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.