CRISIL Ratings has upgraded its ratings on the bank facilities of Karnataka Chemical Industries (KCI; a part of the Marlecha group) to ‘CRISIL BBB/Stable/CRISIL A3+’ from ‘CRISIL BBB-/Stable/CRISIL A3’.

The ratings action reflects the sustained improvement in the group's business risk profile marked by revenue growth of 70% year-on-year in fiscal 2022, while sustaining the margin at around 7%. Revenue has improved to Rs 725.22 crore in fiscal 2022 from Rs. 427.64 crore achieved in the previous fiscal. Revenue booking is estimated to be around Rs. 418 crore in H1FY23, reflecting the sustenance of revenue growth. 

The ratings continue to reflect an established position in the specialty chemicals and aromas business, a long relationship with its customers, and a healthy financial risk profile. These strengths are partially offset by sizeable working capital requirement, and susceptibility to volatility in foreign exchange (forex) rates, economic downturns, and intense competition from global players.

CRISIL Ratings has consolidated the business and financial risk profiles of KCI and Karnataka Aromas (KA), together referred to as the Marlecha group, considering the business and financial synergies between the two entities.

The group’s financial profile is supported by heathy networth of Rs 123.28 crore as on March 31, 2022, and moderate leverage levels with gearing ratio at 1.63 times and total outside liabilities to tangible networth (TOL/TNW) at 2.21 times as on that date. Debt protection metrics remain healthy with interest coverage and net cash accrual to adjusted debt ratio at 5.39 times and 0.12 time respectively in fiscal 2022. Overall financial risk profile is expected to be remain comfortable over medium term.

The groups operating margins remained between 6.4 – 10.1% during the past few years. The group is exposed to significant competition, as the chemical industry is highly fragmented, with numerous unorganized players catering to local demand. The fragmented nature of the industry, the trading nature of operations, and susceptibility to prices of crude derivatives. Nevertheless, the group has adequately passed on the fluctuations in raw material prices to its customers. CRISIL Ratings believes that group's operating profitability will remain susceptible to fluctuations in prices and to competition in the industry.

Cash accruals are expected to be more than Rs 20 crore per annum against no repayment obligations, in the medium term. The group also has access to fund-based limits of Rs 185 crore, utilized to the tune of 42% on an average, over the 12 months ended September 2022. Current ratio is healthy at 5.08 times on March 31, 2022. Liquidity is further supported by the unsecured loans of from promoters, which is expected to remain in the business.

CRISIL Ratings believes group will continue to benefit from the extensive experience of the partners and their healthy relationships with customers and suppliers.