Detailed Rationale

Crisil Ratings has revised its outlook on the long term bank facilities of Sanman Trade Impex Limited (Sanman; part of Groupe Veritas) to ‘Negative’ from ‘Stable’ while reaffirmed its rating at ‘Crisil A-’ ; Short term rating has been reaffirmed at ‘Crisil A2+’.

 

Revision in the outlook factors an expected moderation in the operating performance of Hazel Mercantile Ltd(HML rated 'Crisil A/Crisil A1 Watch Negative') at a consolidated level, compared to previous expectations, with financial risk profile continuing to remain average. Basis consolidated provisional financials for fiscal 2024, while operating revenues have grown by ~3% on-year to Rs. 9,937 crore, operating margin has declined to Rs. 150 crore at ~1.5% (against previous expectations of ~2%) due to steep increase in logistics costs which could not be passed on. While this impact is expected to have faded this fiscal, operating margin are expected to average Rs. 185-190 crore and hence the pace of growth in revenues with maintenance of its targeted operating margins at ~2% would remain monitorable. Financial risk profile remains average, with interest coverage estimated at ~2 times for fiscal 2024 from ~2.6 times in fiscal 2023, while the total outside liabilities to adjusted networth ratio remained adequate at 0.85 times as on March 31, 2024 (0.77 time a year earlier), with liabilities primarily comprising of working capital debt and payables.

 

Operating income of Sanman grew ~12.6% on-year in fiscal 2024 to Rs 717 crore while operating margins moderated to 1.65% in fiscal 2024 from 2.1% in fiscal 2023 as well given increased competition which led to pricing pressure. Over the medium term, company’s operating performance is expected to be in-line with the group.

 

The ratings continue to reflect the established global presence of Groupe Veritas, its sound distribution network, strong relationships with several key suppliers and customers, and the extensive experience of the promoter in the trading business, and their commitment to bring in additional equity. These strengths are partially offset by average financial risk profile and susceptibility of operating performance to volatility in commodity prices and foreign exchange (forex) rates despite the effective risk management practices adopted by the group.

 

In January 2023, HML’s promoters completed a sale of its 55% stake in Veritas (India) Ltd (VIL) to Swan India Ltd (SEL) making VIL along with its wholly owned PVC project company, Veritas Polychem Pvt Ltd (VPPL), a subsidiary of SEL. Thereafter, both VIL and VPPL are no longer a part of Groupe Veritas (GV). As per management, HML will hold 26% stake in Hazel Infra Ltd (HIL), the entity which has been formed in consortium with SEL (holding 74% stake), and which has acquired Reliance Naval and Engineering Ltd (RNAVAL), a distressed company which underwent NCLT proceedings. Given minority stake in HIL, Crisil Ratings understands that Groupe Veritas will not make any investments in the RNAVAL bid or VPPL project, nor will it guarantee for debt raised by these entities. Any change to this understanding leading to higher debt levels for GV will be monitorable.

Analytical Approach

• Crisil Ratings has applied its criteria for rating entities belonging to homogenous corporate groups. HML and its wholly owned subsidiaries (including Hazel Middle East FZE, Hazel Europe BV), as well as Sanman Trade Impex Ltd are considered as part of Groupe Veritas, given the common promoter holding and significant operational, financial and managerial linkages.
• Crisil Ratings has treated unsecured loan from the promoter (Rs 33 crore as on March 31, 2024) as neither debt nor equity, as the loan is interest-free, has no fixed repayment schedule, is subordinated to external debt and is expected to remain in the business over the medium term.
• Crisil Ratings has included letter of credit-backed payables (amounting Rs 751 crore as on March 31, 2024) as short-term debt, as these are interest bearing and have a fixed maturity. At Standalone level, LC outstanding of Sanman amounted to Rs 109 Cr as of March 31-2024

 

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 global presence with a wide distribution network: Groupe Veritas has been trading in chemicals and petrochemicals for over two decades and has a strong presence in the domestic and overseas markets. It has a vast product portfolio and derives 50-55% of its revenue from the international markets. Although naphtha, crude degummed oil, and toluene are major traded commodities, the company does not have high dependence on any single product. Growing volume and addition of profitable products to the basket have aided growth in topline and profitability. The group follows a prudent risk management policy, with full order-backed procurement, thus ensuring negligible forex and price risk, while managing its cost to sustain and improve profitability. The group has a strong network with adequate storage capacity in 12 locations and is present in 10 countries through 8 international offices.

 

• Strong relationships with several key customers and suppliers: Over the years, Groupe Veritas has maintained strong relationships with several large suppliers and customers worldwide, thereby ensuring stability in terms of sourcing and credit. Its clientele includes large corporates and marquee customers, which reduces counterparty risk.

 

• Promoter’s extensive experience: The promoter has extensive experience and has demonstrated high proficiency in managing the commodity trading and distribution business, as reflected in the significant scaling up of operations. He has set up a team of highly qualified professionals and developed robust and effective risk-mitigating strategies in-house. Groupe Veritas has managed sharp fluctuations in prices as well as forex rates and maintained cost control over these years. The operations have been divided according to commodity and functions.

 

Weaknesses:

• Average financial risk profile: The financial risk profile remained average, interest coverage has moderated to ~2 times in fiscal 2024 from 2.6 times in fiscal 2023, while the total outside liabilities to adjusted networth ratio remained adequate at 0.85 time as on March 31, 2024 (0.77 time a year earlier), with liabilities primarily comprising working capital debt and payables. Adjusted networth stood at Rs 2,693 crore as on March 31, 2024.

 

Total debt of the group stood at Rs 904 crore as on March 31, 2024, as against Rs 789 crore as on March 31, 2023. The debt mainly comprises short-term working capital payables in the form of letter of credit-backed payables, which increased to Rs 751 crore as on March 31, 2024, from Rs 652 crore a year earlier. Unsecured loan from the promoter stood at Rs 33 crore as on March 31, 2024. Sanman’s total fund based debt utilization remained steady Rs 33 crore against Rs 34 Crore last fiscal while LC utilization was at ~Rs 109 Crore.

 

• Intense competition and low profitability: The group benefits from its large scale and strong relationships with large and key customers built over the years. Commodity trading involves limited value addition and is a highly competitive business with low entry barriers, resulting in low profitability. The operating margin of Groupe Veritas fluctuated between 1.5 and 2.0% in the past and is expected at a similar range given the high competitive pressure. In Fiscal 2024, the group’s margins moderated given steep increase in logistics costs which could not be passed on to end customers. 

 

• Susceptibility to volatility in crude and petrochemical prices and fluctuations in forex rates: Groupe Veritas trades in chemicals and polymer products, the prices of which are directly linked to crude prices, which are highly volatile. Although Groupe Veritas has adequate risk mitigating strategies, its operating performance remains susceptible to volatility in commodity prices. The group also deals in imported chemicals, and hence, faces forex risk. However, it benefits from a natural hedge as 50-55% of its sales are through exports and procurement is fully order-backed. Nonetheless, any significant movement in commodity prices and forex rates could adversely impact the operating performance and will be closely monitored.

Liquidity: Adequate

Expected annual cash accrual of Rs 100-120 crore will allow the group to comfortably meet nominal capital expenditure, in the absence of any term debt obligation and dividend outgo. Fund-based limits in each group company were utilised 85% on average over the six months through January 2025, and non-fund-based limits at 96% on average. Availability of unsecured loans from the promoter, whenever required, enhances financial flexibility.

Outlook: Negative

The operating performance of the group has moderated in fiscal 2024 compared to previous expectations, pace of growth in revenues with maintenance of  targeted operating margins at ~2% at group level would remain monitorable

Rating sensitivity factors

Upward factors

• Sustained and significant increase in operating profitability to more than 4%, backed by improvement in the trading operations
• Steady increase in scale of trading operations, leading to better profitability
• Prudent working capital management, improving liquidity position and key debt protection metrics such as interest coverage ratio improving to over 4 times

 

Downward factors

• Substantial decline in operating profitability to less than 2% on a sustained basis
• Weakening of the financial risk profile and debt metrics on account of working capital stretch, or cash outflows
• Delay in financial support from the promoter during financial exigencies
• Deterioration of the credit risk profile of HML by one notch or more

About the Company

Incorporated in 1996 and promoted by Mr Nitin Kumar Didwania, Sanman Trade Impex trades in bulk chemicals, solvents, polymers, paints and varnishing chemicals. Sanman’s distribution network is spread across New Delhi, Ahmedabad, Kolkata, Hyderabad and Kochi. It also has tank terminals at Kandla, Mundra, Kakinada, Mumbai, and Kochi for the export and import of traded goods. The company got its present name in August 2015.

About the Group

Groupe Veritas, owned by Mr Nitin Kumar Didwania, primarily trades in petrochemicals, polymers, rubber, agri-products, paper, heavy distillates, minerals and metals. HML is the flagship company of the group, which includes Sanman as the other trading company. The promoter’s extensive experience in the petrochemicals trading business and established relationships with customers and suppliers enabled the group to significantly scale up revenue to around Rs 9,937 crore (provisional) in fiscal 2024. The group has set up several entities for effective management of various business verticals. In the domestic market, it has a network covering 12 locations with adequate storage capacity. It has presence in 10 countries with 8 international offices.

Key Financial Indicators - Sanman

Particulars	Unit	2024	2023
Revenue	Rs.Cr.	777	690
Profit After Tax (PAT)	Rs.Cr.	2.3	4
PAT Margin	%	0.6	0.6
Adjusted debt/adjusted networth*	Times	0.82	0.89
Adjusted interest coverage	Times	1.28	1.48

*Adjusted Debt includes LC utilization

Any other information: Not Applicable