Detailed Rationale

CRISIL Ratings has reaffirmed its ratings on the bank facilities and commercial paper programme of Rallis India Ltd (Rallis) at ‘CRISIL AA+/Stable/CRISIL A1+’.

 

Operating performance remained healthy in fiscal 2021, marked by revenue growth of 8% driven by strong offtake in domestic market and steady performance of international business including contract manufacturing. Rallis, which derives 63% of its revenues from the domestic market will benefit by normal monsoons in current fiscal as well, and is likely to post a revenue growth of ~9-11% this fiscal. Operating margin should remain healthy at 14% supported by favorable product mix.

 

Rallis's financial risk profile should continue to benefit from strong capital structure, negligible debt and healthy surplus liquidity. Capital expenditure (capex) is expected to Rs 200-220 crore per annum for fiscal 2022 and 2023 and it will largely be funded from accruals, leading to continued healthy debt metrics. Liquidity is further supported by cash surplus of Rs 338 crore as on March 31, 2020 and unutilized bank limits of Rs 85 crore in the past 12 months ended August 2021

 

The ratings continue to reflect Rallis’s established position in India’s crop protection market, strong focus on exports, branding and farmer relationship, and a comfortable financial risk profile. The ratings also factor in the strategic importance to the parent, Tata Chemicals Ltd (TCL; rated ‘CRISIL A1+’), and the consequent operational and need-based funding support available from TCL. These rating strengths are partially offset by vulnerability to risks inherent in the crop protection market in India, and working capital-intensive operations.

Analytical Approach

Parent Notch up

The ratings of Rallis factor in support expected from its parent Tata Chemicals Limited (‘CRISIL A1+’). CRISIL Ratings believes that Rallis will, in case of exigencies, receive support from its parent.

 

Consolidation

For arriving at the ratings, CRISIL Ratings has considered consolidated business and financials of Rallis.

 

Goodwill Amortization

CRISIL Ratings has amortised goodwill on acquisitions over a period of 10 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:

• Established market position: Rallis is a major player in the crop protection sector with a strong presence in all three segments of the pesticide industry (insecticides, fungicides, and herbicides) in India and abroad. Moreover, the company has entered into contract manufacturing by partnering with reputed players for developing new products and services. It is also focused on providing end-to-end solutions in the agriculture input chain and has thus entered into related sectors such as seeds (largely through MLSL, which has a commercialised portfolio of hybrid seeds), plant growth nutrients, and organic compost, helping to diversify the revenue base.

 

• Strong focus on branding and relationship with farmers: Strong brand and steady engagement with farmers facilitated regular launch of new products. The company undertakes farmer relationship programmes such as Rallis Kisan Kutumba, through which it provides them information on new and improved practices in agriculture. Rallis launched Samrudh Krishi, through which agricultural solutions are provided to farmers and has also been working on improving productivity of crops. Other initiatives like Sampark which is a mobile app launched to support on filed crop advisers with the goal of creating better engagement with farmers. Also Rallis launched an initiative, Drishti which is remote sensing and artificial intelligence enabled predictive advisory services which will provide farmers information such as pest forecast for Key crops, short and medium term weather and season progress information.

 

• Comfortable financial risk profile: Rallis has generated healthy cash flows over time, which has strengthened its net worth and lowered reliance on debt. Its net worth was large at Rs 1,326 crore, and the gearing healthy at 0.03 time, as on March 31, 2021, while other debt metrics too were at robust levels; for instance interest cover was at 51.90 times in fiscal 2021. With only moderate capital spending over the medium term, and continuing moderately working capital intensive operations, debt metrics will continue to remain at healthy levels.

 

• Support from the parent: Managerial and operational support from TCL continues to benefit the company. In the past, funds infused have helped overcome financial pressures.

 

Weakness

• Vulnerability to risks inherent in the crop protection sector: The domestic crop protection segment is affected by irregular monsoon and volatility in farm income. Also, the sector is highly regulated by specific registration processes in different countries and is subject to various environmental rules and regulations.

 

• Working capital-intensive operations: The domestic crop protection industry is highly working capital intensive. Inventory of the company has been increasing due to higher stocking of raw materials in the anticipation of supply shortages from China and stocking of Metribuzin. The stretch in working capital is expected to remain over the next two years since the industry is undergoing disruptions caused by short-supply of raw material from China

Liquidity: Strong

Rallis is expected to generate cash accruals of Rs 260-290 crore annually between FY22-24. Further, as on March 31, 2021, the company also had cash and cash equivalents of about Rs 338 cr. Additionally, the unutilized bank lines were Rs 85 crore over the past 12 months ending August 2021. The cash surplus, and cash accrual should be sufficient to fund any additional working capital requirements and capex of Rs 200-220 crore per annum in FY22 and FY23.

 

Presently there are negligible long term debt obligations and management reliance on debt for funding of capex is very low. However, in case Rallis requires debt funding, the adjusted gearing is 0.03 time as on March 31, 2021 provide sufficient headroom for additional debt.

Outlook: Stable

CRISIL Ratings believes the business risk profile will continue to be supported by steady demand prospects for Rallis’ products in the domestic market, and improving focus on exports. Revenues from capacity created over the medium term is expected to result in better market share, while operating profitability is expected to sustain at heathy levels, ensuring steady cash generation. Financial risk profile is expected to remain healthy. Rallis will continue to remain critical for TCL and keep receiving operational, managerial and financial support.

Rating Sensitivity factors

Upward Factors

• Sustained revenue growth of >15% and EBITDA margin > 16-17% benefitting cash generation
• Continued healthy debt metrics, supported by prudent capital spending and substantial improvement in working capital situation
• Sustenance of solid liquidity position
• Upward revision in parent rating

 

Downward Factors

• Revenue degrowth or EBITDA margin <12%
• Larger-than-expected, debt-funded capital spending, or substantial acquisition or elongation of working capital cycle resulting in total Debt / EBITDA > 1
• Downward revision in parent rating

About the Company

Rallis, a part of the Tata group, is one of the leading players in the domestic crop protection sector and manufactures pesticides, herbicides, and fungicides at its factories in four locations. These agrochemicals are spread across 80% of India’s districts through an extensive distribution network. The Rallis Innovation Chemistry Hub (RICH) caters to global requirements and plays a key role in contract manufacturing. In fiscal 2010, Rallis became a subsidiary of TCL; earlier, it was jointly owned by multiple Tata group companies.

 

Rallis acquired a majority stake in MLSL, a Bengaluru-based seeds company, in fiscal 2011. MLSL was established in 2000 by scientists to focus on seed research and manufacturing. The company has proprietary bacillus thuringiensis trait and cry1C approvals for its cotton business. In fiscal 2013, Rallis acquired a stake in Maharashtra-based ZWAOL, which manufactures scientifically prepared organic compost from waste derived from the sugar industry. Currently, both the companies are merged with Rallis India Ltd.

About the Parent

TCL was incorporated in 1939 to manufacture soda ash and related chemicals, including sodium bicarbonate, caustic soda, and bromides. The company commenced operations in 1944 with a 30,000 tpa plant at Mithapur. Over the years, it has expanded its gross soda ash capacity to 917,700 tpa. It entered the iodised vacuum salt business in 1986. Tata Salt is the leading iodised edible salt brand in India. TCL also has a 440,000-tpa cement plant in Mithapur, which was set up to effectively utilise the solid waste generated during soda ash production.

Key Financial Indicators (Consolidated)^ for Rallis:

Particulars	Unit	2021	2020
Operating income	Rs crore	2439	2262
Profit after tax	Rs crore	229	184
Adjusted Profit after tax (PAT)*	Rs crore	221	164
PAT margin	%	9.4	8.1
Adjusted debt/adjusted net worth	Times	0.03	0.05
Interest coverage	Times	51.90	29.83

^CRISIL Ratings adjusted numbers

*Adjusted for goodwill amortization

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of Instrument	Date of Allotment	Coupon Rate (%)	Date of Maturity	Issue Size (Rs.Cr)	Complexity level	Rating Assigned with Outlook
NA	Cash Credit*	NA	NA	NA	150.5	NA	CRISIL AA+/Stable
NA	Rupee Term loan	NA	NA	Feb-2023	4.5	NA	CRISIL AA+/Stable
NA	Letter of Credit#	NA	NA	NA	276.5	NA	CRISIL A1+
NA	Proposed Long Term Bank Loan Facility	NA	NA	NA	8.5	NA	CRISIL AA+/Stable
NA	Commercial Paper	NA	NA	7-365 days	75.0	Simple	CRISIL A1+

*Interchangeable with other fund-based facilities

#interchangeable with other non-fund based facilities