Detailed Rationale

CRISIL Ratings has reaffirmed its 'CRISIL A1+' rating on the commercial paper programme of Sudarshan Chemical Industries Ltd (Sudarshan).

 

The rating continues to reflect the extensive experience of the promoters in the pigment industry and the established market position of Sudarshan. The ratings also factors in the diversified product range and end-user industry and customer profile, strong distribution network, marquee clientele, and comfortable financial risk profile of the company. These strengths are partially offset by the large working capital requirements and exposure to risks related to volatility in commodity prices and those related to ramp-up of capacities with regards to large, debt-funded capital expenditure (capex) incurred.

 

Revenues during fiscal 2024 increased by 10% year-in-year (y-o-y) to Rs. 2,539 crore 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 during fiscal 2024 improved by 290 basis points (bps) to 12.9% 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 recent concluded growth capex, positive demand tailwinds in the pigment industry, along with industry consolidation globally. Operating margins 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. 

 

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, the capital structure marked by adjusted gearing (adjusted Debt / adjusted Networth) has 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 financial risk profile is expected to remain healthy over the medium term on account of comfortable capital structure and debt protection metrics owing to improving cash generation resulting in healthy coverage of debt re-payment obligations and yearly capex and working capital requirements, with limited dependance on external borrowing.

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. 

 

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.

 

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.

 

• Comfortable 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 financial risk profile is expected to remain healthy over the medium term on account of comfortable capital structure and debt protection metrics owing to improving cash generation resulting in healthy coverage of debt re-payment obligations and yearly capex and working capital requirements, with limited dependance on external borrowing.

 

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, 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.

 

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:

• SCIL has set a target to reduce Green House Gases (GHG) emissions by 42% by fiscal 2032 from its fiscal 2021 baseline. Also, the company plans to attain zero waste to landfill by fiscal 2032.
• Further it has set a target to decrease specific water consumption by 20% by fiscal 2026 from its 2021 baseline. In fiscal 2024, its specific water intensity reduced by ~40% to 32.54 KL per crore of revenue, in line with its target.
• SCIL’s lost time injury frequency rate (LTIFR) stood at nil for employees and 0.58x for workers in fiscal 2024, higher than the previous fiscal (reported nil LTIFR for workforce).

 

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

• Any significant impact on operating profitability leading to weakening of operating margins below 10% on a sustained basis.
• Substantial increase in working capital requirement or large, debt-funded capex if any, leading to weakening of debt protection metrics.

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).

Any other information: Not Applicable