Rationale
The upgrade of the long-term rating of Apcotex Industries
Limited (AIL) factors in ICRA's expectations that the company will be able to
maintain a healthy financial performance, led by consistent revenue growth and
a sustained margin profile. While the prices of raw materials have increased
substantially in the current fiscal, the company passed on the same to its
customers and hence was able to sustain the operating margins in a range of
13-16% in the last four quarters. The company is undertaking sizeable capex,
which is likely to drive revenue growth, apart from diversifying the product
mix and customer mix. The ratings continue to draw comfort from a healthy
capital structure and debt protection metrics due to strong tangible net worth
and limited reliance on debt. While the metrics are likely to moderate due to
the ongoing planned capex, they are likely to remain comfortable. The company's
liquidity profile has remained strong due to healthy operational cash flows and
availability of healthy cash and investments. The rating draws comfort from
AIL's strong market position in the synthetic rubber and synthetic latex
segments in India and its promoter background with an experience of more than
three decades in the industry. The ratings factor in the company's diversified
customer base across various end-user industries. The ratings, however, are
constrained by the significant debt-funded capex plans for capacity expansion,
which is likely to moderate the company's debt coverage indicators and
liquidity profile to some extent. ICRA notes that the company has been
regularly incurring capex in the last few years for debottlenecking and
improving efficiency. It also plans to incur a capex of ~Rs. 200 crore to
enhance its capacity for carboxylated styrene butadiene (XNB) latex and allied
products and diversify its product portfolio, which will be partly funded
through a debt of Rs. 125 crore and the remaining through internal accruals and
liquid assets. Successful commissioning of the capex and the company's ability
to increase the share of new products in its total revenue pie will remain
critical. Further, the ratings factor in the vulnerability of its profitability
to high volatility in raw material prices (primarily styrene, butadiene and
acrylonitrile) and adverse foreign exchange (forex) movements due to
significant raw material imports. However, the exchange risk is partly
mitigated by a natural hedge from its exports. The company has limited
bargaining power with raw material suppliers and raw material costs are passed
on to its customers. ICRA also notes the competition faced by the company from
existing domestic players in the synthetic latex segment and from imports
across all its segments, which restricts AIL's pricing flexibility.
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