Rationale

 The revision in outlook on the long-term rating of Apcotex Industries Limited (AIL) factors in ICRA's expectation of AIL's strong financial performance led by consistent revenue growth and sustenance of margin profile. While the company witnessed significant volatility in profit margin in its quarterly performance in the past, it has been able to sustain the OPM in the range of 14-16% during the past four quarters, despite the discontinuation on anti-dumping duty (ADD) from December 2020 and covid-related challenges. The company is planning a sizeable capex, which is likely to drive the revenue growth, apart from diversifying the product mix and reducing dependence on nitrile butadiene rubber (NBR). The ratings continue to draw comfort from healthy capital structure and debt protection metrics due to strong tangible net worth and limited reliance on debt. The company's liquidity profile has remained strong as reflected from cash and cash equivalent of ~Rs. 92 crore as on March 31, 2021. 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 a vast 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 towards 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 during the past few years on 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. Successful commissioning of the capex and the company's ability to increase the share of new products in itstotal revenue pie will remain critical. Furthermore, 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, but with a lag. This was evident when the company had witnessed a decline in its profitability because of a sharp increase in raw material costs that could not be passed on completely. 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.