Kothari Petrochemicals Limited

Instrument Amount Rating Action Rs Crore March 2016 Fund-based Long-term Limits 25.00 [ICRA]A- (Stable) reaffirmed Non-fund-based Short-term 15.00 [ICRA]A2+ reaffirmed Limits

ICRA has reaffirmed the long term rating outstanding on Rs 25.00 crore 1 fund-based bank facilities of Kothari Petrochemicals Limited (KPL)2 at from [ICRA]A- (pronounced as ICRA A minus). ICRA has also reaffirmed the short term rating outstanding on the Rs 15.00 crore non-fund based bank facilities of KPL at [ICRA]A2+ (pronounced as ICRA A two plus). The long term rating carries stable outlook.

The rating reaffirmation considers the Company’s dominant position in the domestic poly iso-butylene market and diversified feedstock supplier base, which mitigates the raw material availability risks. Feedstock availability is a key risk for poly iso-butyelene (PIB) manufacturers in India as the feedstock is being increasingly used for alternative higher value added applications; as evident from the steep deterioration in performance of some of the other major domestic PIB manufacturers during the last two years. The company continued to get nearly 35-40% of its feedstock supply from Chennai Petroleum Corporation Limited (CPCL) through pipelines at relatively competitive rates, followed by procurement from Petrochemicals Limited (HPL), which had witnessed stable production during the period and limited quantities from Limited (RIL). Apart from these, the company had also procured from Vinati Organics Limited and Limited’s Panipat refinery in the preceding fiscal and can again do the same going forward, in case of supply disruption from its major suppliers. KPL benefited from the constrained PIB supply from other domestic producers, consolidating its position as the market leader. ICRA however notes that during the 9m FY16 the sales volume were adversely impacted due to loss of a large order form existing customers and impact on production during Q3 FY16 due to floods in Chennai which coupled with decline in realisation due to reduction in crude prices resulted in revenue decline, although the impact on profit margin was mitigated to an extent by pricing pass through option in contracts. While, the profit margin have benefited from lower power and fuel costs during FY15 and 9m FY16 , post commissioning of a husk based “boiler” in preceding fiscal and improvement in power situation in Tamilnadu, they continued to be impacted by losses due to under-recoveries from selling the residual feedstock (for raw material procured from non CPCL suppliers) as LPG in the open market. However, the management is taking steps to increase procurement from CPCL by Q3 of next fiscal and plans to incur capex of ~Rs. 9.0-10.0 crore for the same, which will be funded through internal sources. Post completion of the project, the profit margins are expected to witness improvement due to lower under- recoveries.

The ratings however remain constrained by Company’s vulnerability to commodity price cycles, especially the spread between PIB and LPG/C4 rich feedstock, forex fluctuations and import duty levels, as demonstrated by volatile profitability metrics in the past; and the moderate cost competitiveness arising from the limited integration across the petrochemicals value chain and small capacities. The ratings also consider the declining market outlook for 2T oils in the medium to long term, where PIB currently has major applications as an additive, although the near term outlook is stable and it will be imperative for the company to diversify its customers based on end application. Moreover, ICRA also takes note of the directive from MOPNG that domestically produced LPG should only be supplied to state owned OMCs, which although has not been implemented for the past few years, may have some negative impact on the feedstock availability and margins of the Company, if implemented going forward and remains a key rating sensitivity.

Company Profile Kothari Petrochemicals Limited (KPL) is the largest manufacturer of poly iso butylene (PIB) in the country with an installed capacity of 22,000 tonnes per annum (tpa). KPL is part of the HC Kothari Group, based in Chennai. KPL began operations in the year 1989 with a unit for manufacturing caustic soda; however the operations were discontinued in the 1990s. Since then KPL had remained as a shell company without any significant

1 100 lakh = 1 crore = 10 million 2 For complete rating scale and definitions, please refer to ICRA's website www.icra.in or other ICRA Rating Publications

business interests except marginal trading operations. With effect from April 1, 2006, KPL was merged with Primetra Technologies Private Limited (PTPL), a group company that had purchased the PIB manufacturing facility from Kothari Sugars and Chemicals Limited, another group company, after the latter went through corporate restructuring process following financial distress during the early 2000s. With the merger, PIB became the major business line of KPL. KPL has a plant in Manali, located adjacent to the Chennai Petroleum Corporation Ltd’s (CPCL) refinery. Using feedstock from CPCL ,Haldia Petrochemicals Limited (HPL), Reliance Industries Limited (RIL), Indian Oil Corporation Limited (Panipat refinery) and Vinati Organics Limited, it manufactures PIB of varying grades that have specific applications in lube oil, plastic, paint and rubber industries. The promoter group’s shareholding in KPL was 70.97% as of March 31, 2015.

During fiscal 2014-15, the company reported a profit after tax (PAT) of Rs 11.3 crore on an operating income of Rs. 280.8 crore. The company reported OI and PAT of Rs. 149.8 crore and 5.4 crore during 9m 2015-16.

March 2016

For further details please contact: Analyst Contacts: Mr. K. Ravichandran, (Tel. No. +91-44-45964301) [email protected]

Relationship Contacts: Mr. Jayanta Chatterjee (Tel. No. +91-80-43326401) [email protected]

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