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IndiaRatings & Research ‘Fitch Group Comoany India Ratings Revises Sudarshan Chemical’s Outlook to Positive; Affirms ‘IND A’ 20 By Sumit Shoshwat Inka Ratings and Research (Ind-Ra) has revised Sudorshan Chemical Industies Limited's (SCL) NOV 2015 Outlook to Positive from Stable while affiming Its Long-Term ler Rating at IND X. “The Outlook tevin reflects the Improvement in SCIL's standalone profitability in. tHEYI6, leading toa abstantal improvement ints standalone and consolidated credit profes Ind: continues to take 9 consolidated view of SCL and is subsidiaries, namaly Preicent Color LUmited (200% subsidy), RIECO Instr Limited (100% subsiciary), Sudarshan Europe 8. (100% subsidiary) and Sudarshan North Amenca Inc. (stp-down subsidlary), for the rating purpose. Al the companies are inthe same line of business except RIECO Industes which into ‘engineering business. Prescient Color manufactures colours and addtive master batches, while ‘Sudarshan Europe and Sudarshan North America ae the marketing ana trading arms of SCL. 'SCIL has provided corporate guarantees tothe debt of two of ts subsidiaries, KEY RATING DRIVERS Improved IHFYLG Performance: SCIL achieved revenue of INRG,175.1m in LHFYI6 (LHFYIS: INRS,702.tm) while ‘operating EBITDA was 1NR@30.3m (INRG41.4m). Operating EBITDA margin Improved to 13.4% in 1HFY6 (IHFYIS: 11.296) due to lower mw material prices and rearucunng gains Ue to a reducton In manpower by company In YS. EBITDA margin had declined to 10.7% in FYIS (PYM; 11.9%) due to an increase in raw material rice, forex volatity and one-time restructuring cost despite the company's efforts to minimise other expenses at 21.39% of the revenue (2396). SCI'S gross margin improved to 40.8% In LHFYIG (IHFYI5: 38.2%, FYIS: 38.89%, FY14® 40.8%) ‘due to lower commodity prices ‘Capex Plans: SIL has planned debtfunded capex of INRL,100m (70% debt and 30% equity) tough FYI6 and FY17 to inereace its eapscty for azo pigments and high-performance pigment, 2 BMW captive powerplant, and to increase the capacity oft effluent tretment plant. Ths Company expects to complete the capex by October 2016. ‘SCL has ao planned addtional capex of INRE2OM for FY17. ‘Creat Metres to Further Improve: Net leverage (net GeOLIEBITDA) reduced to 3.15% In FYIS (FYI4: 3.22%) ano Interest coverage (91055 Interest/EBITDA) increase to 3.37 (3.09%) on lower interest cost of INR3B7! (FY44 INRA29m) and lower debt levels of INR4,317m (INRE,405m). The lower interes cost ln FYIS was due to the ‘refinancing of high-cost rupee tem loans with low-cost external commercial Borrowings. Ind-Ra expects the credit ‘meer to Improve in FY16 as well despite the capex due to improved EBFTDA margins For 1HFY6, on a standalone basis, inten coverage improved to 6.7x and net leverage reduced to 1.85% on account of higher EBITDA. odeate quit: SCL cas fw from operation increase to INRZGOM in FYS from INRG2 in FYL4 duc to lower worting cata and hasbeen postive since FY. Fe cash ow nas ued postive and was INR7Im in FY1S (4 nega IND, despite lage capex of INREG7I in FYAS(INRBOIM, due tothe her cash fo, The companys use ofthe une-based ts was 67% on overage and that of non fund based ims was 61% on verge forte 12 months ended Sepamber 2015. SLs net working captal cycle redued to 158 daysin FAS (FYE: 186 diay, FY13; 208 days) due wo lowe avery ds of 125 FS (144, 168). Forex Rik: The company is exposed to forex risk as cxpot forms 44% of the total revenue ond imported rat atenils form 35% of the total aw matenal consumption. SCHL ako has unedged euro denominatad extemal Commercial borrowings. SCI. hedges (90%) fs net exposure Using forward covers and options. End-use Industry: The ratings remain constrained by the cyllealty In the end-user palnts and inks industry, as DecOUnt fr around 65M ofthe total revere. Long Trock Record and Market Leader: SCIL has over 60 year: of operating track record and according to company management; i has a leadership postion in the Indian pigment indusuy with & market share of around 35%. The company's management also has a 30-yeariong operating expeince. RATING SENSITIVITIES Postive: A sustained Improvement In the EBITDA margins with a higher proportion of revenue from value-added pigments recuting in an improvement inthe overall credit profile with the net leverage boing sustained below 2.6% ‘oul result in a positive rating action. Negative: Deterioration in the EBITDA margins and/or any debtHed capex over and above agency's expectation easing to the net leverage being sustained above 3.0x could lad to Ind-Ra rewsing the outlook back to Stable, COMPANY PROFILE ‘SQL 1s a leading manufacturer of pigments, which accounted for 89% of the total FYIS revenue, Pesticides and trong sles account for 43% and 7%, respectively, ofthe company’s revenue. It has manufacturing plants in Roba ‘ond Maho, SOLICITATION DISCLOSURES ‘Adatonal infomation 1s avaable at wow. indaratings¢9.n, The ratings above were collcted by, oF on behalf of, the ive, ond therefor, tndia Ratings has been compensated forthe provision of the ratings otings are not 9 recommendation or suggestion, dict or indkecty, to you or any other person, to buy, sel ‘make OF Hold any investment, loan oF sacunty OF to undertake any Investment strategy with rexpect to ony ‘investment, loan oF secunty or any issuer. 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Limit INDA/ Positive FundAvon-Fund Based Werking Capital Limit INDAY Temioon ProvsionalIND A’ Pesitve ‘Tom Deposit IND A+ Positve Applicable Criteria Gonporate Rating Methodology ‘Teeaiment and Noiching of Hybrids in Nonfinancial Corporates INR 1268.5 m INR 2297.6 m INR 10128m INR 750m INR 900 m