CRISIL?s ratings on the bank facilities of Arjun Chemicals Pvt Ltd (Arjun Chemicals) continue to reflect Arjun Chemicals? healthy financial risk profile, marked by comfortable gearing and debt protection metrics, and its established presence in the paper chemicals industry. These rating strengths are partially offset by Arjun Chemicals? large working capital requirements, and its susceptibility to volatility in raw material prices, exchange rates, and intense industry competition.

Outlook: Stable

CRISIL believes that Arjun Chemicals will maintain its favourable financial risk profile over the medium term, backed by low debt levels and steady cash accruals. The outlook may be revised to ?Positive? if Arjun Chemicals diversifies its revenue profile, and significantly improves its revenues and market share. Conversely, the outlook may be revised to ?Negative? if Arjun Chemicals? revenues and margins deteriorate significantly; it extends more-than-expected funding support to group entities, or undertakes a large, debt-funded capital expenditure (capex) programme.

Update

Arjun Chemicals? revenues and profitability in 2009-10 (refers to financial year, April 1 to March 31) were in line with CRISIL?s expectations. The company generated revenues of Rs.365 million in the six months ended September 30, 2010 and is expected to close the year at Rs.650 million, backed by improved demand from customers. The performance in the current year is also expected to be in line with CRISIL?s expectations. As on March 31, 2010, Arjun Chemicals had a gearing of 0.03 times. The company, during the current financial year, did not undertake any major capex programme. However, in 2011-12, the company plans to set-up two additional factories, at Kashipur (Uttaranchal) and Vapi (Gujarat). The total project cost is expected to be Rs.80 million, to be funded by term loan of Rs.50 million and internal accruals of Rs.30 million. Despite the capex, Arjun Chemicals? capital structure is expected to remain comfortable.

Over 2009-10, Arjun Chemicals invested close to Rs.34 million, Rs.10 million more than expected, in its associate entity, Arjun Paper and Pulp Ltd (APPL). APPL is planning to set up a paper mill with a capacity of 3000 tonnes per annum at a cost of Rs.600 million. CRISIL believes that Arjun Chemicals? investment in this project will remain at current levels. Its liquidity remains adequate, with steady cash accruals of Rs.70 million against term loan obligations of Rs.16 million, and healthy unencumbered cash balances of Rs.16 million as on March 31, 2010.