Chemplast Sanmar Limited - Long-term rating upgraded to 'CRISIL AA-/Stable', short-term rating reaffirmed

CRISIL Ratings has upgraded its long-term rating on the bank facilities of Chemplast Sanmar Limited (CSL) to 'CRISIL AA-/Stable' from 'CRISIL A+/Positive' while reaffirming the short-term rating at 'CRISIL A1+'.

The rating action reflects better than expected performance in fiscal 2022 driven by healthy capacity utilization across facilities and strong realizations for poly vinyl chloride (PVC) products. CRISIL Ratings expects CSL's revenues to cross Rs 5000 crore in fiscal 2022 (Rs. 3800 crore in fiscal 2021) while healthy operating efficiencies is expected to keep operating margins stable at 18-20% (25% in fiscal 2021). Global supply constraints from major manufacturing countries and low capacity additions on account of large capital requirements and stringent environmental norm and shutdown of capacities in China have resulted in global PVC prices remaining high in fiscals 2021 and 2022. On the domestic front also, demand rebounded from end user segments post lifting of the lockdown aiding PVC manufacturers including CSL.

CRISIL Ratings expects CSL to continue registering healthy revenue growth over the medium term, supported by steady demand for its products and balanced demand-supply situation. Its operating profitability is also expected to sustain at ~17-18% over the medium term, followed by better contribution from the custom manufactured chemicals (CS) business, which will partly buttress impact of higher input prices in the commodity PVC business.

CSL's financial risk profile is adequate and improving over time. The company raised Rs 3850 crore (fresh issuance: Rs 1300 crore; offer for sale (OFS) by promoter holding company: Rs 2550 crore) via an initial public offering (IPO), and used proceeds to redeem high-cost non-convertible debentures (NCDs) of Rs 1238 crore raised in fiscal 2020. These NCDs were earlier raised mainly to retire the debt at the holding company, Sanmar Engineering Services Ltd. (SESL), apart from refinancing some debt at the company. CSL's entire long-term debt has been retired, while its subsidiary, Cuddalore Vinyl Ltd (CCVL) has long term debt of ~Rs.900 crore. The sharp reduction in debt and healthy profitability has vastly improved debt protection metrics as reflected in ratio of debt/earnings before interest, depreciation, tax and amortization (EBITDA) estimated at ~1.2 times in fiscal 2022, compared with 2.2 times in fiscal 2021. Besides, interest cover and net cash accruals to total debt (NCATD) ratios are also likely to improve to over 4 times and 0.7 time respectively in fiscal 2022, from 2.2 times and 0.24 time in fiscal 2021.

Earlier, CSL's adjusted net worth turned negative in March 2021, due to acquisition of 100% stake in erstwhile associate, CCVL, which had a negative net worth. In fiscal 2021, CCVL had redeemed CCDs of ~Rs 2450 crore raised from holding companies by utilizing fresh CCD's raised from CSL of Rs 1250 crore and redemption of investment in group companies amounting to Rs 1200 crore. This resulted in negative net worth for CCVL, and for CSL on consolidated basis. However, the negative networth is not due to any business or cash loss. With the IPO infusion and the expected healthy annual profits, networth is expected to turn positive.

Driven by strong operating performance and lower interest outgo, annual accruals are expected to be over Rs 600 crore in fiscals 2022 and 2023. Accruals will be more than sufficient to meet repayment obligations and working capital requirements apart from capex needs. While the company is expected to incur capex of Rs 600-700 crore over the next 3 fiscals, mainly in the paste PVC resin segment and CS segment, the same will be in a phased manner, and is expected to be funded through a prudent mix of accruals and debt. Besides, CSL is also focusing on improving its working capital management, and lower interest payout related to letter of credit (LC) for imports of key raw materials. Hence, improvement in debt metrics is expected to continue over the medium term.

The ratings continue to factor CSL's established market presence in the PVC segment (both paste and suspension segments, through CCVL), diversified revenue stream catering to multiple end user industries, long standing relationship with customers and healthy demand prospects for its products. The rating also factors in the long vintage and experience of the promoters in the PVC and chemicals sector. CSL's financial risk profile is adequate and improving, benefitting from healthy cash generating ability, and a largely deleveraged balance sheet. These strengths are partially offset by part commoditized nature of products which lends variability to operating margins. Besides there is also high import dependence of key raw materials for suspension PVC business, which exposes the company to risk in foreign exchange fluctuations.

Shares of Chemplast Sanmar Ltd was last trading in BSE at Rs. 614.30 as compared to the previous close of Rs. 622.10. The total number of shares traded during the day was 13083 in over 1127 trades.

The stock hit an intraday high of Rs. 629.25 and intraday low of 610.00. The net turnover during the day was Rs. 8142801.00.

Source : Equity Bulls

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ChemplastSanmar INE488A01050 SpecialtyChemicals RatingUpgrade