By Prateek Goyal

India Ratings and Research (Ind-Ra) has upgraded Balaji Amines Limited’s (BAL) Long-Term Issuer Rating to ‘IND AA-’ from ‘IND A+’. The Outlook is Stable. The instrument-wise rating actions are given below:

Instrument Type

Date of Issuance

Coupon Rate (%)

Maturity Date

Size of Issue (million)

Rating/Outlook

Rating Action

Term loans

 

 

January 2020

INR64.9 (reduced from INR244.48)

IND AA-/Stable

Upgraded

Fund-based working capital facilities

-

-

-

INR1,800

IND AA-/Stable/IND A1+

Long-term upgraded and short-term affirmed

Non-fund-based working capital facilities

-

-

-

INR1,300

IND A1+

Affirmed

 

Analytical Approach: The agency has taken a consolidated view of BAL and its subsidiary, Balaji Specialty Chemicals Private Limited (BSCPL) to arrive at the ratings for BAL. This approach has been adopted to reflect Ind-Ra’s assessment of the strong legal and strategic ties between BAL and BSCPL.

The upgrade reflects BAL’s improving business risk profile as reflected in its competitive business position, backed by its purchasing and pricing power with respect to products such as amines, its derivatives, specialty chemicals and pharma excipients.

KEY RATING DRIVERS

Major Player in Oligopolistic Amines Industry: BAL’s revenue increased by 28.8% to INR8,636.5 million in FY18, driven by volume growth as well as higher realisations. The company has demonstrated the ability to pass on raw material price volatility to its customers and maintain healthy and stable EBITDA margins (FY18: 21.9%; FY17: 22.8%; FY16: 19.7%). Also, in the global market, capacity addition has been muted because of plant closures in China; this has benefited domestic amines manufacturers. Ind-Ra expects BAL to maintain margins at the level of about 20% over the next year.

Diversified Product Portfolio:
BAL manufactures amines (methyl amines and ethyl amines) and their derivatives, speciality chemicals and pharma excipients. Overall, the company has a portfolio of over 25 products, which are supplied to domestic and foreign players (exports accounted for around 20% of the total sales in FY18). At present, BAL derives over 50% of its revenues from the pharma sector and 26% from agro industries. Some of its other end-user industries include dyes and textiles, water treatment chemicals, animal industries and oil and gas. The company has been incurring capex to add new products to its portfolio and to also expand the capacities of existing products.

Update on BSCPL:
BAL acquired a 55% stake in BSCPL in FY18 for INR660 million. The acquisition, which was funded through internal accruals and unutilised working capital limits, will enable BAL to add new products that are in demand in both domestic and export markets to its portfolio. BAL’s promoters and directors are shareholders in BSCPL, which is setting up a plant to manufacture specialty chemicals such as ethylene diamine (EDA; 25,400 tonnes per annum (TPA)), piperazine (about 2,200 TPA) and diethyleneteramine (DETA; about 2,400 TPA). BSCPL, incorporated in 2010, has incurred capex of about INR2 billion for the project and has obtained all necessary approvals. The management expects the plant to commence operations by January 2019.

Robust Credit Metrics:
BAL’s net adjusted leverage (adjusted debt net of cash/EBITDAR) remained almost stable at 0.8x in FY18 (FY17: 0.7x; FY16: 1.3x) and gross interest coverage surged to 21.0x (FY17: 11.8x; FY16: 5.7x). The improvement is attributed to higher EBITDA margins, low working capital utilisation and debt repayments, though the positive impact of these factors was partially offset by increased debt levels at end-FY18 due to the acquisition of the stake in BSCPL. Ind-Ra expects the net leverage for full year FY19 to rise modestly as increased working capital utilisation and the debt taken for BSCPL would offset the growth in EBITDA. EBITDA interest coverage is also expected to remain comfortable at over 12.0x for FY19.

Strong Liquidity: BAL’s robust liquidity is reflected in its consistently positive free cash flow generation over FY14-FY18. The cash flow from operations increased to INR1,310 million in FY18 (FY17: INR475 million), driven by sustained operating margins and improvement in the working capital cycle in FY18. Average utilisation of the fund-based facilities was around 48% for the 12 months ended October 2018. The company had modest cash and equivalents of INR0.8 million as on September 30, 2018. Ind-Ra expects the company’s operating cash flow generation ability to remain strong. However, free cash flows are expected to remain negative over the next two to three years, as BAL is likely to incur capex of INR3–INR4 billion towards new product additions and capacity expansion, though the work on the same is yet to start. This capex would be over and above the greenfield capex being incurred at the subsidiary level. Ind-Ra believes the utilisation levels of working capital limits would increase in FY19 due to the growing scale of operations.

Volatile Prices of Raw Materials:
BAL is susceptible to volatility in raw material prices, which depends upon global oil and gas prices. Methanol accounted for a third of the total raw material cost in FY18. Ethanol, ammonia and gamma butyrolactone (GBL) are other key raw materials; they are either imported or procured domestically. The company has demonstrated the ability to pass on the increase in raw materials prices to its customers, though with a lag of 3-4 weeks, leading to some fluctuations in quarterly margins. 


RATING SENSITIVITIES

Positive: A significant increase in the scale of operations, product diversification and capex in line with Ind-Ra's expectations, while maintaining the credit metrics at the current level would be positive for the ratings.

Negative:
Any deterioration in the financial performance of the company, with net leverage increasing to over 1.5x on a sustained basis would be negative for the ratings.


COMPANY PROFILE

Established 1988, BAL is one of India's leading manufacturers of aliphatic amines and its derivatives, speciality chemicals and pharma excipients. As of November 2018, the company operated manufacturing plants with an aggregate capacity of 180,000 metric tonnes per annum.

 

FINANCIAL SUMMARY

 

Particulars

FY18

FY17

Revenue (INR million)

8,636.4

6,704.8

EBITDA (INR million)

1,895.2

1,526.6

EBITDA margin (%)

21.9

22.8

Interest Expense (INR million)

90.4

129.8

Interest coverage (x)

21.0

11.8

Net leverage (x)

0.8

0.7

Source: Ind-Ra, BAL

 


RATING HISTORY

Instrument Type

Current Rating/Outlook

Historical Rating/Outlook

Rating Type

Rated Limits (million)

Rating

24 November 2017

22 November 2016

16 December 2015

Issuer rating

Long-term

 

IND AA-/Stable

IND A+/Stable

IND A/Stable

IND A-/Stable

Term loans

Long-term

INR64.9

IND AA-/Stable

IND A+/Stable

IND A/Stable

IND A-/Stable

Fund-based facilities

Long-term/Short-term

INR1,800

IND AA-/Stable/IND A1+

IND A+/Stable/IND A1+

IND A/Stable/IND A1

IND A-/Stable/IND A2+

Non-fund-based facilities

Short-term

INR1,300

IND A1+

IND A1+

IND A1

IND A2+


COMPLEXITY LEVEL OF INSTRUMENTS

 For details on the complexity level of the instruments, please visit https://www.indiaratings.co.in/complexity-indicators.

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Additional information is available at www.indiaratings.co.in. The ratings above were solicited by, or on behalf of, the issuer, and therefore, India Ratings has been compensated for the provision of the ratings. 

Ratings are not a recommendation or suggestion, directly or indirectly, to you or any other person, to buy, sell, make or hold any investment, loan or security or to undertake any investment strategy with respect to any investment, loan or security or any issuer.

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