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.