India Ratings Upgrades DCW and its NCDs to ‘IND BBB+’/Stable

17
JUN 2021

By Prasad Patil

India Ratings and Research (Ind-Ra) has upgraded DCW Ltd.’s (DCW) Long-Term Issuer Rating to ‘IND BBB+’ from ‘IND BBB’. The Outlook is Stable. The
instrument-wise rating actions are as follows:

Instrument Type Date of Coupon Maturity Size of Issue Rating/Outlook Rating Action
Issuance Rate Date (million)

Non-convertible debentures - - FY27 INR3,500 IND BBB+/Stable Upgraded

(NCDs)

Optionally convertible debentures - - FY23 INR600 IND BBB+/Stable Upgraded

(OCDs)

Term loan - - FY26 INR1,644 IND BBB+/Stable Upgraded

(reduced from
INR4,074.7)
 NCD - - - INR2,250 WD Withdrawn (paid in full)

Fund-based working capital limits - - - INR527.5 IND BBB+/Stable/IND A2 Upgraded

Non-fund-based working capital - - - INR3,272.5 IND A2 Upgraded

limits

The upgrade reflects (i) a better-than-expected operational performance in FY21, thus improving the credit metrics year-on-year (ii) an improvement in DCW’s liquidity
position through the successful issuance of NCDs and OCDs, significantly easing the cash flow mismatches expected by the agency over FY22-FY23 and (iii) an enhanced
diversification of product mix, reducing the overall volatility in the profitability.

KEY RATING DRIVERS

Healthy Profitability in FY21; Substantial Improvement in Credit Metrics: DCW’s operating profitability remained strong in FY21 with an absolute EBITDA of
INR2,094 million (FY20: INR1,464 million). Despite the disruptions in DCW’s operations over end-March-mid-April 2020 amid the nationwide lockdown, DCW reported
healthy revenue growth of 15% yoy during FY21 to INR14,643 million, led by healthy realisations in the polyvinyl chloride (PVC) and chlorinated polyvinyl chloride (CPVC)
segments and a turnaround in the synthetic iron oxide pigment (SIOP) segment in FY21.

The interest coverage (EBITDA/gross interest expense) improved to 1.7x in FY21 (FY20: 1.4x, FY19: 1.6x) and the net leverage (net debt/EBITDA) to 2.4x (3.8x, 4.1x) on
account of healthy profitability after improving year-on-year in FY20, following an equity infusion of INR720 million. The agency expects the credit metrics to remain
healthy with the net leverage below 3.0x and interest coverage in the range of 1.5x-2.0x over the medium term, supported by the improved profitability on demand
recovery and pricing stability.

Liquidity Indicator - Adequate: The refinancing from the mix of NCDs (INR3,500 million) and OCDs (INR600 million) done in March 2021 has significantly eased the
cash flow mismatches expected by the agency over FY22-FY23. Through the funds received on placing these NCDs and OCDs, DCW prepaid INR3,714 million of its term
loans and NCDs outstanding. Considering 18 months of moratorium and the likely conversion of the OCDs into equity, the scheduled repayments have reduced to INR270
million and INR813 million in FY22 and FY23, respectively, from the earlier INR1,400 million and INR1,450 million, respectively. Ind-Ra expects DCW to repay these
through internal accruals without any need for new funding. Moreover, DCW received INR75 million in April 2021 through a warrants issue (25% of the total issue) to
promoters. The balance INR225 million towards this warrants issue is likely to come before FYE22. DCW's annual interest expense is likely to be INR900 million-1,100
million over FY22-FY23. The company had availed the Reserve Bank of India-prescribed moratorium for the principal payment of its term loan over March-August 2020,
leading to lower principal repayments in FY21.

At end-March 2021, the company had unencumbered cash or cash equivalents of INR500 million and INR724 million in other bank balances. DCW's average month-end
utilisation was 89% and 81% for its fund-based and non-fund-based limits during the 12 months ended March 2021. Amid the absence of any major capex and healthy
cash accruals, the company continued to report a positive free cash flow of INR716 million in FY21 (FY20: INR504 million) and Ind-Ra expects DCW to generate positive
free cash flow from FY22, assuming a modest working capital outflow and maintenance capex of INR250 million-300 million. Ind-Ra also derives comfort from the
periodic support of the promoters in the past (around INR1,000 million since FY15) and their ability to infuse capital if needed.
Diversified Product Mix: DCW's product portfolio is diversified across commodity chemicals which include soda ash, caustic soda, PVC, specialty chemicals such as
synthetic rutile, SIOP and CPVC, along with intermediate chemicals such as liquid chlorine, hydrochloric acid, trichloroethylene, utox and sodium bicarbonate. Historically,
the company’s diversification and integration across different segments has protected it from the inherent volatility and cyclicality of the individual segments. In FY21, the
company benefited from product diversification with a significant jump in PVC, which offset the weaker performance in the caustic soda and soda ash divisions. This was
in contrast to FY20 when caustic soda and soda ash outperformed the weakness in PVC profitability. In addition, DCW's earnings have been boosted by the rising
contribution of specialty chemicals.

Healthy PVC Segment Profitability; Moderation in Caustic Soda and Soda Ash Segment: The PVC segment turned profitable and reported a
segment EBITDA of INR1,142 million in FY21 (FY20: EBITDA loss of INR109 million, FY19: positive INR166 million), mainly on account of a surge in PVC resin prices and
a 19% yoy increase in volumes. The company had faced disruptions in vinyl chloride monomer (VCM) supplies in FY20, which stabilised in FY21. Although PVC’s
profitability is likely to decline yoy from the elevated levels of FY21, it is likely to remain at healthy levels in FY22.

The caustic soda segment EBITDA dropped to INR157 million in FY21 (FY20: INR843 million), on account of a fall in the caustic soda prices and reduced contribution
from the high-margin synthetic rutile segment (initially due to shipment delays and in 4Q due to a slump in prices), partially offset by higher volumes. As a result, the
caustic soda segment's contribution to DCW's total EBITDA fell sharply to 7% in FY21 (FY20: 54%). Despite an improvement in the prices from April 2021, the caustic
soda segment profitability is likely to remain moderate over the medium term, on the back of a fall in the demand in light of the second COVID-19 wave and planned
capacity additions by the domestic caustic soda manufacturers. Synthetic rutile prices have recovered after dipping in 4QFY21, which should further aid segment
profitability.

The soda ash segment EBITDA declined to INR150 million in FY21 (FY20: INR426 million) due to an 8% yoy drop in realisations and a 2% yoy fall in the volumes. While
the volumes have recovered to normal levels, realisations have remained weak through the year and are likely to persist till 1HFY22 before starting to recover with a
likely improvement in the demand scenario. The moderation in the soda ash profitability is likely to continue over the near term, on account of the impact on the end-
user demand in light of the second wave. Segmental EBITDA is likely to remain subdued over the near term, due to a combined effect of rangebound prices with a
possible recovery from 2HFY22 as demand normalises, resulting in tightness in global supply-demand balances, with the deferment of new capacities globally.

Gradual Rise in Share of Speciality Chemicals Segment: Traditionally, DCW has been engaged in the manufacturing of commodity chemicals. However,
with the commissioning of the SIOP and CPVC plants, DCW entered the speciality chemical segment, which command higher and stable margins than the other segments.
In the past, the company faced delays in the stabilisation of performance in the two segments but there has been progress over the last three years, especially in the
CPVC segment and more recently, in SIOP too. The CPVC segment continued to demonstrate a steady recovery in FY21 with the EBITDA rising to INR548 million (FY20:
INR295 million, FY19: INR135 million) on the back of a healthy domestic demand and buoyant realisations. The utilisations rose to near-full capacity in FY20 and reached
129% in FY21. With the imposition of anti-dumping duty on CPVC imports from South Korea and China, DCW is likely to witness steady CPVC profitability, being the only
domestic producer. The SIOP segment turned profitable in FY21, in line with the agency’s expectation, and reported a segment EBITDA of INR94 million (FY20: loss of
INR26 million, FY19: loss of INR53 million) with 4QFY21 EBITDA hitting INR47 million, on the back of improved order flow from international customers as they look to
build alternative supplier base. Together, the two specialty segments contributed 29% to the company’s EBITDA in FY21 (FY20: 17%, FY19: 5%).

Significant Operational Track Record: In 1939, DCW began operations with the takeover of a soda ash plant in Dhrangadhra, Gujarat. It set up caustic soda and
PVC plants in Sahupuram, Tamil Nadu in 1959 and 1970, respectively. Over the years, DCW has gained a strong foothold in the chemical markets in India and abroad,
and has, thus, developed durable relations with its suppliers, customers and other industry stakeholders.
Near-Term Outlook Weak for Caustic Soda and Soda Ash; Medium-term Outlook Resilient: The global caustic soda prices plunged in FY21 due to a
weakness in the global demand, which is likely to weigh on near-term realisations. Furthermore, the domestic market is witnessing capacity expansion, albeit delayed, in
the wake of the COVID-19 outbreak, which will exceed domestic demand growth potentially turning India into a net exporter from a net importer. However, the global
caustic soda cycle is likely to improve over FY22 with limited expansions elsewhere and a gradual recovery of demand to normalised levels.

The soda ash prices also declined in FY20 on the local oversupply due to the commencement of production from new local capacities, and higher imports following the
removal of anti-dumping duty. The COVID-19-related demand decline squeezed FY21 profitability with a potential recovery in FY22, aided by the postponement/delays of
capex and the normalisation of demand. The PVC prices have recovered in tandem with the recovery in oil prices; although the profitability is characterised by margin
volatility due to the fluctuations in PVC-VCM spread.

RATING SENSITIVITIES

Positive: A steady improvement in the profitability, leading to the interest coverage ratio rising above 2x and the net leverage staying below 3x, on a sustained basis,
will lead to the positive rating action.

Negative: A weaker-than-expected operating performance leading to sustained deterioration in the credit metrics with the net leverage being above 3.5x, on a sustained
basis, could result in a rating downgrade.

COMPANY PROFILE

Established in 1939, DCW manufactures a wide range of chemicals. It has three primary divisions: PVC, soda ash and caustic soda (including synthetic rutile).

FINANCIAL SUMMARY

Particulars FY21 FY20

Revenue (INR million) 14,643 12,773

EBITDA (INR million) 2,094 1,464

EBITDA margin (%) 14.3 11.5

Interest coverage (x) 1.75 1.36

Net leverage (x) 2.35 3.76

Source: DCW, Ind-Ra

RATING HISTORY

Instrument Type Current Rating/Outlook Historical Rating/Outlook

Rating Type Rated Rating 6 January 31 July 2020 3 February 4 January 2019
Limits 2021 2020
(million)

Issuer rating Long-term - IND BBB+/Stable IND BBB/Positive IND BBB/Negative IND BBB/Stable IND BBB/Negative

Term loan Long-term INR1,644 IND BBB+/Stable IND BBB/Positive IND BBB/Negative IND BBB/Stable IND BBB/Negative

Fund-based working capital limits Long-term/Short-term INR527.5 IND BBB+/Stable /IND A2 IND IND IND IND
BBB/Positive/IND BBB/Negative/IND BBB/Stable/IND BBB/Negative/IND
A3+ A3+ A3+ A3+

Non-fund-based working capital limits Short-term INR3,272.5 IND A2 IND A3+ IND A3+ IND A3+ IND A3+

OCDs Long-term INR600 IND BBB+/Stable IND BBB/Positive - - -

NCDs Long-term INR3,500 IND BBB+/Stable IND BBB/Positive IND BBB/Negative IND BBB/Stable -

ANNEXURE

Instrument Type ISIN Date of Issuance Coupon Rate (%) Maturity Date Size of Issue (million) Rating/Outlook

NCD1 INE500A07083 5 March 2021 11 FY27 INR 3,500 IND BBB+/Stable

OCD INE500A07075 5 March 2021 9.17 FY23 INR600 IND BBB+/Stable

NCD2 INE500A07042 7 June 2019 10 FY25 INR712 WD

NCD3 INE500A07059 23 August 2019 10 FY25 INR358.8 WD

NCD4 INE500A07067 30 September 2019 14 FY25 INR429.2 WD

NCD5* - - - - INR 750 WD

*unutilised

COMPLEXITY LEVEL OF INSTRUMENTS

Instrument Type Complexity Indicator

Nonconvertible debentures Low

Optionally-convertible debentures Low

Non-fund-based working capital limits Low

Fund-based working capital limits Low

Term loans Low

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.

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accurate, timely and prospective credit opinions. Built on a foundation of independent thinking, rigorous analytics, and an open and balanced approach towards credit
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Applicable Criteria

Corporate Rating Methodology

Short-Term Ratings Criteria for Non-Financial Corporates

Analyst Names

Primary Analyst
Prasad Patil

Analyst
India Ratings and Research Pvt Ltd Wockhardt Towers, 4th Floor, West Wing, Bandra Kurla Complex, Bandra East,Mumbai - 400051
Secondary Analyst
Krishan Binani

Director
+91 22 40356162

Committee Chairperson
Prashant Tarwadi

Director
+91 22 40001772

Media Relation
Ankur Dahiya

Manager – Corporate Communication

+91 22 40356121