Crisil Analytical Report
Strengths
* Established position in the specialty chemicals business, and strong relationships with large global customers: Established market position in the specialty chemical business, is backed by a healthy product portfolio, strong clientele, and long-term contract manufacturing agreements with customers. ARIL has a strong and reputed customer base which includes BASF Grenzach GMBH, Bayer Corp Sciences, and Syngenta Asia Pacific PTE Ltd. Continuous research and development (R&D) efforts have helped the company widen its product portfolio, cater to a larger customer base, and thereby, record revenue growth over the past few years.
* Above-average financial risk profile supported by capital infusion: Financial risk profile is marked by a large networth of Rs.455 Cr., and moderate gearing and total outside liabilities to tangible networth ratios of 0.9 times and 1.1 times, respectively, in fiscal 2018, supported by a fresh equity infusion of Rs.168 Cr. in the same year. Debt protection metrics are healthy, with interest coverage and net cash accrual to total debt ratios of 4.5 times and 0.13 times, respectively, for fiscal 2018, backed by a healthy operating margin. Over the medium term, the financials risk profile is expected to be above average.
Weakness
* Sizeable working capital requirement and exposure to risk related to significant ramp up of scale post the large capex: Operations are working capital intensive, as reflected in gross current assets of 190-352 days (has been in increasing trend since past 3 years ended in fiscal 2018; increased to 352 days as on March 2018 vs. 281 days a year earlier) over the four years ended March 31, 2018, primarily because of large inventory holding. The company plans to undertake total capex of around Rs.800 Cr. phased out from fiscals 2017 to fiscal 2020, towards capacity expansion and backward and forward integration, although supported by commensurate fund infusion (total Rs.258 Cr. of equity & Rs.234 Cr. of unsecured loans infusion for the capex by KPI LLC) but has led to increase in bank debt as well. The ramp up from new capacities and benefits, in terms of growth in revenue and profitability along with controlled working capital cycle, remain critical and hence, will be closely monitored.
Outlook: Stable
CRISIL believes ARIL will continue to benefit from its established market position, reputed clientele, and healthy profitability. The outlook may be revised to ''Positive'' if growth in revenue and profitability, and a controlled working capital cycle, leads to sizable cash accrual and strengthens the financial risk profile. The outlook may be revised to ''Negative'' if lower-than-expected growth in revenue or profitability, substantial stretch in the working capital cycle, or large debt funded capex, weakens the financial risk profile, especially liquidity.
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