Detailed Rationale

Crisil Ratings has reaffirmed its ‘Crisil AA/Stable’ rating on the long-term bank facility of Sumitomo Chemical India Ltd (SCIL).

 

Revenue from operations increased by ~14% to Rs 2,469 crore in the first nine months of fiscal 2025, from Rs 2,170 crore in the first nine months of fiscal 2024, driven by volume growth while the realisation remained under pressure owing to continued supply deluge from China. Revenue from the domestic segment (~81% of sales in the first nine months of fiscal 2025) increased by 6.0% on-year to Rs 2,000 crore driven by robust demand for domestic pesticides and above-normal rainfall witnessed during June 2024 to October 2024, which benefited the kharif crops. Nearly 60% of revenues of SCIL is achieved during first half. Exports, after sharp decline of 35% in fiscal 2024, recovered strongly by 66% on-year (albeit over a lower base) to Rs 469 crore in the first nine months of fiscal 2025, driven by improving demand conditions across key export regions such as South America, Japan, Africa and Europe. The recovery in exports was also volume driven. The revenue is expected to grow 8-12% over the medium term supported by stable domestic demand growth, continued recovery in exports and scale-up of recently launched products.

 

The operating margin of SCIL increased sharply to 20.8% in the first nine months of fiscal 2025 from 15.4% in the first nine months of fiscal 2024, led by increase in gross margin by 493 basis points (bps) to 41.2% (36.3% in the corresponding period of the previous fiscal), owing to decline in input prices, favourable product mix and rigorous cost optimisation in procurement by the company. Furthermore, tight control on overheads and high fixed cost absorption aided by strong recovery seen in both domestic and export segments have also supported the expansion in operating margin. Over the medium term, the operating margin is expected to sustain at 19-20%, aided by high operating leverage benefits.

 

Healthy business risk profile is complemented by strong financial risk profile and liquidity. Tangible networth (networth minus intangible assets) stood strong at Rs 2,691 crore and the company continues to be debt free as on September 30, 2024. Reliance on external debt is expected to remain nil as annual cash accrual should be sufficient to meet modest annual capital expenditure (capex) of Rs 130-150 crore and incremental working capital requirement over the medium term. Normalisation of the business environment, translating into better operational performance and debt protection metrics will remain monitorable in the medium term.

 

The rating continues to reflect the established market position of SCIL in the domestic crop protection business, supported by its diversified product portfolio including insecticides, weedicides, fungicides, fumigants, rodenticides, plant growth nutrition products, bio-pesticides and plant growth regulators, and access to the proprietary products of its Japanese parent— Sumitomo Chemical Company Ltd (SCCL), and the healthy financial risk profile. These strengths are partially offset by large working capital requirement, exposure to regulatory risks, and susceptibility to vagaries of the monsoon.

Analytical Approach

Crisil Ratings has combined the business and financial risk profiles of SCIL and its wholly owned subsidiaries, as all these companies are in similar business and have common management and business and financial linkages. Furthermore, Crisil Ratings has amortised the goodwill arising out of the acquisition of balance 85% stake in Barrix Agro Sciences Pvt Ltd in fiscal 2024 over a period of five 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 presence in the crop protection segment: Diversified product portfolio including insecticides, weedicides, fungicides, fumigants, rodenticides as well as plant growth nutrition products, biorationals and plant growth regulators; well-balanced technical and formulations manufacturing capabilities; and access to proprietary products of SCCL have helped SCIL become one of the major players in this segment.

 

• Well-diversified product portfolio, with agrochemical products covering multiple crop segments: The product portfolio is well-diversified, with SCIL’s agrochemical products covering multiple crop segments in both kharif and rabi seasons and non-agrochemical products for animal nutrition and environment health. With over 15,000 distributors, the distribution network covers close to 85% of India, providing geographical diversity. Furthermore, around 19% of the revenue in the first nine months of fiscal 2025 came from exports, partially offsetting risks related to demand cyclicality in the domestic market.

 

• Healthy financial risk profile: The financial risk profile should remain supported by nil debt, continued healthy cash generation and prudent capital spending. Tangible networth was comfortable at Rs 2,691 crore as on September 30, 2024, while continuing to be debt free. Healthy annual cash accrual has enabled robust debt protection metrics, with interest coverage ratio remaining strong during the first nine months of fiscal 2025.

 

Weaknesses:

• Large working capital requirement: The operations remain working capital-intensive owing to large inventory, seasonality in demand and extensive credit to dealers and distributors. While sales occur at the start of the season, payments are realised post-harvest, resulting in stretched receivables. Furthermore, the company must maintain sizeable inventory owing to the large number of products to ensure that the requirement of dealers is met on time.

 

• Susceptibility to risks inherent in the agrochemicals sector, including irregular monsoon: The crop-protection sector remains susceptible to specific and separate registration processes in different countries, and to various environmental rules and regulations. Changes in regulatory requirements, such as export and import policies, and environmental and safety requirements in countries where the company has significant exposure, could weaken the growth prospects. Also, with 80% of the revenue coming from the domestic agricultural inputs business, SCIL remains exposed to cyclicality in the agrochemicals industry, which is highly dependent on monsoon and level of farm income.

Liquidity: Strong

SCIL is expected to generate net cash accruals (NCA) of Rs.430-440 crore this fiscal which will be sufficient to fund the capex of Rs 80-100 crore and the incremental working capital requirement. Over the medium term, SCIL is expected to generate NCA of over Rs 470 crore, which will be adequate to meet capex requirements of Rs.130-150 crore per annum and incremental working capital requirement. In addition, SCIL has unutilised fund-based limits of over Rs 300 crore as of December 2024 and a liquid surplus of Rs 1,556 crore as on September 30, 2024, which provide additional cushion.

Outlook: Stable

Crisil Ratings believes SCIL’s business risk profile will continue to benefit from its established position in the domestic market, with demand expected to reinstate for crop protection products, as the company leverages its balanced presence across key sub segments of crop protection and the strong brand and chemistry skills of its parent. Improving business risk profile will be complemented by its strong financial risk profile and liquidity.

Rating sensitivity factors

Upward factors:

• Significant improvement in revenue growth and operating margin at above 20% on sustained basis leading to strong annual cash accrual
• Sustenance of healthy financial risk profile and strong liquidity in the absence of any large debt funded capex

 

Downward factors:

• Sharp decline in revenue and fall in operating margin below 12%, leading to lower cash accruals
• Large, debt-funded capex or acquisition or stretched working capital cycle weakening the financial risk profile, liquidity position

About the Company

SCIL, which is a subsidiary of Japanese chemical major SCCL, manufactures and markets crop protection formulations based on the active ingredients procured from SCCL and third parties. It has manufacturing plants in Gujarat, Maharashtra and Dadra and Nagar Haveli. SCCL holds 75% stake in SCIL.

 

SCCL established Sumitomo Chemical India Pvt Ltd (SCIL) in 2000 as its manufacturing and marketing base for crop protection products, household insecticides, public health insecticides and animal nutrition products in India. SCIL was reconstituted as a public limited company with effect from November 24, 2018. To further fortify its business in India, SCCL acquired a majority stake in Excel Crop Care Ltd (ECCL) in fiscal 2016. ECCL, which manufactures agrochemical formulations, was promoted by the Shroff family members.

 

On August 31, 2019, the entire business and undertaking of ECCL was transferred to SCIL after the National Company Law Tribunal approved the scheme of amalgamation.

Any other information: Not Applicable