The rating factors CRISIL Ratings expectations that CSL's (Chemplast Sanma Ltd) operating performance will witness steady recovery from fiscal 2024, supported by better realizations of suspension PVC (S-PVC) and paste PVC (~80% of consolidated revenues) and healthy prospects for PVC products.

CRISIL Ratings also expects the custom manufacturing (CMC) and other chemicals businesses of CSL (caustic soda, chloromethanes and hydrogen peroxide) to continue to perform well amid stable demand and growing realization. These businesses have helped the company to diversify their business offerings and have supported the bottom line of the company at the times of extreme fluctuations in PVC prices.

Domestic demand of PVC is expected to continue to be healthy due to strong demand from the construction sector, including residential segment and irrigation projects. More than 70% of the domestic demand for S-PVC is from pipe and fitting businesses which in turn is dependent on the domestic irrigation/ water conveyancing/ construction activity.

The demand for S-PVC from the profiles segment is also growing in India. Domestic demand for S-PVC is expected to reach ~3.3 mn MT in fiscal 2023 and is expected to grow at 8-9% CAGR through fiscal 2025. The Indian domestic S-PVC capacity is only ~1.5 mn MT, with over 50% of demand being catered by imports majorly from China, Japan, Korea and Taiwan.

CSL is the second largest producer of PVC in India only behind Reliance Industries Limited, with annual S-PVC capacity of 331,000 MT (increased by 31000 MT in fiscal 2023) and largest producer of paste PVC with an annual capacity of 66,000 MT.

The company is expanding its paste PVC capacity by 41,000 MT and the same is expected to be added by October - December 2023 quarter. Due to pent up demand for PVC in the domestic market and higher prices of PVC due to restricted supply from China, consolidated revenue of the company grew by 55% in fiscal 2022. The PVC segment contributed towards more than 80% of the consolidated revenue of the company.

Realizations in the other specialty chemical business of the company also grew at a healthy rate. However, due to strict covid lock down in China and zero COVID policy in the first half of fiscal 2023, dumping from China increased into the Indian market, impacting domestic PVC realizations until November 2022. Paste PVC prices which had higher realization and profitability also dropped 42% during the period.

However, lifting of Covid related restrictions in China and recovery in Chinese consumption of PVC products, from midNovember 2022, led to a gradual recovery in domestic PVC prices, both S-PVC and paste PVC. While there are some temporary pressures on PVC prices now, these are expected to recover and improve gradually over fiscal 2024 as well.

CSL's revenue is expected to decline by 15-17% in fiscal 2023 due to lower PVC realisations, relative to fiscal 2022, despite continued volume growth. Realization from the other specialty chemical businesses of the company (caustic soda, chloromethane, Hydrogen peroxide and custom manufacturing) is expected to be stable. With PVC prices recovering, revenue is expected to grow steadily by 10-15% in the medium term driven by higher PVC prices and additional paste PVC and custom manufacturing capacity becoming available from fiscal 2024. Operating profitability expected to moderate to 9%-11% in fiscal 2023 from 20% in fiscal 2022 due to lower realization in PVC, and then improve to 14-15% in the medium term, supported by better share of higher margin paste PVC and custom manufacturing revenues.

CSL's financial risk profile remains adequate and supported by more than Rs 1100 crore of unencumbered cash and cash equivalents as on December 31, 2022. Interest coverage is expected at 3.75x in fiscal 2023 compared to 3.89x in fiscal 2022. The company has announced capex of ~Rs 1100 crore to be done in phases over fiscal 2023 and fiscal 2024 towards expansion of capacity in paste PVC and custom manufacturing. The capex is expected to be implemented with debt of Rs 810 crore which is to be disbursed in phases, and balance from accruals. The ratio of debt/EBITDA is expected at 2.2-2.4 times in fiscal 2023, and improve to below 2 times over the medium term, supported by improved operating profits.

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, benefitting from healthy cash generating ability. These strengths are partially offset by part commoditized nature of products (S-PVC) 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.

However, CSL is diversifying its businesses by adding more capacity in their higher margin businesses such as paste PVC and custom manufacturing to mitigate this risk. CSL also uses plain vanilla forwards to hedge its imports to reduce forex risk.