By Neermoy Shah

This announcement corrects the version published on 21 February 2019 to rectify the standalone financials, consolidated interim financials and the term loan amount in the commentary. An amended version is as follows:

India Ratings and Research (Ind-Ra) has downgraded Camlin Fine Sciences Limited’s (CFSL) Long-Term Issuer Rating to ‘IND BBB+’ from ‘IND A-’. The Outlook is Negative. 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 loan

-

-

FY22

INR75 (reduced from INR239.8)

IND BBB+/Negative

Downgraded

Fund-based limits

-

-

-

INR2,200

IND BBB+/Negative/IND A2

Downgraded

Non-fund-based limits

-

-

-

INR1,648

IND A2

Downgraded

Proposed term loan

-

-

-

INR1,282

WD

Withdrawn (company did not proceed with the instrument as envisaged)

Commercial paper

-

-

7 to 365 days

INR644.5

WD

Withdrawn (company did not proceed with the instrument as envisaged)

Analytical Approach: Ind-Ra continues to take a consolidated view of CFSL and its subsidiaries for arriving at the ratings because of strong operating linkages among them. CFSL operates three divisions: antioxidants, performance chemicals and aroma chemicals.

KEY RATING DRIVERS

Fall in EBITDA Margin and Consequent Deterioration Credit Metrics: The downgrade reflects CFSL’s weaker operating performance in 9MFY19 than Ind-Ra’s expectations, and the performance may now take longer to return to the historical levels. The EBITDA margin in 9MFY19 was significantly lower at 8.3% than the historical level of 15%-18% in FY15 and FY16, though was better than the FY17 and FY18 levels of 6.2% and 1.7%, respectively. The improvement in the EBITDA margin in 9MFY19 from the FY18 level was due to the benefits of integrated operations as subsidiaries formed for backward and forward integration in the last five-six years started to perform well. With CFSL benefiting from integrated operations, Ind-Ra believes that the margin would remain steady in the medium term. 

Moreover, the standalone operating performance, though improved, remained modest, with EBITDA margin
at 5.4% (FY18: 2.0%; FY17: 7.5%). The improved performance of overseas subsidiaries supported the overall consolidated profitability. The consolidated return on capital employed was negative 1.8% in FY18 (FY17: 1.8%). 

The fall in the consolidated EBITDA margin in FY17 and FY18 was primarily due to the discontinuation of a contract by its biggest customer, following the acquisition of a Mexican company by CFSL in May 2016, making it a direct competitor to the customer. The fall was also due to losses incurred by some overseas subsidiaries due to initial stages of their operations. As a result of these developments, credit metrics substantially weakened, with EBITDA interest cover (EBITDA/net interest expense) falling to 0.4x in FY18 (FY17: 1.1x) and net leverage (net debt/EBITDA) increasing to 16.0x (7.6x). 

Its revenue rose at a 20% CAGR to INR7,228 million over FY16-FY18 and is likely to cross INR8,000 million in FY19 as the company had booked a revenue of INR6,241 million for 9MFY19 (FY17: INR5,339 million).

Debt-Funded Capex Plans to Keep Credit Metrics Subdued:
The Negative Outlook reflects CFSL’s continued debt-funded expansion as it would keep the credit metrics weak. In FY19 so far, it has issued foreign currency convertible bonds totalling INR1 billion for its ongoing capex in Dahej (India) for setting up hydroquinone (6,000 million tonne (mt) capacity) and catechol (4,000mt capacity) facilities, aimed at backward integration. The capex commenced in FY18. CFSL plans to raise further debt of the same quantum in FY20 for a preferred supply agreement signed in November 2017 with Lockheed Martin Advanced Energy Storage USA for the supply of speciality chemicals. Although the successful completion and operationlisation of these two capex programmes would improve revenue visibility and operating profile, they pose the project risk until completion.

The Negative Outlook also reflects the possibility of the EBITDA margin not improving further from the 9MFY19 level in FY20-FY21 due to the competitive pressure.

Weak Standalone Profile
: On a standalone basis, CFSL’s revenue rose 24% yoy to INR4,028 million in FY18, driven by increased order flows. For 9MFY19, CFSL booked a revenue of INR3,766 million. Its EBITDA margin increased to 5.4% in 9MFY19 (due to better price realisation) from 2% in FY18 after dipping from 7.5% in FY17 due to a raw material price increase. The rise in the EBITDA margin improved the 9MFY19 EBITDA interest cover to 1.35x from 0.31x in FY18, but still remains weak. In Ind-Ra’s opinion, the competitive pricing pressure could keep the standalone credit profile subdued over FY19-FY20.

Modest Liquidity Supported by Qualified Institutional Placement
: CFSL raised INR1.5 billion in FY18 through a qualified institutional placement and warrants, a part of which was used to make good debt obligations on due date. The company has repaid a large portion of its term loan, with only INR75 million outstanding as on 21 January 2019 repayable in the next three years. If the redemption of the foreign currency convertible bonds happens, it will be after FY23. Hence, CFSL has no major near-term debt repayment obligation. The average bank limit utilisation was moderate at 90% for the trailing 12 months ended December 2018. 

Dominant Position in Global Antioxidant Industry
:  CFSL has a dominant position in the global antioxidant industry, with a 50% market share in tertiary butyl hydroquinone and a 70%-80% market share in butyl hydroxy anisole. CSFL’s derives the majority of revenue from export markets; CSFL mainly sells to Europe, the US and other Asian countries.


RATING SENSITIVITIES

Negative: A sustained weak EBITDA margin or operating losses at a standalone and/or a consolidated level, leading to continued weak credit metrics, could lead to a downgrade. 

Positive:
Any substantial and sustained improvement in the EBITDA margin on standalone and consolidated bases as per the agency's expectations, leading to an improvement in the credit metrics, could lead to the Outlook revision to Stable. 


COMPANY PROFILE

Ltd (formerly Camlin Ltd) in July 2006. CFSL mainly sells antioxidants such as tertiary butyl hydroquinone and butyl hydroxyl anisole (used in fried snack foods, bakery, confectionary, fats and oils, and dairy products), industrial performance chemicals such as methoxy phenol, and aroma chemicals such as vanillin and ehtyl vanillin. 

CONSOLIDATED FINANCIAL SUMMARY
 

Particulars

FY18

FY17

Revenue (INR million)

7,228

5,339

EBITDA (INR million)

126

331

EBITDA margin (%)

1.7

6.2

EBITDA gross interest cover (x)

0.4

1.1

Net debt/EBITDA (x)

16.0

7.6

Source: CFSL, Ind-Ra


RATING HISTORY

Instrument Type

Current Rating/Outlook

Historical Rating/Outlook

Rating Type

Rated Limits (million)

Rating

21 December 2017

23 September 2016

30 December 2015

Issuer rating

Long-term

-

IND BBB+/Negative

IND A-/Negative

IND A/Stable

IND A/Stable

Term loans

Long-term

INR75

IND BBB+/Negative

IND A-/Negative

IND A/Stable

IND A/Stable

Fund-based limits

Long-term

INR2,200

IND BBB+/Negative/IND A2

IND A-/Negative/IND A2+

IND A/Stable/IND A1

IND A/Stable/IND A1

Non-fund-based limits

Short-term

INR1,648

IND A2

IND A2+

IND A1

IND A1

Commercial paper

Short-term

INR644.5

WD

IND A2+

IND A1

IND A1


COMPLEXITY LEVEL OF INSTRUMENTS

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

SOLICITATION DISCLOSURES

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.

ABOUT INDIA RATINGS AND RESEARCH

About India Ratings and Research: India Ratings and Research (Ind-Ra) is India's most respected credit rating agency committed to providing India's credit markets accurate, timely and prospective credit opinions. Built on a foundation of independent thinking, rigorous analytics, and an open and balanced approach towards credit research, Ind-Ra has grown rapidly during the past decade, gaining significant market presence in India's fixed income market. 

Ind-Ra currently maintains coverage of corporate issuers, financial institutions (including banks and insurance companies), finance and leasing companies, managed funds, urban local bodies and project finance companies. 

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Applicable Criteria

Analyst Names

  • Primary Analyst

    Neermoy Shah

    Associate Director
    India Ratings and Research Pvt Ltd 510-Sun Squre, Above IDFC Bank, Near Hotel Regenta, Off. C.G. Road, Navrangpura, Ahmedabad 380009
    +91 79 49110703

    Media Relation

    Namita Sharma

    Manager – Corporate Communication
    +91 22 40356121