CRISIL has reaffirmed its ratings on the bank facilities of Veritas India Limited (VIL; part of Groupe Veritas (GV)) at 'CRISIL BBB+/Stable/CRISIL A2'.
 
The ratings continue to reflect the group's established global presence, sound distribution network, strong relationships with several key suppliers and customers and the promoter's extensive experience in the trading business. These rating strengths are partially offset by an average financial risk profile because of a moderate capital structure, and susceptibility of operating performance to volatility in commodity prices and foreign exchange rates. The group has recently commenced operations at the tank terminal project at Hamriyah (United Arab Emirates), but remains exposed to volatility in cash flows which are linked to prevailing rental rates.  The ratings are also constrained by exposure to risks related to cost overrun and timely implementation of an upcoming project at Dighi port in one of the group entities. The ratings of VIL are further constrained by these sizeable risks related to projects in its wholly owned subsidiaries.
 
The operating margin for trading business bounced back to about 4% in the first half of fiscal 2019 (similar to fiscal 2017) after moderation to 2.7% in fiscal 2018. The recovery was driven by resolution of one-off issue related to double taxation on goods in custom bonded warehouse with effect from April 2018; this issue resulted in higher costs during fiscal 2018 as the group's customers demanded cleared goods. Further, the effective risk management practices adopted by the group contained the impact of forex and crude price volatility in fiscal 2018.
 
Moreover, the debt as of March 2019 will be lower-than-earlier expected due to delay in upcoming project. The on-going insolvency proceedings under new bankruptcy law at the debt-laden Dighi port resulted in this delay.
 
The rating also factors in steady ramp-up in utilization of Hamriyah tank terminal. The project, which costed around Rs 1000 crore (funded with 60% debt), commenced operations with a delay of 4-5 months in April 2018. While it faced initial stabilization issues, the terminal has reached almost 95% capacity utilization in December 2018 and is expected to sustain this going forward, given assured offtake from the group and gradual addition of new clients. While the soft rental rates resulted in lower-than-expected cash flows from the terminal so far, a recovery in rates, driven by expected stability in crude prices, should drive improvement over the medium term. The extent of improvement and sustainability of current capacity utilization level in the absence of any long term contracts with clients will, however, be a key rating monitorable.
 
Operating income, which grew by 2-3% in fiscal 2018 and first half of fiscal 2019 due to soft prices of crude and crude-linked commodities, is expected to grow at 5-6% going forward driven by steady demand for traded products and established presence of the group. Operating margin is expected to improve by 70-80 bps over the medium term driven by scale-up at Hamriyah tank terminal, resulting in significant cash flow addition and sustained margin in trading business. Nevertheless, ability to sustain the ramp-up of tank terminal operations and maintain operating margin at about 4% for trading business, given volatility in prices of key products, will be a key rating sensitivity factor.

* For arriving at the ratings, CRISIL has applied its criteria for 'Rating entities belonging to homogenous corporate groups'. Accordingly, VIL and its wholly owned subsidiaries, and other group entities, such as Hazel Mercantile Ltd (HML; 'CRISIL A/Stable/CRISIL A1) and its wholly owned subsidiaries, Aspen International Pvt Ltd (Aspen, 'CRISIL BBB+/Stable/CRISIL A2') and Sanman Trade Impex Ltd (Sanman, 'CRISIL A-/Stable/A2+') are considered a part of GV in view of common promoter holding and significant operational, financial and managerial linkages.
* Goodwill on amalgamation has been adjusted against networth in the year in which it was accounted in the books. Revaluation reserve of Rs 834 crore has been eliminated from both fixed assets and total reserves.
* CRISIL has also treated the unsecured loans from promoters as neither debt nor equity as these are interest free, have no fixed repayment schedule, are subordinated to external debt and expected to remain in the business over the medium term.

Please refer Annexure - List of entities consolidated , which captures the list of entities considered and their analytical treatment of consolidation.

Liquidity remains adequate, in the form of healthy cash accrual as well as cash and cash equivalents of around Rs 100 crore as on September 30, 2018. Annual cash accruals of Rs 350-500 crore will allow the group to comfortably meet the repayment obligations of Rs 120-130 crore in fiscal 2019 and fiscal 2020. The fund-based limits in each of the group companies are utilized at an average of 70-80% for the 12 months ended September 2018 while the non-fund based limits were utilised at an average of 80-90% during the same period. Financial flexibility is also enhanced by availability of unsecured loans from the promoter whenever required.

CRISIL believes GV will maintain its established market position over the medium term, supported by its promoter's extensive experience and strong relationships with customers and suppliers. Financial risk profile is likely to remain moderate because of large, debt-funded capex.
 
Upside scenario
* Significantly higher-than-expected increase in cash flows, backed by recovery in rental rates at the tank terminal and sustained high capacity utilization
* Steady increase in scale of trading operations leading to better profitability
* Prudent working capital management resulting in improved key financial credit metrics
* Significant reduction in project risks
 
Downside scenario
* Substantial decline in operating profitability
* Deterioration of financial risk profile, on account of weaker-than-expected performance of tank terminal or time or cost overrun in Dighi project implementation.

VIL (formerly, Duroflex Engineering Ltd) was incorporated in Mumbai in 1985. The company stocks, trades in, and distributes bulk chemicals, rubber, and metals. The company has three overseas subsidiaries: Veritas International FZE, Hazel International FZE and Veritas America Trading Inc. Of these, Veritas America Trading Inc has no business operations currently. Hazel International FZE, the wholly owned subsidiary of VIL, has setup a tank terminal with capacity of around 175,000 kilolitres at Hamriyah Free Zone, near Sharjah, at a total cost of around Rs 1000 crore . This was funded through a debt to promoters' contribution mix of 3:2. The terminal has 30 tanks spread across 30,000 square metres and has commenced commercial operations in April 2018. Another wholly owned subsidiary, VPPL is setting up an integrated industrial complex at Dighi port, Maharashtra, comprising of manufacturing plants for PVC and Polymer Modified Bitumen (PMB), a gas storage terminal and a captive power plant, at a cost of about Rs 1400 crore. This is expected to be funded at a debt to promoters' contribution mix of 2:1.
 
On a standalone basis, for the half-year ended September 30, 2018, VIL reported profit after tax (PAT) of Rs 3.1 crore on operating income of Rs 177 crore, against a PAT of Rs 4.3 crore on operating income of Rs 262 crore in the corresponding period in the previous year.
 
About the group
GV, 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 relationship with customers and suppliers enabled the group to significantly scale up revenue to around Rs 12,000 crore in fiscal 2018. The group has set up various entities for effective management of various business verticals. In the domestic market, it has a network covering 12 locations with adequate storage capacity. Globally, it has presence in 10 countries and currently has 8 international offices.

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