IndiaRatings &cResearch ‘ompan Login India Ratings Assigns Laxmi Organic Industries’ Additional CPs ‘IND A1+’; Affirms Other Ratings Jan 05, 2024 | Specialty Chemicals India Ratings and Research (Ind-Ra) has taken the following rating actions on Laxmi Organic Industries Limited's (LOIL) debt instruments: Instrument | Date of | Coupon | Mati Size of Issue | Rating/Outlook Rating Action Type Issuance | Rate Date (million) Term loans - - FY27-FY28 | INR1,352 IND AA-Positive Affirmed Fund-based - - - INR1,130 IND AA-/Positive/IND ‘Affirmed working capital A+ facility Non-fund-based - - - INR8,570 INDAT+ ‘Affirmed working capital facility Proposed term - - - INR1,148 IND AA-Positive ‘Affirmed loan ‘Commercial - - - INR500 INDAT+ ‘Affirmed paper (CP) cps - - - INR50O INDAI+ Assigned **The CP will be carved out of the existing working capital facility. Analytical Approach: The agency continues to take a consolidated view of LOIL, wholly-owned subsidiaries, a step-down partnershi step-down subsidiary and associate companies to arrive at the ratings, in view of the strong operational and strategic interlinkages. The Positive Outlook reflects Ind-Ra’s continued expectation of an improvement in LOIL’s business profile over the near- to-medium term on the back of steady growth in the specialty intermediates business and the company's upcoming entry into the fluorochemicals segment, while maintaining a strong credit profile. Key Rating Drivers Leading Market Position; Project Completion to Strengthen Diversification: LOIL is a leading manufacturer of ethyl acetate, a portfolio of acetic acid derivatives that are key solvents across industries (essentials business), and di-ketene derivatives products (specialities business) .It is the seventh-largest manufacturer of ethyl acetate globally,with a capacity of over 232,000MTPA, according to the management. Furthermore, LOIL is among the top three backward integrated manufacturers of diketene derivatives in the world as per management. Exports accounted for around 32% and 51% of the essentials and specialties business turnover, respectively, in FY23. According to management, in the essentials space, the company has about 35% of the domestic market share. LOIL meets close to 55% of the domestic demand for diketene derivatives; the balance is imported, mainly from Europe and China. Considering that procurement of domestic diketene derivative products eases the supply chain and provides cost benefits, local supplies of the same are preferred by Indian customers, leading to a deeper penetration and improved market share for the company. Furthermore, the company has entered the fluorinated chemicals segment and expects to commercialise its fluorine capacity by end-FY24. This will add to the company’ specialties portfolio and allow it to serve the current customer base, thereby enabling a higher wallet share with the same customers and entry into new industries as well. The management has articulated that LOIL is the sole manufacturer of specific products and formulations in India. LOIL's product offerings remain healthy, with a healthy mix of the higher-margin specialties and growing essentials portfolio. In FY23, the Specialties segment contributed 35% (FY22: 29%) to the top line and 70% (45%) to the Profitability, while the essentials segment contributes about 65% (60%) to the top line and 30% (54%) to the Profitability. Ind-Ra believes the new product launches and the company’s focus on high-margin specialty products in the di-ketene derivatives and fluorochemicals segment will provide stability to its earnings and boost its margins and business risk profile over the near-to-medium term, which is a key rating monitorable, Incremental Capacity to Support Profitability: LOIL has commissioned the first phase of its new fluorinated chemicals segment over May 2023 and expects to commission the second phase by end-FY24. The segment has an installed capacity of 13,820TPA and management expects it to gradually ramp-up in FY25 and reach its potential in FY26. LOIL has acquired the assets for the business segment from Miteni SpA (Italy) through its wholly owned subsidiary, Viva Lifesciences Private Limited. Given the broad-based applications of fluorochemical specialty Products in the pharmaceutical and agrochemical sectors, LOIL intends to leverage its existing customer relationships by offering a diverse set of products while strengthening its position in the specialty chemicals segment. Simultaneously, it plans to reduce its dependence on commodities such as ethyl acetate and imported raw materials. This expansion is likely to improve the consolidated margin profile over the near-to-medium term while reducing the margin volatility and single location risk. Additionally, LOIL commissioned an incremental capacity of diketene derivatives in FY23. These products have strong demand with long term contracts. Furthermore, the completion of Yellowstone Chemicals Private Limited acquisition in October 2021 has strengthened LOIL's market position while expanding its essentials capacity. EBITDA to Moderate in FY24; Improve in FY25: The consolidated EBITDA is likely to moderate in FY24 yoy basis, the 1HFY2é4 results, The mix of essentials and specialties business, coupled with the end-user diversification, places it as a outperformer relative to peers, In FY23, LOIL's consolidated revenue reduced to INR27,966 million (FY22: INR30,842 million; FY21: INR17,684 million) and EBITDA moderated to INR2.445 million (INR3,677 million; INR2,167 million). In 1HFY24, the company eamed a consolidated revenue of INR13,858 million and an EBITDA of INR1,163 million, Also, the consolidated EBITDA margins moderated further to 8.4% in 1HFY24 (FY23: 8.7%; FY22: 11.9%). The fall in revenue and profitability over 1HFY24 and FY23 can be largely attributed to the essentials business's weak performance due to the weakness in export demand especially within Europe and volatile raw material prices, resulting in lower realisations which impacted the margins. According to management, the company has a top quartile cost position in the essentials business. However, Ind-Ra expects the performance to gradually improve over FY25 as the prices stabilise and demand picks up. The specialties business has also seen some weakness in demand due to de- stocking within the agro-chemical industry, but the overall profit margins remain strong Credit Metrics to Remain Comfortable despite Capex: LOIL was net cash positive over FY21-FY22 with a Portion of the equity raised through initial public offering (IPO) proceeds of INR5,000 million being used to prepay debt. The balance portion of the IPO proceeds have been utilised towards the capex for the fluorochemicals and diketene expansion. The consolidated net leverage (net debt / operating EBITDA) came in at 0.5x in 1HFY24 (FY23 ‘1x; FY22: negative 0.03x; FY21: negative 1.28x). Ind-Ra expects it to increase in FY25 to 1x-1.5x owing to theplanned capex, but remain comfortable. However, with EBITDA generation from the new facilities, the leverage is expected to gradually reduce post FY25. The consolidated interest coverage (operating EBITDA / gross interest expense) stood at 21.7x in FY23 (FY22: 23.8x; FY21: 12.8x) and is likely to be comfortable in FY24-FY25. Liquidity Indicator - Adequate: The company had consolidated cash and cash equivalents of INR1,468 million at FYE23 (FYE22: INR1,550 million; FYE21: INR5,081 million; FYE20: INR241 million). LOIL’s overall utilisation of its working capital limits was around 43% during the 12 months ended October 2023 and around 56% including CP (since it is carved out of working capital limits). The debt service coverage ratio is also comfortable at 3.5x-4x for FY24-FY25 due to low repayment obligations (FY24: INR118 million, FY25: INR331 million). The company also has debt capital market exposure in the form of CP in addition to banking channels to meet funding requirements. The ‘company had a negligible net working capital cycle of 31 days in FY23 (FY22: 13 days; FY21: negative 1 day) with inventory of 66 days (50 days; 55 days) and receivables days of 81 days (65 days; 82 days) and payable days of 116 days (103 days; 138 days). The company's free cash flows are likely to be negative over FY24-FY25 due to the ongoing capex plan and could turn positive once the incremental capacities ramp-up output. The company is likely to incur capex of INR10,500 million-INR11,000 million over FY24-FY26 which the management intends to fund largely through a qualified institutional placement and internal operational cash flows. In 1HFY24, the company executed a qualified institutional placement of INR2,591 milion equity. Accordingly, the capex planned is unlikely to weaken the financial profile. The company has obtained board and shareholder approval to raise INR8,000 million in funding of which INR5,000 million (of which INR2,591 million has been raised) may be done through equity and balance is debt. The company is evaluating sources to fund the remaining capex. Low Customer Concentration; Exposure to Europe: LOIL has a low customer concentration risk as no customer accounted for more than 10% of the consolidated sales in FY23. The share of sales to the top 10 customers reduced to 30% in 1HFY24 (FY23: 34%; FY22: 37%: FY21: 37%; FY20: 26%). The revenue share of exports fell to around 26% of sales for 1HFY24 (FY23: 36%) on account of the weaker export demand. While high exports provide some geographic diversity, it exposes the company to cycles of a weaker export demand. The company's geographical presence is enhanced by the presence of its offices in the Netherlands and China which boosts its customer outreach. Over the years, LOIL has significantly expanded its scale of operations and global footprint, with over 620 plus customers in over 45 countries, including China, the Netherlands, Russia, Singapore, the UAE, the UK and the US. However, Europe accounted for around 31% of LOIL's exports in 1HFY24 and reduced in proportion from FY23 and FY22 (FY23: 55%; FY22: 50%) on account of a weak European demand. According to the management, LOIL is one of the largest Indian exporters within the segment to Europe. ind-Ra believes the company is exposed to any demand softness, currency fluctuation, increased freight rates when exporting to Europe, which could dampen LOIL’'s business over the near-lo-medium term. However, with the ‘ongoing Europe energy crisis, the cost competitiveness of European manufacturers would weaken, thereby providing opportunities to ex-European manufacturers such as LOIL. Raw Material Price Volatility: LOIL and its subsidiaries are exposed to foreign exchange fluctuations, as they import raw materials (acetic acid and ethyl alcohol). Ethyl acetate is a commodity product, and thus, is vulnerable to volatility in raw material prices, which are governed by global supply-demand dynamics. Also, the price of acetic acid is cyclical as it is linked to crude oil prices. Similarly, the price of local ethyl alcohol, derived from sugarcane molasses, is cyclical. However, the company’s exports provide a natural hedge to some extent. Furthermore, LOIL uses forward contracts to mitigate the risk. LOIL’s Standalone Performance: In FY23, LOIL reported revenue of INR26,934 million (FY22: INR28,772 million) and EBITDA of INR2,494 million (INR3,366 million), net debt of INR2,495 million (net cash of INR785 million) and interest coverage of 11.5x (19.6x), Rating Sensitivities Positive: An increase in the scale and profitability, along with improved product diversification with a higher share of specialty products leading to improved and stable operating margins, while maintaining net leverage below 1x, on a sustained and consolidated basis, could lead to a positive rating action.Negative: Delay in the ramp-up of ongoing projects and/or lower-than-expected profitability, and/or elongation of the working capital cycle and/or any unexpected debted capex, leading to the net leverage exceeding 1x, on a sustained and consolidated basis, could be negative for the ratings. ESG Issues Risk of Floods Affecting Operations; Measures Implemented by Management to Minimise Impact: LOIL’s profitability has historically been impacted by floods (1.5 months of production loss due to floods in 2QFY20; two months in 2QFY21 due to flash floods) at its specialty intermediate unit in Maharashtra. To mitigate this risk, the management has taken several measures, including raising the infrastructure to a particular height and making the facility flood proof, moving stocks to warehouse outside of the Mahad region to ensure short-term continuity to customers and ensuring limited inventory loss and gradually increasing the share of alternate site for production through purchase of land in Dahej. While the measures are unlikely to entirely enable the company to operate in a flood, they will help the company to restart operations faster thereby limiting downtime. There has not been any instance of flooding subsequent to the aforesaid instance. For more information on Ind-Ra’s ESG Relevance Disclosures, please click here. For answers to frequently asked questions regarding ESG Relevance Disclosures and their impact on ratings, please click here. Company Profile LOIL, incorporated in 1989, commenced operations in 1991 and primarily manufactures ethyl acetate, diketene derivatives, and other specialty intermediates. FINANCIAL SUMMARY - CONSOLIDATED Particulars FY23 FY22 Revenue (INR milion) 27,986 30,842 EBITDA (INR million) 2.445 3,677 EBITDA margin (%) a7 119 Interest coverage (x) 207 23.8 Net debt (INR million) 2,502 “217 Net Leverage (INR million) 1.02 Net Cash ‘Source: LOIL, Ind-Ra Non-Cooperation with previous rating agency Not applicable 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. Rating HistoryAPPLICABLE CRITERIA Evaluating Corporate Governance Short-Term Ratings Criteria for Non-Financial Corporates Corporate Rating Methodology The Rating Process Instrume: Current Rating/Outiook Historical Rating/Outiook nt Type |” Rating Rated Rating 24 20 October 26 30 26 Type Limits December | 2023 | December | December | February (million) 2023 2022 2021 2024 Issuer rating | Long-term - ~ - wo IND IND IND AdsPositve | AAxStable_|_AvPositive TTermloan | Long-term | INR2,500 IND IND : IND IND IND AAsPositve | AAPositive AAsPositve | AA‘Stable_| AxPositive Fund-based | Long INRT,130 IND IND - IND IND IND working | term/Short- AAsPositve | AA-/Positive AAsPositve | AAStable | At/Positivel capital term INDAt+ | JINDAI+ ANDAI+ | JINDAI* | NDAt+ facility Non-fund- | Short-term | INR8.570 | INDAT+ | INDATS : INDAI | INDAT+ | INDATr based working capital facility cP Short-term | INRT.000_[_INDATe | _INDATr 5 INDATY | _INDAT+ | _INDATr Bank wise Facilities Details Click here to see the details Complexity Level of the Instruments Instrument Type ‘Complexity Indicator ‘Term loans Low ‘Non-fund-based working capital facilities Low. Fund-based working capital facilites Low CP, Low For details on the complexity level ofthe instruments, please visit hitps:ziwaw.indiaralings.co.inicomplexity-indicators Contact Primary Analyst Siddharth Rego Senior Analyst India Ratings and Research Pvt Lid Wockhardt Towers, 4th Floor, West Wing, Bandra Kurla Complex, Bandra East, Mumbai - 400051 +91 22 40356115, For queries, please contact; infogrp@indiaratings.co inSecondary Analyst Khushbu Lakhotia Director +91 33 40302508 Media Relation Ameya Bodkhe Marketing Manager +91 22 40356121 ‘About India Ratings and Research: India Ratings and Research (Ind-Ra) is 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. 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