along with capex and incremental working capital requirement. Bank limit utilisation was 38% (on average) for the 12 months through December 2022. |
Outlook Stable POCL will continue to benefit from its established position in the lead metal, lead alloys, and other nonferrous metals businesses along with longstanding relationships with reputed customers. |
Rating Sensitivity factors Upward factors
Downward factors
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About the Company Incorporated in March 1995, POCL manufactures lead and lead alloys, which are supplied to customers who make lead-acid batteries. Its production units are strategically located -- the Sriperumbudur plant is close to the Chennai port while the Chittoor plant is close to the Amara Raja unit. The company has smelting facilities and the ability to manufacture various types of lead metal, lead alloys and other nonferrous metals as per customer requirement. |
Key Financial Indicators
Financials adjusted by CRISIL Ratings |
Any other information: Not applicable |
Note on complexity levels of the rated instrument: |
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 – List of entities consolidated
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| 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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Criteria Details
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