CRISIL reaffirms rating of Sudarshan Chemical Industries' commercial paper programme

CRISIL Ratings has reaffirmed its 'CRISIL A1+' rating on the commercial paper programme of Sudarshan Chemical Industries Limited (Sudarshan).

Operating income grew by 18.1% to Rs 2,201 crore for fiscal 2022, aided by the domestic and export business, which recorded year-on-year (y-o-y) growth of 27% and 9% respectively. Growth in domestic business was supported by growth in plastic and coatings segments. In comparison to fiscal 2022, operations in the first half of fiscal 2021 were impacted by disruptions caused by the Covid-19 pandemic.

Operating margin contracted by nearly 290 basis points to 12.6% in fiscal 2022, on account of high cost of raw material, energy and logistics. Rise in coal prices and freight rates led to a spike in energy prices and logistics cost, thereby driving up manufacturing overhead. For the first half of fiscal 2023, turnover rose by almost 11% year-on-year to Rs 1,003 crore, driven by nearly 16% growth in the first quarter, aided by price revisions even as volume remained muted. In the second quarter, turnover was impacted by drop in volume on account of geopolitical risks leading to high inflation in the US and Europe, and other major economies, and China's zero Covid policy, resulting in demand pull-back in overseas markets. Even in the domestic market, plastic manufacturers deferred their buying decisions, due to significant drop in polymer prices, in anticipation of further correction. As a result, operating margin contracted to 7.5% and 8.1% in the first and second quarters of fiscal 2023, respectively, on account of under-recovery of fixed cost with volume contraction and high energy cost.

Demand is likely to revive in the later part of third quarter of fiscal 2023, primarily in the domestic market, with stabilization of raw material prices, especially benzene, crude, toluene and Linear Low Density Polyethylene. In contrast, demand in overseas markets remains subdued. Revenue for fiscal 2023 is expected to remain flat but will revive thereafter, driven by capacity expansion in the pigment business and new launches. Operating margin is likely to be lower in fiscal 2023, vis-a-vis fiscal 2022, but will still be higher than levels reported for the first quarter of fiscal 2023 (7.8%), aided by various cost rationalization measures undertaken to offset the impact of the rise in prices of coal and other raw materials. Recovery in operating performance over the next couple of quarters shall remain a key rating monitorable.

Financial risk profile should be comfortable with interest cover and net cash accrual to adjusted net debt (NCA/AD) ratios projected around 5 times and 15%, respectively, in fiscal 2023. The total outside liabilities to tangible networth (TOL/TNW) and gearing ratios are likely to remain around 2.0 times and 1.2 times, respectively, as on March 31, 2023, considering the large capital expenditure (capex) of Rs 750 crore incurred over the last three and half years, and mainly funded via debt (75%).

The ratings reflect the extensive experience of the promoters in the pigment industry and the established market position of Sudarshan. The ratings also factor in the diversified product range and end-user industry profile, strong distribution network, marquee clientele, and comfortable financial risk profile of the Company. These strengths are partially offset by the industry based large working capital requirements and risks related to volatility in commodity prices and those related to ramp-up of capacities with regards to large capex incurred.

Shares of Sudarshan Chemical Industries Limited was last trading in BSE at Rs. 390.15 as compared to the previous close of Rs. 383.70. The total number of shares traded during the day was 8074 in over 826 trades.

The stock hit an intraday high of Rs. 395.35 and intraday low of 387.15. The net turnover during the day was Rs. 3162472.00.

Source : Equity Bulls

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SudarshanChemicalIndustries INE659A01023 RatingUpdate CommercialPaper