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ATUL LTD.

Short-Term Bank Loans / Facilities Long-Term Bank Loans / Facilities PR1 CARE A-

Rating CARE has assigned CARE A- [Single A Minus] rating to the long-term bank loans / facilities and PR 1 [PR One] rating to the short-term bank loans / facilities of Atul Ltd. (Atul) for an aggregate amount of Rs 507.57 cr, including outstanding term loan (as on Sep.09, 2007) of Rs 221.64 cr, fund-based working capital sanctioned limits of Rs 185 cr and non-fund based sanctioned limits of Rs 100.93 cr. The ratings take into account Atuls long and established track record in chemical industry, its competent and experienced management, well diversified product range with reputed clientele and stable financial position characterized by moderate gearing levels and relatively comfortable liquidity position backed by liquid investments. The ratings are, however, constrained by its relatively low profit margins, due to poor performance of its Colours division on account of stiff competition from unorganized sector and cheap imports from China. This is exacerbated by rupee appreciation and high raw material prices which are mainly based on crude oil prices. Background Atul Ltd. (Atul) was originally promoted by late Shri Kasturbhai Lalbhai in 1947 as Atul Products Ltd. as a step towards backward integration of their cotton textile business. In 1996, it was renamed as Atul Ltd. It has one of the biggest integrated chemical complexes in Asia, manufacturing a wide variety of dyes & dye intermediates, bulk chemicals & intermediates, agrochemicals, polymer & pharma intermediates and aromatics. The over three hundred products manufactured by the company, find wide usage in industries like - textile, paints, agriculture, fragrance & flavours, tyre, paper, pharmaceutical, aerospace, construction, etc.

Operations of the Company Atuls operations are divided into five Strategic Business Units (SBUs) viz.: Colours/Dyes, Bulk chemicals and intermediates, Agrochemicals, Polymers & Pharma intermediates and Aromatics. During FY07, these SBUs contributed 28%, 7%, 18%, 25% and 22%, of the total net sales respectively. While its Aromatics division is located in Ankleshwar, all the other divisions are located at Atul. The products manufactured by it find market in both domestic, as well as international market with exports contributing nearly 50% of the sales. The Colours/Dyes division is the largest business division of the company. It is the largest manufacturer of dyestuff in India. It produces the entire gamut of dyes i.e. VAT dyes, Reactive dyes and Disperse dyes. The Bulk chemicals and intermediates division manufacture key dye intermediates as well as bulk chemicals. These products meet the captive requirements and the balance is sold. Atul is the largest manufacturer of naphthalene-based dye intermediates in India which have good export potential. Resorcinol, which is used as a bonding agent in the tyre and conveyor belt industry, is expected to be the future growth driver of this division. The Agrochemicals division is among the worlds five leading manufacturers of 2,4-D range of chloro phenoxy derivatives. Atuls major strength also comes from, its licence to manufacture phosgene because there are some complex agrochemicals which are phosgene-based and are highly profitable. Atuls Polymer division has almost 25% share of the domestic epoxy market. Epoxy resins are being sold by Atul under the brand name of Lapox. The pharma intermediates division of Atul is a GMP (good manufacturing practices) approved facility and it manufactures a wide range of specialty intermediates

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and API (active pharmaceuticals ingredients) using captive phosgene. Atuls Aromatics division is the leading manufacturer of para-cresol in the country. It also has around 80% share of the domestic market in p-Anisic Aldehyde. Atul is self-sufficient in its power requirement with its captive power plant meeting almost 95% of its total requirement. It also has a state-of-the-art effluent treatment plant which has the capacity to treat industrial effluents of around 30,000 m3 /day. Financial Performance The total income of the company has been growing at a CAGR of 10% during the last four years. The agrochemicals, bulk chemicals & intermediates, aromatics and polymer divisions have been the major contributors to this growth. PBILDT margin, which has remained at a low level, decreased further during FY07 over FY06 mainly on account of higher raw material cost. The subdued performance of colours division and agrochemicals divisions, which constitute nearly 46% of the companys net sales, are mainly contributing to the lower margins of the company. The decrease in PBILDT margin in FY07 resulted into decrease in PAT margin which was at a low level of 2.1%, in FY07. Higher PAT margin in FY06 was attributed to extra-ordinary income in the form of profit on sale of investment of Rs 68 cr. While long-term debt equity ratio increased to 0.73, as on Mar.31, 2007 as compared to 0.65, as on Mar.31, 2006 due to project specific borrowing, the overall gearing improved marginally to 1.32, as on Mar.31, 2007 from 1.36, as on Mar.31, 2006 on account of accretion of profit in reserves & surplus. The interest coverage remained low at 1.28 times for FY07 which is a marginal improvement over FY06 levels due to lower profitability attributed to under performance of colours and agrochemicals division. As on Mar.31, 2007, the current ratio and quick ratio were relatively comfortable at 1.41 times and 0.92 times, respectively. Projects The Aromatics and Polymer divisions have been among the better performing SBUs of the company

Financial Results (Rs. crore) For the period ended / as on March 31, Working Results Total Income PBILDT Depreciation Interest and Finance charges Profit from operations (PBT) PAT Net Cash Accruals Financial Position Equity Capital Net Worth Total Capital Employed Key Ratios Profitability (%) PBILDT / Total Income PAT / Total Income ROCE Solvency Long Term Debt Equity Ratio Overall Gearing Ratio Interest Coverage (times) Current Ratio* Turnover Avg. Inventory (days) Avg. Collection Period (days) Working Capital Turnover Ratio Capital Turnover Ratio 7.47 1.74 4.62 1.15 2.04 1.13 1.31 107 88 2.51 1.26 8.15 10.79 5.68 0.65 1.36 1.14 1.32 100 81 2.92 1.44 7.38 2.10 5.68 0.73 1.32 1.28 1.41 95 85 2.81 1.40 2005 (12 m) 722 54 27 23 3 13 40 29.67 188 574 2006 (12 m) 875 71 29 30 4 94 98 29.67 272 640 2007 (12 m) 924 68 31 29 8 19 37 29.67 292 678

*includes current portion of long- term debt. Note: Shri S.M. Datta, the Director of Atul Ltd, is one of CAREs Rating Committee members. He did not participate in the rating process nor the rating committee while assigning the rating for bank facilities of the company.

and their order book position has mostly remained high, utilising existing capacities at optimum levels. During FY08, a BLR (basic liquid resin) plant with a production capacity of 8000 mtpa has been installed in the polymer division with the project cost of Rs 15.25 cr and commercial production has already begun from August 2007. In Aromatics division, Atul has taken up capacity expansion of its existing products i.e. p-anisyl alcohol from 1000 mtpa to 2000 mtpa and p-anisic

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aldehyde from 6000 mtpa to 8400 mtpa with the total investment of Rs 16.8 cr. These expansions will help the company to meet the demand from the highly lucrative spot market. These expansion projects are expected to commence operations from Q4FY08. The above projects are proposed to be financed with a project D.E.R. of 3:1. Industry Scenario Dyestuff: The dyestuff industry (dyes and pigments) world-wide is witnessing a gradual shift of manufacturing facilities from the developed countries to Asia, particularly China and India, due to environmental considerations, availability of trained and inexpensive manpower and the relocation of the end-user industries mainly textile and leather to the Asia-Pacific region. The Indian dyestuff industry is widely fragmented between the organised and unorganised sectors. There are approximately 950 dye manufacturing units in India, of which 50 units are in the organised and 900 in the unorganised sector. Disperse dyes have maximum share in the total domestic demand followed by acid and direct dyes, while reactive dyes normally account for the major share in the total dyes exports. Vat dyes net in better price realisation than other dyes and account for a higher share in exports in value terms. Other than Dyestuff: Resorcinol, a chemical intermediate, is the essential component of an adhesive system used in the tyre manufacturing process and other fibre-reinforced rubber mechanical goods. INDSPEC Chemical Corporation is the worlds largest producer of resorcinol, having global market share of above 50%. In India, Atul has approximately 40% share of the domestic resorcinol market, whereas the balance requirement is met mainly through imports. As of 2006, the epoxy industry amounted to about US $15 billion world-wide, dominated by a few multinationals like Hexion, Dow Chemical and Huntsman Corporation (which recently got merged with

Hexion). Atul has approximately 25% share of the domestic epoxy resin market whereas 3M India Ltd has around 10% market share. The major share of the epoxy market in India belongs to Huntsman Corporation (now Hexion group). Atul is the leading manufacturer of p-cresol (aromatic division) in India, having almost 30% domestic market share. The balance demand is being met mainly through imports. Atul has almost 80% domestic market share of p-anisic aldehyde which is used mainly as an intermediate in the synthesis of other compounds important in pharmaceuticals and perfumery. Prospects Technological up gradation and innovative processes with an emphasis on product quality and process safety will be the key success factors for the chemical industry. All those companies who have invested significantly in R & D (research & development) will definitely have an upper hand. On the other hand, the rising input costs and the appreciating rupee are an area of concern. Various steps have been taken by the company to improve the profitability of the colours division, which has been eating into the margins of the company. During Q2FY08, the company could successfully increase the prices of all its dyes, after almost three years while increasing its focus on the VAT dyes which provide better margins and new product developments which can yield better realisations. As a step towards improving the performance of its agrochemicals division, it has started venturing into branding business which is expected to show good results. Because of the manual method of farming prevalent in most parts of India, the domestic herbicides market is very small but still, the potential remains huge. The prospects for the remaining three divisions i.e. bulk chemicals and intermediates, polymers and pharma intermediates and aromatics continue to remain good. The overall, improvement in performance of colours division and agrochemicals division, would be crucial for the performance of the company. November 2007

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