Rating Rationale

Detailed Rationale

CRISIL Ratings has upgraded its rating on the long-term bank facilities of Savita Oil Technologies Limited (SOTL) to ‘CRISIL AA/Stable’ from ‘CRISIL AA-/Positive‘. Furthermore, the short term rating has been reaffirmed at ‘CRISIL A1+’.

The upgrade in the rating is driven by sustained improvement in the financial risk profile of SOTL aided by strong capital structure and liquidity position and healthy debt protection metrics. Besides, the company’s better product and customer diversity supports its business risk profile.

SOTL registered 27% year-on-year growth in revenue during nine months ended December 31, 2022 (9MFY2023) driven mainly by increased realisations linked to base oil prices. This comes on the back of 47% year-on-year growth in revenue during fiscal 2022, driven by price increase as well as pent-up demand arising from recovery in end user industries such as power distribution, cosmetics, automobiles, etc post the second wave of pandemic. With ongoing cooling off in base oil prices, its key raw material and a derivate of crude oil, the company’s overall operating performance for fiscal 2023 is expected to correct. As a result, the company’s operating margin is expected to moderate to 9-10% on a steady state basis (12.4% in fiscal 2022) backed by 2-3% volume growth and no steep volatility in base oil prices.

Operating margin stood at 10.5% for 9MFY2023 as against 12.4% during the corresponding period of the previous fiscal. Profitability has been impacted with declining base oil prices as well depreciation in the rupee particularly since the second quarter of the current fiscal. The company is expected to sustain operating margin of around 9-10% over the medium term with benefit of operating leverage, despite expected softening of base oil prices.

The financial risk profile benefits from strong capital structure, healthy debt protection metrics and comfortable liquidity. Adjusted net worth stood at Rs 1257 crore as on March 31, 2022 and gearing was 0.24 times on the same date. Debt mainly comprises of trade acceptances availed for import of key raw materials. In the absence of any large capital expenditure (capex) plans, gearing is expected to remain at the current level over the medium term. Debt protection metrics are also expected to remain healthy over the medium term withinterest coverage ratio of ~10.3 times during 9MFY23.

SOTL plans to carry out capex of Rs 30-35 crore per annum during fiscals 2023 to 2026, which will be funded entirely through internal cash accruals. Liquidity should remain strong with cash accrual expected to be Rs 150-190 crore per annum over the medium term coupled with unencumbered cash surplus of Rs 427 crore as on September 30, 2022.

On May 30, 2022, SOTL had informed the exchanges regarding the approval received from their board of directors regarding the amalgamation of Savita Polymers Ltd (SPL) with SOTL, post which the entire assets and liabilities of SPL will be transferred to SOTL. The objective of this merger is to consolidate operations under a single roof, which will provide higher diversification of product offerings and improve operating efficiencies and cost competitiveness as they are involved in similar line of business. Approvals for the merger are under process.

CRISIL Ratings has taken note of the newly incorporated wholly owned subsidiary, Savita Greentec Limited on October 03, 2022 with paid up capital of Rs.1 lakh. Considering it is yet to commence its business operations, it has not been considered for consolidation.

The ratings continue to reflect the company’s established market position, diversified revenue profile, and healthy financial risk profile. These strengths are partially offset by the vulnerability of operating margin to sharp volatility in foreign exchange (forex) rates and commodity prices, working capital-intensive operations and exposure to intense competition.