CRISIL Ratings has revised its outlook on the long-term bank facilities of Chemplast Sanmar Limited (CSL) to ‘Negative’ from ‘Stable’ and reaffirmed the rating at ‘CRISIL AA-‘. The short term rating has been reaffirmed at ‘CRISIL A1+’.

The revision in the outlook follows the higher than anticipated deterioration in revenues and absolute operating profits of CSL in the current fiscal, due to steep decline in realisations of suspension PVC (S-PVC) and paste PVC (80% of consolidated revenues), following heavy dumping by China.

Besides, other business segments such as caustic soda, chloromethanes and customs manufacturing are also facing headwinds due to excess domestic supply, further adding to pressure on profitability for the second year in a row, operating profitability too will be significantly impacted at 2-3%, from 9.5% in fiscal 2023.

This along with higher interest costs due to debt raised for capex will exacerbate pressure on net profits and cash accruals in fiscal 2024. That said, better PVC-VCM (Poly Vinyl Chloride-Vinyl Chloride Monomer) spreads, higher contribution from customs manufacturing business with expansion in capacity, is likely to help operating profitability recover to ~10-12% over the medium term, and will remain a monitorable.

CSL’s financial risk profile remains adequate and supported by ~Rs 955 crore of unencumbered cash and cash equivalents as on September 30, 2023. This will help buttress impact of moderation in key debt metrics in fiscal 2024 owing to lower operating profitability, and higher capex debt. On the consolidated basis, total debt is expected to increase to Rs 1500-1600 crore at March 31, 2024, compared to Rs 1008 crore at March 31, 2022. due to debt raise for capex plans – including expansion of paste PVC capacity and customs manufacturing capacity.

Interest cover and the ratio of net debt to earnings before interest, depreciation, tax and amortization (EBITDA) is expected to moderate to below 1 times and ~8 times, respectively, in fiscal 2024. Progressive debt repayment, and improved operating profitability of 12-13%, due to stabilization in PVC prices and spreads and higher contribution from custom manufacturing segment as well as additional PVC capacity, are expected to result in interest cover and net debt/EBITDA recovering to above 2-3 times and below 2 times over the medium term. The same though will be a key monitorable.

The ratings continue to factor CSL’s established market presence in the PVC segment (both paste, and suspension through its subsidiary, Chemplast Cuddalore Vinyls Ltd (CCVL, rated ‘CRISIL AA-/Negative’/CRISIL A1+’), diversified revenue stream catering to multiple end user industries, long standing relationship with customers and healthy demand prospects for its products. The rating also factors in the long vintage and experience of the promoters in the PVC and chemicals sector and integrated nature of operations.

However, these strengths are partially offset by commoditized nature of products (SPVC) which lends variability to operating margins, and the company’s moderate financial risk profile. Besides there is also high import dependence of key raw materials for PVC business (VCM and EDC), which exposes the company to risk in foreign exchange fluctuations. CSL is diversifying its businesses by adding more capacity in their higher margin businesses such as paste PVC and custom manufacturing to mitigate this risk. CSL also uses plain vanilla forwards to hedge its imports to reduce forex risk.

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