Detailed Rationale

CRISIL Ratings has continued its ratings on the bank facilities of Veritas India Limited (VIL; part of Groupe Veritas) on ‘Rating Watch with Developing Implications’.

 

The rating action follows announcement by its group company Veritas (India) Ltd (VIL, ‘CRISIL BBB+/CRISIL A1/RWDI’) on May 20, 2022 about open offer by Swan India Ltd (SEL) to purchase upto 81% stake in VIL. SEL plans to acquire 55% stake from the promoters for Rs 172.5 crore and the remaining stake upto 26% from public shareholders. Post completion of the open offer, VIL along with its wholly owned PVC project company, Veritas Polychem Pvt Ltd (VPPL; ‘CRISIL BBB-/Watch Developing’), will become subsidiary of SEL and no longer remain a part of Groupe Veritas. This open offer nullifies earlier announcement dated October 19, 2021 regarding VIL’s proposed sale of 74% stake in its wholly owned subsidiary, VPPL and Veritas Infra and Logistics Pvt Ltd (VILPL) to SEL. The management has also indicated that HML will hold 26% stake in Hazel Infra Ltd (HIL), the entity which has been formed in consortium with SEL (holding 74% stake), which has won the bid for Reliance Naval and Engineering Ltd (RNAVAL), a distressed company undergoing NCLT proceedings. Given minority stake in HIL, CRISIL Ratings understand that Groupe Veritas is unlikely to make investments in RNAVAL bid and VPPL project, including guarantee for debt raised by these entities. This could reduce pressure on its financial risk profile.

 

The open offer for VIL closed in August-2022 with only 0.01% of shareholders accepting the offer. SEL is now in the process acquiring the shares from the existing promoter and complete other compliance requirements; making it the majority shareholder of VIL. CRISIL Ratings will continue to engage with the management of both GV and SEL and monitor developments regarding the transactions and seek clarity on the strategy, parent support and funding plan for VPPL’s project and RNAVAL’s bid. CRISIL Ratings will resolve the rating watch on receipt of requisite approvals and clarity on the above-mentioned aspects.

 

Operating income of the group declined 12.6% on-year in fiscal 2021, on account of the pandemic related lockdown and its impact on various end-user industries. However, operating margin improved slightly to 2.9% from 2.8% in fiscal 2020, driven by better utilisation and rental rates at the tank terminal operations, despite credit costs and bad debt provisions.

 

The group’s operating performance benefitted from ramp-up at the Hamriyah tank terminal operations of VIL, with increase in average rental rates in fiscal 2021 vis-à-vis last year, and increased capacity utilisations. This was supported by increased throughput of terminals, higher rental rates in the region, and addition of clients, apart from assured offtake by group companies. Ramp-up in the distillation business, which started operations in the fourth quarter of fiscal 2021, should support healthy cash accrual, making the project self-sustaining to meet its debt obligation in the near term. Sustenance of rental rates, capacity utilisation and ramp-up in the distillation business are key rating monitorables.

 

The revenue is expected to grow almost 5% over the medium term, driven by sustained performance of the tank terminal operations, steady demand for traded products and established presence of the group. The operating margin should sustain at 3-3.5%, driven by healthy operating performance of the Hamriyah tank terminal and sustained profitability in the trading business.

 

VPPL is setting up manufacturing-storage-bottling facilities at Dighi port in Maharashtra at a cost of Rs 2,050 crore in phases, likely to be funded through debt and promoter funds in a ratio of 2:1. Phase 1 of the project comprises a polyvinyl chloride (PVC) plant with capacity of 1.75 lakh metric tonne per annum (MTPA), a polymer modified bitumen (PMB) plant with capacity of 3.6 lakh MTPA, six gas storage terminals, and a captive power plant, at a cost of Rs 1,400 crore. Phase II will involve setting up 26 gas storage terminals and an LPG bottling plant at a cost of Rs 650 crore. Enhancement of the scope and addition of phase II in fiscal 2019 led to the project obtaining Ultra Mega Project (UMP) approval from the government of Maharashtra, which makes it eligible for various benefits, including industrial promotion subsidy, and tax and duty concessions. The project got delayed by over three years due to insolvency proceedings on the Dighi port. Environmental clearance for the project was also delayed due to the pandemic and was received in March 2021. Funding is being tied up.

 

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, for funding any cost overrun. 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. The ratings are also constrained by exposure to risks related to implementation and funding of the project at VPPL, and stabilisation of operations.

Analytical Approach

• CRISIL Ratings has applied its criteria for rating entities belonging to homogenous corporate groups. Accordingly, HML and its wholly owned subsidiaries (including Hazel Middle East FZE, Hazel Europe BV), and other group entities are considered a part of Groupe Veritas, in view of common promoter holding and significant operational, financial, and managerial linkages. The other group entities comprise Aspen International Pvt Ltd (Aspen), Sanman Trade Impex Ltd (Sanman; ‘CRISIL A-/CRISIL A2+/Watch Developing’), and VIL and its wholly owned subsidiaries (including VPPL and Veritas Agro Ventures Pvt Ltd).
• CRISIL Ratings has treated unsecured loan from the promoter (Rs 75 crore as on March 31, 2021) as neither debt nor equity, as the loan is interest-free, has no fixed repayment schedule, is subordinated to external debt, and expected to remain in the business over the medium term.
• CRISIL Ratings has included letter of credit backed creditors (amounting Rs 757 crore as on March 31, 2021) as short-term debt, as these are interest bearing and have a fixed maturity.

 

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 gas oil is a major traded commodity forming 20% of revenue, no other product brings in over 3% of revenue. Adding more profitable products to the basket has aided growth in topline and margin. 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 margin. 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 such as Reliance Industries Ltd (‘CRISIL AAA/Stable/CRISIL A1+’), Indian Oil Corporation Ltd (‘CRISIL AAA/Stable/CRISIL A1+’), Asian Paints Ltd (‘CRISIL AAA/Stable/CRISIL A1+’), Kansai Nerolac Paints Ltd (‘CRISIL AAA/Stable/CRISIL A1+’), Chemtrade Overseas Pvt Ltd, IOL Chemicals & Pharmaceuticals Ltd, Pon Pure Chemical India Pvt Ltd (CRISIL A-/Positive/CRISIL A2+) and Walambia Plastics Pvt Ltd.

 

• 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. Of the employee base of over 800, around 150 are engaged in international operations.

 

Weaknesses:

• Average financial risk profile: Adjusted networth stood at Rs 3,248 crore and total outside liabilities to adjusted networth ratio remained adequate at 0.71 time as on March 31, 2021, with liabilities primarily comprising working capital debt and payables. The interest coverage ratio stood at 4.52 times for fiscal 2021.

 

Debt level stood at Rs 1,348 crore by the end of fiscal 2021 as compared to Rs. 2,800 crore by end of fiscal 2018, supported by repayment of term debt and negligible dividend outflow. The share of working capital debt is expected to increase from 70-75% currently as the group repays term debt. With proposed stake sale in VIL and minority stake in HML, the group is unlikely to make any additional investment or contract more debt for VPPL project as well as RNAVAL, thereby reducing pressure on its financial risk profile.

 

• Risks related to timely project implementation and funding tie-up at VPPL: VPPL is implementing a debt-funded project at a cost of Rs 2,050 crore for setting up a manufacturing facility in phases at the Dighi port. The project will be funded through debt and promoter funds in a ratio of 2:1. The project has received UMP approval from the Maharashtra government and is eligible to receive various benefits, including industrial promotion subsidy, and tax and duty concessions. The group has roped in a marquee player, Technip India Ltd, as its engineering, procurement and construction management (EPCM) contractor. The latter was involved in dismantling the plant at Malaysia and its shipment to Dighi port in fiscal 2018.

 

The project has been delayed by about three years, due to insolvency proceedings under the bankruptcy law at the debt-laden Dighi port and delay in receipt of environmental clearance. The final National Company Law Tribunal (NCLT) order in favour of Adani Ports and SEZ Ltd (APSEZ) was received in July 2020 and environmental clearance only in March 2021.

 

APSEZ has taken charge of the port and Groupe Veritas has commenced pre-commissioning surveys. The project faces implementation risk, given its scale and scope, uncertainty regarding technical output and efficiency, and its idle status for almost three years. Funding risk continues as the group is yet to achieve financial closure. Any significant cost or time overrun may affect cash flow and debt protection metrics, and therefore, remains a key rating sensitivity factor.

 

• Exposure to volatility in crude and petrochemical prices and fluctuations in forex rates: Groupe Veritas trades in chemicals and polymer products whose prices are directly linked to crude prices, which are highly volatile. Although Groupe Veritas has adequate risk mitigating strategies, 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. Any significant movement in commodity prices and forex rates could adversely impact the operating performance and will be closely monitored.

Liquidity: Adequate

Cash and cash equivalent was Rs 16 crore as on February 28, 2022. Annual cash accrual of Rs 300-350 crore will allow the group to comfortably meet debt obligation of about Rs 120 crore in fiscals 2023 and Rs 83 crore in fiscal 2024. Also, a significant portion of long-term debt relating to the tank terminal project will be repaid by then. Fund-based limits in each group company were utilised ~90% on average over the 12 months through September 2022, and non-fund-based limits at 70-80% on average. Availability of unsecured loans from the promoter, whenever required, enhances financial flexibility.

Rating Sensitivity factors

Upward factors

• Sustained and significant increase in operating profitability to more than 4%, backed by improvement in tank terminal and trading operations
• Prudent working capital management resulting in improved key debt metrics
• Timely completion of project at VPPL, as per stipulated cost and funding mix
• Receipt of regulatory approvals and stake sale in VIL, reducing investment requirement and additional debt and improving the financial risk profile

 

Downward factors

• Substantial decline in operating profitability to less than 2%
• Weakening of the financial risk profile and debt metrics on account of lower-than-expected performance of the tank terminal, or more-than expected debt for funding VPPL’s project or RNAVAL bid, including due to any material time or cost overrun
• Changes in the credit risk profile of the parent or group, and in stance of support
• Delay in financial support from the promoter during financial exigencies

About the Company

VIL (formerly, Duroflex Engineering Ltd) was incorporated in Mumbai in 1985. The company stocks, trades in, and distributes bulk chemicals, rubber, and metals. It has three overseas subsidiaries: Veritas International FZE, Hazel International FZE and Veritas America Trading Inc. Veritas America Trading Inc has no business operations currently. Hazel International FZE, the wholly owned subsidiary of VIL, has set up a tank terminal with capacity of around 175,000 kilolitre at Hamriyah Free Zone near Sharjah at a cost of around Rs 1,000 crore. This was funded through debt and promoter contribution in a ratio of 3:2. The terminal has 30 tanks spread across 30,000 square metre and commenced commercial operations in April 2018.

 

Another wholly owned subsidiary, VPPL, is setting up an integrated industrial complex at Dighi port, comprising manufacturing plants for PVC and PMB, a gas storage terminal and a captive power plant, at an initial cost of about Rs 1,400 crore. VPPL has enhanced the project scope by doubling the gas storage terminal capacity leading to increased total cost of about Rs 2,000 crore with a phased execution plan while maintaining the ratio of debt to promoter funding at 2:1. The project has received UMP approval from the Maharashtra government, making it eligible for various benefits including industrial promotion subsidy, tax and duty concessions.

 

The insolvency proceedings under the bankruptcy law at the debt-laden Dighi port as well as restrictions owing to the pandemic resulted in delay in the VPPL project. The final NCLT order in favour of APSEZ was received in March 2020 which was upheld by the National Company Law Appellate Tribunal (NCLAT) in July 2020 while the environmental clearance was received in March 2021. APSEZ has taken charge of the port and Groupe Veritas has commenced with pre-commissioning surveys

 

On a consolidated basis, during the first six months of fiscal 2023, VIL reported profit after tax (PAT) of Rs 40.7 crore on operating income of Rs 932 crore, against a PAT of Rs 67.9 crore on operating income of Rs 1,161 crore in the corresponding period in the previous year.

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. The other group companies are VIL, Aspen and Sanman. The promoter’s extensive experience in the petrochemical trading business and established relationships with customers and suppliers enabled the group to significantly scale up revenue to around Rs 11,000 crore in fiscal 2021. 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

Particulars	Unit	2021	2020
Revenue	Rs cr.	1876	2037
Profit after tax (PAT)	Rs cr.	109	122
PAT margin	%	5.8	6.0
Adjusted debt/adjusted networth	Times	0.24	0.34
Adjusted interest coverage	Times	6.82	5.69

 

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs crore)	Complexity level	Rating assigned with outlook
NA	Proposed Long Term Bank Loan Facility	NA	NA	NA	20.0	NA	CRISIL BBB+/Watch Developing
NA	Proposed Short Term Bank Loan Facility	NA	NA	NA	116.0	NA	CRISIL A2/Watch Developing

 

Annexure – List of entities consolidated

S. No	Name of entity	Extent of consolidation	Rationale for consolidation
1	Hazel Mercantile Ltd	Full	Common promoter and business linkages
2	Hazel Infra Pvt Ltd	Full	Subsidiary
3	Hazel Middle East FZE Dubai	Full	Subsidiary
4	Hazel Europe BV Amsterdam	Full	Subsidiary
5	Hazel PTE Ltd	Full	Subsidiary
6	Hazel Middle East General Trading LLC	Full	Subsidiary
7	Hazel Middle East Shanghai Trd Co Ltd	Full	Subsidiary
8	Veritas (India) Ltd	Full	Common promoter and business linkages
9	Sanman Trade Impex Pvt Ltd	Full	Common promoter and business linkages
10	Aspen International Pvt Ltd	Full	Common promoter and business linkages
11	VERASCO FZE (Formerly Know as Hazel International FZE), Sharjah	Full	Common promoter and business linkages
12	Veritas Polychem Pvt Ltd	Full	Common promoter and business linkages
13	Veritas International FZE, Dubai	Full	Common promoter and business linkages
14	Veritas Global PTE Ltd Singapore	Full	Common promoter and business linkages
15	GV Investment Finance Company Ltd	Full	Common promoter and business linkages
16	Veritas Infra & Logistics Pvt Ltd	Full	Common promoter and business linkages
17	GV Offshore Private Ltd	Full	Common promoter and business linkages
18	Veritas Agro Ventures Pvt Ltd	Full	Common promoter and business linkages