Detailed Rationale

CRISIL Ratings has removed its rating on the proposed long-term bank facility of Veritas Polychem Private Limited (VPPL) from 'Rating Watch with Negative Implications’ and reaffirmed the ‘rating at 'CRISIL BBB-’ and assigned a ‘Stable’ outlook to the long-term rating.

 

The rating action follows removal of the negative watch on the bank facilities of VPPL’s 100% parent, Veritas (India) Ltd (VIL) and reaffirmation of its ‘CRISIL BBB+/CRISIL A2’ ratings with a ‘Stable’ outlook assigned to the long-term rating.

 

Swan Energy Ltd (SEL) became the controlling shareholder of VIL along with VPPL, following completion of its 55% stake purchase on January 20, 2023. The company is implementing a 10-MMTPA liquefied natural gas (LNG) port terminal at Jafrabad in Gujarat. The rating action follows a written undertaking from SEL that funds and reserves available and generated by VIL and its subsidiaries will be used solely for funding the growth plans of VIL and its subsidiaries. CRISIL Ratings also understands that while VIL will continue to fund the equity portion required for VPPL’s project, any shortfall will be met by SEL.

 

VPPL is setting up a manufacturing-storage-bottling facility at Dighi port in Maharashtra, at a budgeted cost of Rs 2,050 crore, to be set up in phases. The project is being funded through a debt and equity in a mix of 2:1. Phase 1 — comprising 1.75 lakh tonne per annum (TPA) polyvinyl chloride (PVC) and 3.6 lakh TPA polymer modified bitumen (PMB) plants, six gas storage terminals, and a captive power plant — is to cost Rs 1,400 crore. Phase II will involve setting up 26 additional gas storage terminals and a liquefied petroleum gas (LPG) bottling plant for Rs 650 crore. The scope enhancement and addition of Phase II in fiscal 2019 helped VPPL get the project approved as Ultra Mega Power Project by the Government of Maharashtra, making it eligible for various benefits (including industrial promotion subsidy and tax and duty concessions). While the plant has been on site since 2018, the project has been delayed by more than four years due to insolvency proceedings on the debt-laden Dighi port and delay in receipt of environmental clearances. The final National Company Law Tribunal (NCLT) order in favour of Adani Ports and SEZ Ltd was received in July-2020 and environmental clearances were received in March 2021. To simplify the organization structure, VPPL merged with Veritas Petro Industries Pvt Ltd, a 100% subsidiary of VIL, in fiscal 2023 and changed the name to Veritas Polychem Private Limited (VPPL).

 

The project is exposed to implementation risks given its scale and scope and is susceptible to uncertainty regarding plant technical output and efficiency as it has been idle for almost five years. As it is largely debt-funded and yet to achieve financial closure, the project is also exposed to funding risk.

 

After drawdown of the full project debt, VIL’s debt is expected to peak to about Rs 1,400 crore by March 31, 2026. Any delay in financial closure or project implementation resulting in substantial time and cost overruns could adversely impact the cash flow and debt protection metrics of VIL and will remain a key monitorable.

 

The rating continues to reflect the strong financial and operational support VPPL receives from its parent, VIL, as well as ultimate parent SEL, and the company’s established client relationships in the trading business. The rating also factors in the demonstrated ability of SEL to secure funding for large projects and to bring in additional equity. These strengths are partially offset by exposure to risks associated with timely financial closure and implementation and commercialisation of the project, and limited track record of VIL in manufacturing.

Analytical Approach

CRISIL Ratings has applied its criteria for notching up ratings for support from the parent, VIL.

Key Rating Drivers & Detailed Description

Strengths

• Strong financial and operational support from VIL, as well as ultimate parent, SEL:

The project scope increased to about Rs 2,050 crore from Rs 1,400 crore, earlier; to be funded through debt and equity in a ratio of 2:1. As on December 31, 2020, about 51% of the promoter contribution had come in through equity infusions. VIL is committed to fund the project through internal accrual, with any shortfall to be met by SEL. Furthermore, SEL will continue to provide the required support to the project and has demonstrated its ability to secure funding for large projects and bring in additional equity.

 

• Promoter’s extensive experience:

SEL, the new promoter of VIL, has extensive experience in managing diverse businesses including textile and real estate, and in setting up large infrastructure projects in the energy space. VIL has demonstrated proficiency in managing the commodity trading and distribution business, as reflected in the significant scaling up of operations as well as setting up of the tank terminal complex at Sharjah. VIL has a team of highly qualified professionals who have supported the diverse businesses abroad.

 

Weaknesses

• Project yet to achieve financial closure:

Due to delay in environmental clearance due to the pandemic and in handover of the land because of the insolvency proceedings at Dighi port, VPPL’s project has been delayed. The company was earlier close to achieving financial closure for Phase 1 of the project. However, having received the environmental clearance in March 2021, fresh discussions have begun and financial closure is expected this fiscal. This remains a key monitorable.

 

• Exposure to project risks:

Given the scale and complexity of the project, VPPL faces risks related to implementation, timely funding tie-ups and receipt of clearances, and material cost overruns. The company has appointed Technip India Ltd as its engineering, procurement and construction management (EPCM) contractor, which had dismantled and shipped the plant to Dighi port in fiscal 2018. INEOS Technologies is the licence provider for the PVC plant.

 

• Limited track record in manufacturing:

VPPL is implementing a large, integrated manufacturing project. The parent, VIL, is yet to demonstrate its expertise in implementing complex projects of such scale, though it has successfully set up the tank terminal complex in Sharjah. While SEL’s experience in setting up large infrastructure projects in the energy space provides some comfort, the large size and complexity renders VPPL’s project susceptible to implementation risks.

Liquidity: Adequate

The company has no borrowings at present and repayment of the proposed debt is expected to commence only after operations begin at the end of fiscal 2026. Till then, during the construction phase, all the funding requirements will be met through the proposed debt and equity infusion by VIL. Any shortfall, financial exigencies, or liquidity mismatch is expected to be met by SEL.

Outlook: Stable

CRISIL Ratings believes VPPL will implement its project without material overruns. CRISIL Ratings also believes the company will enjoy support from the parent until operations stabilise, including by way of timely funding support during exigencies.

Rating Sensitivity factors

Upward factors

• Increase in VIL’s scale and profitability to 9-10%, driven by improvement in the tank terminal and trading operations
• Timely implementation of the project as per stipulated cost and funding mix

 

Downward factors

• Delay in achieving financial closure, leading to time and cost overruns
• Larger-than-expected peak debt of Rs 1,400 crore in the project
• Project implementation issues, including material cost or time overruns or delays in stabilising operations after commissioning
• Changes in the credit risk profile of the parent or group, and in stance of support

About the Company

VPPL was set up in 2011 by Mr Nitin Kumar Didwania as a wholly owned subsidiary of VIL. The company is setting up an integrated industrial complex at Dighi port at a cost of Rs 2,050 crore. This will comprise plants for manufacturing 175,000 TPA of PVC and 360,000 TPA of PMB, a gas storage terminal consisting of 32 mounded bullets with total capacity of 80,000 cubic metre and a LPG bottling plant, and a captive 18-megawatt power plant. The project is likely to be funded through debt and promoter funds in a ratio of 2:1. The expected construction period is 30 months. As on March 31, 2021, about Rs 344 crore was spent on the project, funded entirely through equity infusion.

 

The Government of Maharashtra has approved the project as an Ultra Mega Project, which will make VPPL eligible for benefits such as duty-free electricity in case of grid connection for 20 years, waiver of stamp duty charges, industrial promotion subsidy as per Packaged Scheme of Incentives 2013 up to 100% of eligible capital investment, and concessions on state government taxes.

About the Parent

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 (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.

 

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 a total cost of about Rs 2,050 crore.

 

On a consolidated basis, VIL reported profit after tax (PAT) of Rs 95 crore on operating income of Rs 2,163 crore for fiscal 2023, against a PAT of Rs 105 crore on operating income of Rs 2,131 crore in the previous fiscal.

Key Financial Indicators (VPPL)

Particulars	Unit	2023	2022
Revenue	Rs crore	--	--
Profit after tax	Rs crore	--	--
PAT margin	%	--	--
Adjusted debt/adjusted networth	Times	--	--
Adjusted interest coverage	Times	--	--

Financials not applicable as project is yet to commence

Any other information: Not applicable