By: ICN Bureau
Last updated : January 09, 2021 11:06 am
Debt reduced to Rs 364 crore as on November 30, 2020 driven by improved working capital management.
CRISIL has upgraded its rating on the long-term bank facilities of Dorf-Ketal Chemicals India Private Limited (Dorf Ketal) to 'CRISIL AA-/Stable' from 'CRISIL A+/Positive' and reaffirmed its 'CRISIL A1+' rating on the short-term bank facility.
The rating upgrade reflects CRISIL's belief that the Dorf Ketal group will sustain its improved business risk profile supported by diverse product offerings, healthy market position and steady addition of customers and businesses backed by its strong research and development (R&D) expertise and process chemistry skills. Besides, the group has strengthened its financial risk profile and liquidity, which should sustain over the medium term.
Operating margin is expected to improve to around 14% in fiscal 2021 from 11.4% in fiscal 2020 driven by cost cutting measures, better product mix and lower input price. Moreover, backed by new orders in fuel additives and oilfield segments, revenue is likely to moderate by only 5% in fiscal 2021 despite the impact of Covid-19, resulting in healthy cash generation. New business of over Rs 400 crore in the pipeline and the expected recovery in demand should lead to compound annual growth rate of 12-14% in revenue over the medium term, while operating margin should remain steady at 11-13%.
The financial risk profile has strengthened in fiscal 2021. Debt reduced to Rs 364 crore as on November 30, 2020 driven by improved working capital management. Gearing is expected to remain healthy below 0.4 time over the medium term supported by steady cash accrual of over Rs 200 crore and moderate capital expenditure (capex) of Rs 30-50 crore per annum. Liquidity is strong as indicated by cash surplus of Rs 266 crore as on November 30, 2020, which is expected to remain in the business.
The ratings continue to reflect the group's healthy market position, strong R&D capability, and healthy financial risk profile. These strengths are partially offset by susceptibility of operating margin to volatility in raw material prices and the group's large working capital requirement.
The group's success is underpinned by its ability to meet requirements of customers and focus on offering customised solutions. It has established itself as a strong competitive player due to focus on technology and R&D. It has over 600 process and product patents, including those acquired from UOP Inc, DuPont, and Johnson Mathey. The strong market position is supported by customised solutions and support services. Onsite services offered include product applications, field trials, checks on chemical dosage rates, and troubleshooting of environmental, health, and safety-related issues. The group has developed its unit at Taloja, Maharashtra, as an R&D hub for its product pipeline. Strong process chemistry skills, specialised products and customised solutions provided will continue to benefit the group.
The financial risk profile is supported by healthy cash accrual, and moderate capex and external debt. Gearing was below 0.65 time in the four fiscals through 2020 backed by healthy cash generation and no major acquisitions. The group will likely undertake moderate capex of Rs 30-50 crore per annum and has no acquisition plan over the medium term. Gearing should thus improve (expected below 0.40 time as on March 31, 2021). Interest coverage and net cash accrual to adjusted debt ratios will remain healthy, estimated at over 10 times and over 0.5 time, respectively, for fiscal 2021. Any large, debt-funded expansion or acquisition will remain a monitorable.
Outlook: Stable
The Dorf Ketal group's credit risk profile will continue to benefit from new businesses, steady demand from customers, healthy market position, established clientele, and strong R&D. The financial risk profile should improve in the absence of any large, debt-funded capex.