India Ratings and Research (Ind-Ra) has upgraded Laxmi Organic Industries Limited’s (LOIL) long-term bank loan rating to ’IND AA’ from ‘IND AA-’ with a Stable Outlook while affirming the short-term bank loan rating at ’IND A1+’ as follows:

Ind-Ra has treated LOIL’s associates - Cleanwin Energy One LLP, India (26% held by LOIL) and Radiance MH Sunrise Seven Private Limited, India (26%) as per IND-AS.

The upgrade reflects a higher visibility of improvement in LOIL’s business profile over the near term, backed by the commissioning of its Fluoro-specialty unit, the increasing share of its specialties segment in the overall business, and an increase in the size and scale of the company’s profitability over FY25-FY26. Furthermore, the increase in the share of the company’s value-added products is likely to reduce the volatility in product margins.

The company’s EBITDA grew 25% yoy to Rs. 1,459 million in 1HFY25, led by volume growth. The ratings also factor LOIL’s strong credit profile, backed by the management’s commitment to maintain financial discipline by ensuring its net leverage remains below 1x and the company’s adequate liquidity buffers over the medium term, despite its large capex execution plans. The ratings continue to factor in LOIL’s leading market position within the existing product segments and the diversified end-use industry as well as geographical sales mix.

Commissioning of Fluorination Capacity to Support Business Profile: While LOIL had commissioned the first phase of its fluorinated chemicals segment over May 2023, the second phase was commissioned during 1HFY25 with the segment likely to generate revenues from 4QFY25. This segment will add to the company’ specialties portfolio and allow it to serve the current customer base, thereby enabling a higher wallet to share with the same customers along with an entry into new industries.

Given the broad-based applications of fluorochemical specialty products in the pharmaceutical and agrochemical sectors, LOIL intends to leverage its existing customer relationships by offering a diverse set of products while strengthening its position in the specialty chemicals segment. LOIL received customer approval from 16 out of 20 customers during 1HFY25 for 10 samples with three more products having been sent as samples to seven more customers in FY25. While there was a delay from the initially envisaged commissioning in FY23, the commissioning of the plant and the customer approvals obtained provides a greater visibility on LOIL’s ability to scale up the plant.

LOIL is the sole manufacturer of the said products and formulations in India, thereby enabling import substitution and supporting capacity ramp up. The management expects the segment to record a peak revenue of around Rs. 2,000 million in FY27 with 40%-60% of it being achieved in FY26. The ramp up within this product segment is likely to improve the consolidated margin profile over the near-to-medium term while reducing the margin volatility and single-location risk.  Furthermore, it will help reduce the company’s dependence on commodities such as ethyl acetate and imported raw materials.  The segment has an installed capacity of 13,820TPA and the said assets were acquired by LOIL from Miteni SpA (Italy) through its wholly owned subsidiary, Viva Lifesciences Private Limited.

Large Capex Plans to Improve Size and Scale, Increase Value-added Share:  LOIL intends to incur capex of INR11, 000 million over FY25-FY28, equally split within the essentials and specialties business. The management expects the investment to double its revenue and triple its EBITDA by FY28 over its FY24 performance, thereby substantially increasing the size and scale of profitability and increasing its value-added share. Considering that around 80% of the growth will be within existing chemistries in which LOIL has a strong market position, LOIL remains well placed to timely execute its capex plans, stabilise the incremental capacity and ramp up output. The capex investments within the essential segment are likely to be within the Esterification or Acetylation chemical chain and will enable the company to maintain its Indian market share, grow exports and enable a further improvement in operational efficiencies while expanding its product portfolio and de-risking its existing business.

Furthermore, the investments in the specialty segment will be within the ketene/diketene/fluorination and new chemistries and enable LOIL to increase its market share, focus on increasing its global customer base, further improve its cost competitiveness and maintain 20% of its segment sales from new products. LOIL’s announced capex plans over FY25-FY28 are likely to see similar capex intensity levels as witnessed over FY20-FY24 (around 10%; capex incurred/operating revenue). The capex executed over FY20-FY24 included LOIL’s foray into the Fluoro-specialties segment, the commissioning of incremental capacity of diketene derivatives and capacity addition within ethyl acetate and acetaldehyde through the acquisition of Yellowstone Chemicals Private Limited acquisition.

Leading Market Position Within Existing Lines of Business: LOIL is a leading manufacturer of ethyl acetate, a portfolio of acetic acid derivatives that are key solvents across industries (essentials business), and di-ketene derivatives products (specialties business). It is the seventh-largest manufacturer of ethyl acetate globally, with a capacity of over 232,000MTPA, according to the management. Furthermore, LOIL is among the top three backward integrated manufacturers of diketene derivatives in the world as per management.  According to management, in the essentials space, the company has about 35% of the domestic market share. LOIL meets close to 55% of the domestic demand for diketene derivatives; the balance is imported, mainly from Europe and China. Considering that the procurement of domestic diketene derivative products eases the supply chain and provides cost benefits, local supplies of the same are preferred by Indian customers, leading to a deeper penetration and improved market share for the company.

LOIL’s product offerings remain healthy, with a healthy mix of the higher-margin specialties and growing essentials portfolio. In 1HFY25, the specialties segment contributed 31%% (FY24: 30%; FY23: 35%) to the top-line and 67% (67%; 70%) to the profitability, while the essentials segment contributes about 69% (70%; 65%) to the top-line and 33% (33%; 30%) to the profitability. The management intends to launch new products that it estimates will account for 20% of its revenue within the specialties segment over the medium term. Ind-Ra believes the product launches and the company’s focus on high-margin specialty products will provide stability to its earnings and boost its margins and business risk profile over the near-to-medium term, which is a key rating monitorable.

Credit Metrics to Remain Comfortable Despite Planned Capex: Ind-Ra gains comfort from the management’s commitment to maintain financial discipline by ensuring the net leverage remains below 1x over the medium term, despite its large capex execution plans. The ramp up of the fluorination segment and the incremental facilities once commissioned are critical to improving the size and scale of profitability and keep the credit metrics in check; these are key monitorables. LOIL intends to fund the planned capex over FY25-FY26 through a mix of internal accruals, on-balance sheet cash with minimal term debt required. The company was net cash positive on a consolidated level at end-1HFY25 (FYE24: net cash; FYE23: net leverage of around 1x) despite the capex plans on account of the qualified institutional placement (QIP) issuance of around INR2,589 million in FY24, which it utilised towards repaying the entire long-term debt over 10MFY25. The consolidated interest coverage (operating EBITDA / gross interest expense) stood at 39.1x in FY24 (FY23: 21.7x; FY22: 23.8x) and is likely to be comfortable over FY25-FY28.