| Sudarshan Chemical Industries Limited | ||
| Rating placed on 'Watch Developing' | ||
| 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 placed its rating on the commercial paper programme of Sudarshan Chemical Industries Ltd (Sudarshan) on ‘Rating Watch with Developing Implications’.
The rating action follows the recent announcement of a definitive agreement entered into by Sudarshan to acquire the global pigment operations of the Heubach group of Germany on a debt-free basis for a total consideration of EURO 127.5 million (approximately Rs 1,180 Crore) through its wholly owned subsidiary Sudarshan Europe B.V. (SEBV). The announcement was made on October 11, 2024, and the proposed transaction includes acquisition of assets and share deal of Heubach group by SEBV. In addition, Sudarshan also proposes to infuse around EURO 100 million (approximately Rs. 925 crore) in the acquired entities of the Heubach group for working capital, restructuring, and meeting regulatory requirements. The transaction will also trigger a mandatory open offer to public shareholders in accordance with the provisions of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (“SEBI SAST Regulations, 2011”) for acquisition of upto 26% stake in Heubach’s group listed Indian entity Heubach Colorants India Limited, entailing a maximum consideration of Rs. 346 crore.
The acquisition will be funded through a mix of equity and debt. Accordingly, Sudharshan’s Board of Directors has approved a proposal for raising funds of Rs. 1,000 crore plus green shoe option up to 25% by way of issuance of Equity Shares or any other eligible securities (“Securities”) through permissible modes.,. The deal is expected to be closed in the first quarter of calendar year 2025 (i.e., fourth of fiscal 2025), subject to regulatory clearances
The deal will help Sudharshan emerge as a leading global pigment company with a presence across 19 countries, as well as 17 manufacturing facilities in 11 countries. The Heubach group is the second largest player in the global pigment sector and is estimated to have reported revenues of close to around EURO 1 billion but faced financial challenges recently, due to headwinds from the Ukraine-Russia conflict leading to a rise in energy prices followed by weak demand scenario in key European markets impacted profitability and significant debt levels weakened the balance sheet, owing to which it filed for bankruptcy. Post-acquisition, Sudharshan’s group revenues will witness a material increase with inclusion of Heubach group turnover and its market position in the pigments business will solidify.
Post the monetisation of freehold land and utilisation of the proceeds (Rs. 287 crore, net of taxes) to reduce high-cost borrowings and pre-pay external commercial borrowing (ECB) debt, Sudharsan’s adjusted gearing significantly improved to 0.40 time as on March 31, 2024 (as against 1.04 times during the previous fiscal). In addition, owing to the improvement in operating profitability followed by the de-leveraged balance sheet, the debt protection metrics marked by interest coverage ratio and gross debt to OPBDIT (operating profitability before depreciation, amortisation, interest & finance charges, and taxes) also witnessed sharp improvement to 8.60 times and 1.34 times respectively during fiscal 2024 as against 4.95 times and 3.54 times in the previous fiscal. The large spend of over Rs. 2,000 crore to fund the acquisition of Heubach group and additional infusion will result in rise in Sudharsan’s debt levels and thereby impact debt metrices in near term. Thereafter, improvement in debt metrics will depend on turnaround of the acquired asset and realizing cost synergies. Besides, with debt obligations rising, the company’s ability to maintain adequate liquidity will be a key monitorable.
CRISIL ratings will monitor the progress of the transaction and engage with the management to understand their strategy for turning around the acquired entity, which is over three times larger than Sudarshan’s current operations; this includes assessing expected synergies, timelines for realising benefits, and long-term business and financial plan. The watch will be resolved after all the requisite regulatory approvals are in place and there is more clarity on these aspects.
The rating also continues to reflect the extensive experience of the promoters in the pigment industry and the established market position of Sudarshan. The ratings also factor in the diversified product range and end-user industry and customer profile, strong distribution network, marquee clientele, and adequate financial risk profile of the company. These strengths are partially offset by the working capital requirements and exposure to risks related to volatility in commodity prices.
Sudharshan’s revenues increased by 10% year-on-year (y-o-y) to Rs. 2,539 crore in fiscal 2024 on the back of 7% y-o-y growth in pigment revenues (Rs. 2,223 crore during fiscal 2024 as against Rs. 2,079 crore during fiscal 2023) and 42% y-o-y growth in the engineering division business (Rs. 316 crore during fiscal 2024 as against Rs. 223 crore during fiscal 2023) i.e., RIECO Industries Limited (RIECO). The growth in pigment revenues was supported by demand tailwinds in the plastics and coatings segment especially pertaining to the domestic operations whereby revenues increased by 10% on-year as against overseas operations which recorded modest 4% y-o-y increase owing to macro-economic challenges in European geographies while Northern Latin America, North America, and Middle Eastern regions registered strong performance.
Operating margins improved by 290 basis points (bps) to 12.9% in fiscal 2024 owing to stable raw material prices, improved product mix, and lower energy / power costs. Consequently, operating profitability increased by 42% on-year to Rs. 329 crore during fiscal 2024.
Demand continued to be healthy in the first quarter of the fiscal 2025, with pigment revenues increasing by 10% on-year to Rs. 589 crore on the back of 11% y-o-y growth in specialty pigments followed 7% y-o-y growth in non-specialty pigments. The volume ramp-up from the recent completed growth capex coupled with healthy domestic demand and recovery in overseas markets, translated to healthy growth in pigment revenues. That said, overall revenue growth was constrained at 4% on-year to Rs. 634 crore during the first quarter of fiscal 2025 owing to the underperformance in the engineering business division. Operating margins during the said period though down by 290 bps on sequential basis owing to normal business seasonality resulting in lower operating leverage, continued to be healthy at 12.7% (as against 11.5% during the same period last fiscal) on the back of stable raw material prices, favorable product mix and lower energy / power costs.
Over the medium term, the company is expected to register healthy revenue growth owing to volume ramp-up from the recently concluded growth capex, positive demand tailwinds in the pigment industry, along with industry consolidation globally. Operating margins (excluding the proposed acquisition of Heubach group) are expected to improve to 13-14% over the medium term on account of favorable product mix with skewness towards specialty pigments, cost optimisation measures implemented by the management, and stable raw material prices.
The ratings continue to reflect Sudarshan’s healthy position in the pigment industry with established operating efficiencies and its adequate financial risk profile. These strengths are offset by large working capital requirements and susceptibility of profitability to volatile raw material prices. |
Analytical Approach CRISIL Ratings has combined the business and financial risk profiles of Sudarshan and its subsidiaries, Sudarshan Europe B.V., Sudarshan North America, Inc., Sudarshan Shanghai Trading Company Ltd, Sudarshan Mexico S de R.L.de CV and Sudarshan Japan K.K. All these companies are collectively referred to as the Sudarshan group and have significant managerial, operational, and financial linkages. CRISIL Ratings has also consolidated the business and financial risk profiles of RIECO Industries Ltd, which is a wholly owned subsidiary of Sudarshan and also because of the support committed by the group and its track record demonstrated earlier. CRISIL will also consolidate Heubach group on consummation of the acquisition.
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: Healthy market position in the pigment industry Sudarshan is the largest pigment manufacturer in India, with a market share of 35%, and as per company estimates, is the third largest pigment manufacturer in the world. The products are used in various end-user industries such as decorative and automotive coatings, plastics, inks, and cosmetics. The company, with a product base comparable to global leaders, aims to add more products to its portfolio. Its strong network comprises more than 60 channel partners and subsidiaries in the USA, the Netherlands, China, Mexico and Japan; for distribution of pigments worldwide & procurement of raw materials. Exports accounted for 48% of revenue in fiscal 2024. The company is likely to see its growth strengthen further including global market position, aided by new products launched as a part of capex program which is recently concluded and the “Go to Market” strategy initiative of the company post the easing macro-economic headwinds and global uncertainties. Tailwinds like ongoing consolidation in the industry and the China plus one strategy may also benefit the company.
At current, specialty pigments product portfolio accounts for around 68% of pigment business revenues, and the proportion is said to increase with new product launches within High Performance Pigments (HPPs) and Complex Inorganic Color Pigments (CICPs). The new products from the capex investments have higher skewness towards overseas markets, given the global shift toward specialty pigments due to higher durability and sustainability amidst growing environmentally friendly chemicals demand.
Adequate financial risk profile Owing to the debt funded expansionary capex of Rs. 750 crore undertaken over fiscals 2020-23, the company’s leverage marked by adjusted gearing sharply increased from 0.87 time as on March 31, 2020 to 1.04 time as on March 31, 2023. However, following demand headwinds impacting capex ramp-up and profitability, the company’s debt protection metrics such as interest coverage and gross debt to OPBDIT were significantly impacted; interest coverage during fiscal 2023 contracted to 4.95 times (vs. 15.43 times during fiscal 2020) and gross debt to OPBDIT increased to 3.54 times (vs. 2.00 times during fiscal 2020). That said, the decision by the management to de-leverage the balance sheet through the proceeds of asset monetisation, resulted in the sharp improvement in gearing to 0.40 time as on March 31, 2024. De-leveraged balance sheet followed by improving profitability owing to recovery in demand resulted in the improvement in debt protection metrics, with interest coverage and gross debt to OPBDIT) improving to 8.60 times and 1.34 times respectively during fiscal 2024.
The large spend to fund the acquisition of Heubach group and additional infusion will result in a material rise in Sudharsan’s debt levels and impact debt metrics. Thereafter, improvement in debt metrics will depend on turnaround of the acquired asset and realizing cost synergies. Besides, with debt obligations rising, the company’s ability to maintain adequate liquidity will be a key monitorable.
Weaknesses Large working capital requirements Gross current assets (GCA; net of cash) days stood at 164 days as on March 31, 2024. Inventory requirement remains high as the company has multiple stock keeping units for pigments and several distribution centers both in India and abroad. That said, while GCA days (net of cash) is high, the net working capital cycle stood moderate at around 38 days as on March 31, 2024 (as against 41 days during the same period last fiscal). The sustenance of the net working capital cycle of around 35-40 days shall keep working capital intensity limited, and thereby resulting in limited reliance on external funding.
Susceptibility to volatility in raw material prices Sudarshan’s profitability margins are susceptible to volatility in raw material prices such as benzene, toluene, naphthalene, and liner low density polyethylene, which are essentially crude linked. Sharp increase in key raw material prices over fiscal 2022-23 resulted in operating profitability margins to contract to around 12.7% during fiscal 2022 and 10.0% during fiscal 2023 from over 13% in the previous fiscal years. That said, cost plus model pertaining to straight pass through of commodity inflation, limits the impact of sharp increases in raw material prices. |
Liquidity- Strong Expected annual net cash accruals of Rs. 250-300 crore will be sufficient to meet debt re-payment obligations of Rs. 150-170 crore per annum (on existing debt), yearly capex requirements of Rs. 80-100 crore and working capital requirements with limited dependence on external funding. Also, the company has access to fund-based limits of Rs. 515 crore, which during the last twelve months through to June 2024 is entirely unutilised. Timely raising of funds will be critical to consummate the acquisition.
ESG Profile CRISIL Ratings believes that the Environment, Social, and Governance (ESG) profile of Sudarshan supports its existing strong credit risk profile.
The Chemical sector has a high impact on the environment because of the high greenhouse gas (GHG) emissions, high hazardous waste generation by its core operations. The sector has a social impact because of its large workforce, the impact on the health and wellbeing of its workers and the local community on account of its nature of operations.
Sudarshan Chemical Industries Limited has continuously focused on mitigating its environmental and social impact.
Sudarshan’s Key ESG highlights:
There is growing importance of ESG among investors and lenders. Sudarshan’s commitment to ESG principles will play a key role in enhancing stakeholder confidence, given its share of overseas borrowings in its overall debt and access to both domestic and foreign capital markets. |
Rating sensitivity factors Downward factors
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About the Company Sudarshan is a globally renowned pigment player and the largest in India, manufacturing a wide range of organic and inorganic pigments and mica-based effect pigments. The company, which was established in 1951, remained focused on the domestic market till 2006. The joint venture with Dainippon Ink Corporation (DIC) was operational between 1990 and 2006, post which Sudarshan went global, establishing its footprint in North America Europe and other geographies. The company has two manufacturing facilities in Roha and Mahad (both in Maharashtra).
During the three months ended June 30, 2024, on a consolidated basis, the company posted net profit of Rs. 29 crore (Rs. 267 crore for the corresponding period of previous fiscal, which also includes exceptional income pertaining to the gain on sale of freehold land). |
Key Financial Indicators - CRISIL Ratings adjusted numbers
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Any other information: Not applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
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Annexure – List of entities consolidated
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| Annexure - Rating History for last 3 Years | |||||||||||||||||||||||||||||||||||||||
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Criteria Details
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