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| Product | Quantum (Rs. Cr) | Long Term Rating | Short Term Rating |
| Bank Loan Ratings | 129.22 | ACUITE BBB- | Negative | Reaffirmed | Stable to Negative | - |
| Bank Loan Ratings | 77.78 | - | ACUITE A3 | Reaffirmed |
| Total Outstanding Quantum (Rs. Cr) | 207.00 | - | - |
| Total Withdrawn Quantum (Rs. Cr) | 0.00 | - | - |
| Rating Rationale |
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Acuité has reaffirmed the long-term rating of ‘ACUITE BBB-’ (read as ACUITE triple B minus) and the short term rating to ‘ACUITE A3’ (read as ACUITE A three) on the Rs. 207 Cr bank facilities of Shalimar Paints Limited (SPL). The outlook is revised from 'stable' to 'negative'.
Rationale for rating reaffirmation and change in outlook: The reaffirmation of rating factors established brand name, strong promoter profile and the strategic stake sale to infra.market improving the liquidity position of the company has been taken into consideration to arrive at the rating. The rating is underpinned by working capital intesive operations, susceptibility of profitability to volatility in raw material prices and strong competition from organized and unorganized players in the industry. The outlook is revised from 'stable' to 'negative' as the company is continuing to incur EBITDA losses resulting into erosion of networth and Acuite's expectation of continuation of operating losses on account of fluctuating RM prices. |
| 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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| 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. Strategic stake sale coupled with improved liquidity position The company had raised funds to the tune of Rs. 270 Cr. in March 2022 by way of issuance of equity shares of Rs. 215 Crore (24.8% of total equity) and optionally convertible debentures amounting to Rs. 55 Crore to Hella Infra Market Private Limited (HIMPL). Further to fuel the next phase of growth during next couple of years HIMPL have committed an investment of Rs. 150 Crore through the issue of warrants. SPL has received 25% of the subscription amount i.e. Rs. 37.50 Crore towards warrant allotted on preferential basis. The balance 75% shall be payable at the time of allotment of equity shares pursuant to exercise of rights attached to the warrants to subscribe the equity shares. The issue of shares and OCD has resulted into improved liquidity position as is apparent from the improved cash and bank position of the company, which grew from 3.45 Cr in FY21 to Rs. 164 Cr. in FY22 against which the company had a total debt of 144.23 Cr. making the company net debt negative in FY22. Improved operations supported by better demand and realization The company showed improvement in its operating performance as reflected from the turnover of Rs. 358.10 cr. as against Rs. 325.56 Cr. in FY21. The improvement in operating performance attributed to better demand and realization. The company has already achieved a turnover of Rs. 109.90 Cr. in Q1FY23 i.e. 4.1% growth from the previous quarter and 68.64% from last year same quarter. Further, the company has achieved turnover of Rs. 110.27 Cr. in Q2FY23 which is 22% growth from Q2FY22 however more or less the same as compared to previous quarter. The operating losses of the company narrowed in Q1FY23 and stood at -1.63% from -17.27% in Q1FY22. Further the operating losses increased a bit in Q2FY23 as compared to Q1FY23. The company is projecting a growth in topline by 35% in FY23. The projection is backed by better realization in decorative paints, support from its new promoter group infra.market’s dealer network that will improve the dealer network resulting into higher market penetration and demand. Moderate utilization of working capital limits The fund-based working capital limits are utilized at an average of 37.49 per cent, while the non-fund based limits are utilized at an average of ~58.41 per cent in past 11 months through August 22, giving sufficient liquidity buffer in the form of unutilized limits. |
| Weaknesses |
| Average Financial Risk Profile
SPL has average financial risk profile marked by average debt protection metrics marked by interest coverage ratio (ICR) of (0.79) times and debt-service-coverage-ratio (DSCR) of (0.60) times for FY22. This is to an extent mitigated by strong net worth and healthy leverage. The company’s net worth stood at Rs. 352.10 crore as on March 31, 2022 as against Rs. 202.39 crore as on March 31, 2021. Gearing levels (debt-to-equity) improved to 0.41 times as on March 31, 2022 as against 0.64 times as on March 31, 2021. Total outside liabilities to total net worth (TOL/TNW) also stood healthy at 0.78 times in FY22. Gearing improved in FY2022 on account of raising of funds through rights issue. Working capital intensive business operations SPL has working capital intensive nature of operations as is apparent from gross current assets of 240 days in FY22, which deteriorated from 213 days in FY21. The inventory and debtor days of the company has seen improvement in FY22 however, it still remained high and stood at 93 days and 80 days respectively. 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 and it's performance in Q2FY23 wherein the operating losses increased due to increase in RM prices and hence price fluctuation will remain a key monitorable. 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, chemicals 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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| Material covenants |
| None |
| Liquidity Position |
| Adequate |
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The company's liquidity profile has improved and is at adequate level as reflected by the unecumbered cash of Rs. 165 Cr. as on 31st March 22. The fund-based working capital limits are utilized at an average of 37.49 per cent, while the non-fund based limits are utilized at an average of ~58.41 per cent in past 11 months through August 22, giving sufficient liquidity buffer in the form of unutilized limits. The company is currently at zero net debt.
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| Outlook: Negative |
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Acuité believes that SPL will continue to derive benefits over the medium term due to extensive experience of promoters, long-track record of operations and established brand name however the company will continue incurring losses in near term and hence the outlook is 'Negative'. The outlook may be revised to 'Stable' in case the company registers higher-than-expected growth in its revenue and profitability and is able to turn around the operations. Conversely, the rating may be downgraded in case the company registers lower-than expected growth in revenues and incur further EBITDA losses resulting into deterioration in the company's financial risk profile or significant elongation in the working capital cycle exerting pressure on the liquidity position of the company.
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| Other Factors affecting Rating |
| None |
| Particulars | Unit | FY 22 (Actual) | FY 21 (Actual) |
| Operating Income | Rs. Cr. | 358.10 | 325.56 |
| PAT | Rs. Cr. | (63.85) | (49.50) |
| PAT Margin | (%) | (17.83) | (15.20) |
| Total Debt/Tangible Net Worth | Times | 0.41 | 0.64 |
| PBDIT/Interest | Times | (0.79) | 0.58 |
| Status of non-cooperation with previous CRA (if applicable) |
| None |
| Any other information |
| None |
| Applicable Criteria |
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• Default Recognition :- https://www.acuite.in/view-rating-criteria-52.htm • Manufacturing Entities: 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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