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| Product | Quantum (Rs. Cr) | Long Term Rating | Short Term Rating |
| Bank Loan Ratings | 129.22 | ACUITE BB+ | Stable | Downgraded | Negative to Stable | - |
| Bank Loan Ratings | 77.78 | - | ACUITE A4+ | Downgraded |
| Total Outstanding Quantum (Rs. Cr) | 207.00 | - | - |
| Rating Rationale |
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Acuité has downgraded the long-term rating from ‘ACUITE BBB-’ (read as ACUITE triple B minus) to 'ACUITE BB+' (read as ACUITE Double B plus) and the short term rating from ‘ACUITE A3’ (read as ACUITE A three) to 'ACUITE A4+' (read as ACUITE A four plus) on the Rs. 207 Cr bank facilities of Shalimar Paints Limited (SPL). The outlook is revised from 'Negative' to 'Stable'.
Rationale for rating downgrade: The rating downgrade is majorly on the account of consistent deterioration in profitability despite growth in revenue from operations and the company continues to incur losses due to higher employee, supplychain and marketing expenses. Furthermore, the profitability of the company is expected to further deteriorate in the near term which might result into further networth erosion and deterioration in coverage indicators. The rating is also constrained on account of stretched working capital of the company as apparent from GCA days of 200 days as on 31 March 2023. However, the rating continues to draw comfort from the company’s established brand name with reputed clientele, strong promoter profile and the strategic stake sale to infra.market. Acuite has further taken cognizance of the open offer floated by Hella Infra Market Private Limited to acquire 2,17,64,907 Equity Shares from the eligible shareholders of Shalimar Paints Limited at a price of Rs. 165 per Equity Share aggregating to a total consideration of up to Rs. 359,12, 09,655 payable in cash. The progress of the same will remain a key monitorable and will be closely tracked. |
| About the Company |
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SPL was incorporated in the year 1902 and is the pioneer in the Indian Paints industry. The company is engaged in the manufacturing and marketing of decorative paints and industrial coatings and have four manufacturing plants located strategically at Howrah (Kolkata), Sikandrabad (Uttar Pradesh), Gummidipoondi (Tamil Nadu) and Nashik (Maharashtra). In 1989, the company was acquired by O.P. Jindal Group and Hongkong based S. S. Jhunjhunwala group. Currently, SPL is a part of Ratan Jindal faction of O.P. Jindal group and S. S. Jhunjhunwala group, both the promoter groups together holding 39.92 per cent of the shares. Further Hella Infra Market Private Limited holds 24.89% shares. It is listed on National Stock Exchange as well as Bombay Stock Exchange since 1972.
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| Unsupported Rating |
| Not Applicable |
| Analytical Approach |
| Acuité has considered the standalone business and financial risk profiles of SPL to arrive at this rating. |
Key Rating Drivers
| Strengths |
| Established brand name in the paints industry
Diversified brand portfolio spread across various segments with major brands, ‘Superlac Hi- Gloss Enamel’ & ‘G.P. Synthetic Enamel’ in decorative enamels, ‘Xtra Exterior Emulsion’ in exterior wall finishes, ‘Master Emulsion’ & ‘No.1 Silk Emulsion’ in interior wall finishes and ‘No.1’ (specifically catering to the rural demand) in acrylic distemper. SPL has vintage of 118+ years into the paint industry and is the first paint company of India. Strong promoter profile SPL is a part of O.P. Jindal group of companies. The group was formed by Late Mr. O.P. Jindal, a first-generation entrepreneur and is one of the large industrial groups in India having varied business interests in steel, mining, power, industrial gases and ports vehicles. Currently, SPL forms part of Delhi-based Ratan Jindal faction of O.P. Jindal group and Hongkong-based S.S. Jhunjhunwala Group, since 1989. Both the promoter groups together own 39.92 per cent of the shareholding in the company through various group companies. After the strategic stake sale, 24.99% of the shareholding now lies with Hella Infra Market Private Limited. Improved operations supported by better demand and realization The company showed improvement in its operating performance as reflected from the turnover of Rs. 485.55 cr. in FY23 as against Rs. 358.10 Cr. in FY22 showing a growth of 35.59%. The improvement in operating performance is attributed to better marketing strategy adopted by the company with more addition of dealers and improving its painter network which contributed to Rs. 47.63 Cr. of sale i.e. 13% contribution to the net sales. Further, the sales improved due to increase of products in water based umbrella, launch of new products in waterproofing range & increased number of tinting machines. The company has already achieved a turnover of Rs. 244.77 Cr. in H1FY24 i.e. a growth from corresponding period of the last fiscal. The company is projecting a topline of ~ Rs. 550 Cr. in FY24. The projection is backed by better realization in decorative paints, new product launch and better dealer network. |
| Weaknesses |
| Significant deterioration in profitability with operating losses
In FY23 & H1FY24 due to aggressive growth policy of the company the other expenses, supplychain, marketing and employee cost as % of revenue has increased impacting the EBITDA margin. The EBITDA margin of the company further deteriorated in H1FY24 and remained in the negative zone and stood at -8.51% as compared to -3.03% in FY23. The EBITDA margin in Q2FY24 stood at -16.88% as compared to -4.28% in Q2FY23 and -3.68% in Q1FY24. Below Average Financial Risk Profile SPL has below average financial risk profile marked by average debt protection metrics marked by negative interest coverage ratio (ICR) of (0.47) times and debt-service-coverage-ratio (DSCR) of (0.24) times for FY23. This is to an extent mitigated by strong net worth and healthy leverage. The company’s net worth saw a dip and stood at Rs. 333.30 crore as on March 31, 2023 as against Rs. 352.10 crore as on March 31, 2022. The Networth of the company saw a further dip in H1FY24 and stood at Rs. 297.91 Cr. on account of losses incurred by the company. Gearing levels (debt-to-equity) saw a minuscule dip and move to 0.42 times as on March 31, 2023 as against 0.41 times as on March 31, 2022. Total outside liabilities to total net worth (TOL/TNW) also stood healthy at 0.80 times in FY23. Working capital intensive business operations SPL has working capital intensive nature of operations as is apparent from gross current assets of 200 days in FY23 albeit improvement from previous year. The inventory days of the company has seen improvement in FY23 and debtor days remained almost same however, it still remained high and stood at 83 days and 81 days respectively. Albeit intensive working capital the fund-based working capital limits remained unutilized with debit balance in past 9 months ending May 23 while the non-fund based limits was utilized at an average of ~43.14% per cent in past 9 months through May 23 giving a respite on liquidity front. Susceptibility of profitability margin to volatility in raw material prices Given that raw material cost accounts for around 70% of total cost of sales with notional exposure in crude based derivatives profitability in the non-decorative segment is partly susceptible to volatility in raw material prices. Hence operating margins would remain susceptible to the fluctuations in raw material prices as can be seen from the company's past performance. Though the share of revenue from decorative segment is going down and hence is a mitigating factor here. Strong competition from organised and unorganised players in the industry A few large players dominate the organised paint industry. Despite this, paint manufacturers face competition from strong regional players, especially in mass-market products. Consequently, while paint manufacturers have the flexibility to pass on cost increases, their ability to absorb cost benefits and thereby increase margins is limited. |
| ESG Factors Relevant for Rating |
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Chemical companies, including specialty and commodity chemical producers, face environmental risks arising from their exposure to waste, pollution, and toxicity. They are subject to environmental regulations as they release NOx, Sox, VOCs and other hazardous emissions. The industry faces major material risk from treatment and disposal of waste and waste water and maintain water quality standards. The key social risks for chemical companies evolve around health & safety of labors, product safety and maintain product quality. The industry has to manage risks associated with community development and supply chain procurement. Other material issues include employee training, employee development and freedom of association for trade unions.Overall, chemical industry faces governance risk, as it is usually spread out geographically and demographically. Companies' governance structure, ownership and control, shareholders’ rights are key issues. Additionally, regulations with respect to bribery, corruption and money laundering are crucial for efficient working of the industry. SPL being one of the oldest paint manufacturers in the country do have proper waste treatment and is adhering to the environmental norms. The company’s Nashik plant is certified for Quality Management System (ISO9001:2015), Environment Management System (ISO 14001:2015) and Occupational Health & Safety Management System (ISO 45001:2018). Further, Sikandrabad Plant of the Company is certified for Quality Management System (ISO 9001:2015). Company further has NABL (National Accreditation Board for Testing and Calibration Laboratories) accreditation.
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| Rating Sensitivities |
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| All Covenants |
| Not Applicable |
| Liquidity Position |
| Adequate |
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The company's liquidity profile has remained at adequate level as reflected by the unecumbered cash of Rs.106.29 Cr. as on 31st March 23. The fund-based working capital limits of Rs. 102.5 Cr. remained unutilized with debit balance in past 9 months ending May 23 while the non-fund based limits of Rs. 77 Cr. was utilized at an average of ~43.14% per cent in past 9 months through May 23, giving sufficient liquidity buffer in the form of unutilized limits. Further, the company has available commitment of Rs. 112.5 cr. in the form of warrants from infra.market. The comfortable leverage position, available unutilized bank limits and fund commitment from infra.market gives the company sufficient liquidity for any working capital requirement or to fulfil capex requirement without compromising on the capital structure of the company.
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| Outlook: Stable |
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Acuité believes that SPL will maintain a 'Stable' outlook and will continue to derive benefits over the medium term due to extensive experience of promoters, long-track record of operations and established brand name. The outlook may be revised to 'Positive' in case the company registers higher-than-expected growth in its revenue and profitability while improving its liquidity position. Conversely, the outlook may be revised to 'Negative' in case the company registers lower-thanexpected growth in revenues and profitability or in case of deterioration in the company's financial risk profile or significant elongation in the working capital cycle.
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| Other Factors affecting Rating |
| None |
| Particulars | Unit | FY 23 (Actual) | FY 22 (Actual) |
| Operating Income | Rs. Cr. | 485.55 | 358.19 |
| PAT | Rs. Cr. | (36.10) | (59.97) |
| PAT Margin | (%) | (7.44) | (16.74) |
| Total Debt/Tangible Net Worth | Times | 0.42 | 0.50 |
| PBDIT/Interest | Times | (0.47) | (1.12) |
| Status of non-cooperation with previous CRA (if applicable) |
| Not Applicable |
| Any other information |
| None |
| Applicable Criteria |
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• Default Recognition :- https://www.acuite.in/view-rating-criteria-52.htm • Entities In Manufacturing Sector:- https://www.acuite.in/view-rating-criteria-59.htm • Application Of Financial Ratios And Adjustments: https://www.acuite.in/view-rating-criteria-53.htm |
| Note on complexity levels of the rated instrument |
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In order to inform the investors about complexity of instruments, Acuité has categorized such instruments in three levels: Simple, Complex and Highly Complex. Acuite’ s categorisation of the instruments across the three categories is based on factors like variability of the returns to the investors, uncertainty in cash flow patterns, number of counterparties and general understanding of the instrument by the market. It has to be understood that complexity is different from credit risk and even an instrument categorized as 'Simple' can carry high levels of risk. For more details, please refer Rating Criteria “Complexity Level Of Financial Instruments” on www.acuite.in.
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