Rationale
The rating reaffirmation and revision in outlook to Positive
takes into account the continued improvement in the financial profile of Deepak
Nitrite Limited (DNL) characterised by healthy growth in revenue and profitability
and improvement in the debt coverage indicators in FY2020. ICRA notes that this
improvement has been aided by the sustained healthy performance of its
erstwhile profitable business segments—viz. Basic Chemicals (BC) and Fine and
Specialty Chemicals (FNS), as well as a strong turnaround in its Performance
Products (PP) segment, given the steep increase in realisations. While there
could be some moderation in the profits in FY2021 as volumes may be impacted by
the extended lockdown and realisations moderate, ICRA believes that DNL should
retain a portion of the gains on account of its increased market share, which
will sustainably strengthen its credit metrics. Additionally, the rating also
factors in the healthy ramp-up of operations at the company's phenol and
acetone plant as well as the operationalisation of the isopropyl alcohol (IPA)
plant under its wholly-owned subsidiary, Deepak Phenolics Limited (DPL), which
is expected to translate into healthy cash accruals for DNL on a consolidated
basis. The rating continues to take into account the long operating track
record of the company in the chemical industry, its diversified product mix as
well as exposure to diversified end-user industries. ICRA notes the leading
market position enjoyed by the company in most of its product segments across
domestic as well as global markets. The rating continues to factor DNL's
multi-purpose manufacturing facility with significant backward and forward
integration linkages that provide flexibility over the product mix to suit
changing market requirements. ICRA also notes DNL's technical expertise to
handle complex and hazardous chemical processes like nitration, hydrogenation
and diazotisation. The rating is, however, constrained by the exposure of the
company's profitability to volatility in the raw material prices, though the
same is reduced in certain products through formula-linked price contracts. The
rating also factors in capex of ~Rs. 375-425 crore for capacity expansion
planned in the current fiscal at DNL and DPL. Part of the same, however, may be
deferred to FY2022, given the recent Covid-19 pandemic. The rating also factors
in the high borrowing at a consolidated level given the debt taken at DPL to
fund the phenol-acetone project. However, healthy profitability and cash
accruals are expected to help maintain the debt coverage metrics at sound
levels.
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