Long-Term Rating Placed on Watch with Developing Implications Summary of Rating Action Rationale

February 27, 2020

Nirma Limited: Long-term rating placed on watch with developing implications

Summary of rating action Previous Rated Current Rated Instrument* Amount Amount Rating Action (Rs. crore) (Rs. crore) [ICRA]AA&; rating placed on watch Non-Convertible Debentures 1,000 1,000 with developing implications Commercial Paper 1,500 1,500 [ICRA]A1+; outstanding Programme [ICRA]AA&; rating placed on watch Term Loan 750 750 with developing implications Total 3,250 3,250 *Instrument details are provided in Annexure-1

Rationale ICRA has placed the long-term rating of [ICRA]AA (pronounced as ICRA double A) outstanding on the bank facilities and non-convertible debentures of Nirma Ltd. (Nirma) under rating watch with developing implications. The rating watch with developing implications follows the announcement of Nuvoco Vistas Corporation Limited (NVCL), a Nirma group entity, entering into binding agreement to acquire 100% stake in Emami Cement Limited (ECL). The group is evaluating various debt / equity options for funding the acquisition. ICRA believes that in case Nirma decides to extend financial support to NVCL, it would require to raise additional debt, which could result in an increase in the company’s leverage (debt/OPBDITA) and will push back the anticipated trajectory of improvement in the leveraging levels.

As per the management’s plan, Nirma has divested its stake in NVCL to Niyogi Enterprise Pvt. Ltd. (NEPL), a promoter Group entity in FY2020. Hence, the ratings continue to factor in the combined business and financial risk profiles of Nirma and Karnavati Holding Inc., USA. The ratings continue to reflect Nirma's strong competitive position in the commodity chemical space, emanating from its access to cheap raw materials, high level of vertical integration and product diversity. Along with the commissioning of caustic soda and soda ash projects, this further strengthened the company's position in chemicals. The ratings also consider Nirma's established market position in the domestic soda ash and the soaps and detergents (S&D) businesses, albeit with elevated competition in the latter business, further supported by the highly backward-integrated nature of its operations.

The ratings, however, are constrained by the vulnerability of its profitability to commodity price cycles, foreign exchange fluctuations, import duty levels, elevated competition in the S&D business and moderate capital structure, besides the sizeable contingent liabilities.

Key rating drivers

Credit strengths

Diversified revenue and EBITDA sources - Nirma's revenue and EBITDA sources remain diversified with its US operations contributing ~17% to the revenue and ~10% to the EBITDA. Further, the Indian operations in chemical and FMCG segments have a fairly wide geographical reach. The EBITDA mix has a healthy diversification across soda ash, caustic soda, S&D and other products as well. Going forward, the ramping up of capacities in caustic soda would boost the revenues, along with the capex completion for refined bicarbonate and purified phosphoric acid. Integrated operations in soda ash and S&D segments; strong control over cost structure - Backward integration, a key strategic strength for the company, protected it from the steadily increasing raw material prices during the last few years. Additionally, it ensures timely and adequate raw material supply. Nirma manufactures soda ash and linear alkyl benzene (LAB), which are the key raw materials in detergent manufacturing. Further, its operations are backward integrated to manufacture n-paraffins and other chemicals. Nirma has large salt pans in Gujarat, which provide a steady supply of salt for soda ash production. Over time, it set up a larger capacity of soda ash than its captive requirements, strengthening its market position in the soda ash business. Thus, there is considerable control on the cost structure, which continues to result in a competitive advantage. Nirma also expanded its caustic soda and soda ash capacities in March 2017, which combined with addition to the captive power plant capacity and favourable demand outlook for soda ash could allow it to maintain healthy EBITDA margins from soda ash in the medium term.

Credit challenges Growing competition in detergent and toilet soap businesses pressurises margins - Nirma is a significant player in the detergent market after Hindustan Unilever Limited (HUL), Rohit Surfactant (brand: Ghari) and P&G. While HUL is present across multiple categories, Nirma tends to focus on value-for-money offerings. While the S&D segment—in which Nirma operates—is highly competitive, ICRA believes it will be able to maintain its existing position as one of the prominent S&D players in the Indian market because of its strong brand and its wide distribution network. As the company caters primarily to the price-sensitive economy segment, it faces intense competition from unorganised players. Vulnerability of profitability to commodity cycles and import duty levels for soda ash, caustic soda and LAB - Soda ash, caustic soda and LAB drive ~65% of Nirma's revenues. Given the commodity nature of the chemicals, despite the strong control over costs on account of backward integration, the company's margins remain exposed to global prices, domestic demand-supply fluctuations, forex fluctuations and import duty levels. Leveraged capital structure due to primarily debt-funded acquisition - Nirma's financial risk profile remains weighed down by its high debt levels of Rs. 5,551 crore as of March 2019 (including the perpetual debt of Rs. 1,500 crore). While the leverage (Net debt/EBIDTA) ratio is currently at ~2.6x, ICRA expects leveraging and credit metrics to be influenced by more than expected financial support to be extended to NVCL for acquisition of ECL. However, the operational cash flows from the existing businesses are expected to improve in the medium term on the back of moderate capex plans for forward integration and other initiatives for process improvements.

Liquidity position: Adequate Overall, the company's liquidity position remains adequate with its access to unused working capital limits of ~Rs. 450 crore as on January 31, 2020. The average utilisation level of the Rs. 1,500-crore assessed working capital limits for last twelve months remained around ~52%. Nirma has repayment obligation of ~Rs. 1,200 crore in FY2020, which reduces to

~Rs. 200-300 crore per year from FY2021 onwards. ICRA expects the cash accruals to be adequate for the repayment obligations. Further, the liquidity is supported by Nirma's ability to raise funds at a short notice and at competitive rates.

Rating sensitivities Positive triggers – ICRA could upgrade the ratings if there is sustained improvement in net leveraging (net debt/OPBDITA) levels of the company.

Negative triggers – Negative pressure on the ratings can arise if there is delay in expected de-leveraging of Nirma or substantial decline in performance resulting in significantly lower accruals or any large debt-funded acquisition or capex.

Analytical approach

Analytical Approach Comments Rating Methodology for Entities in the Chemical Industry Applicable Rating Methodologies Corporate Credit Rating Methodology Parent/Group Support Not applicable. For arriving at the ratings, ICRA has considered the consolidated financials of Nirma Consolidation/Standalone and its five subsidiaries and an associate, which are all listed out in Annexure-2.

ICRA has assigned equity credit to a portion of the Rs. 1,500-crore perpetual NCDs raised by Nirma in July 2017.

About the company Nirma, set up by Dr. Karsanbhai K. Patel in 1980, is one of the leading manufacturers of detergents and soaps in India. The company has steadily expanded its operations over the years and currently has several manufacturing plants. It has also backward integrated its manufacturing processes by producing a variety of chemicals used as inputs in detergent manufacturing. The company has manufacturing plants in Searles Valley (USA), Mehsana, Ahmedabad, Vadodara, Bhavnagar and Porbandar in Gujarat. Nirma, the largest soda ash manufacturer in India, also manufactures other products like caustic soda and bromine. It is also the second largest player in the edible salt business in the country. In FY2008, Nirma acquired the California-based natural soda ash producer, Searles Valley Minerals Inc., which has manufacturing facilities at Argus, Trona and West End (USA).

Key financial indicators (consolidated) FY2018 FY2019 Operating Income (Rs. crore) 8294 8980 PAT (Rs. crore) 668 879 OPBDIT/ OI (%) 19.7% 20.5% RoCE (%) 11.3% 13.5%

Total Debt/ TNW (times) 0.9 0.8 Total Debt/ OPBDIT (times) 3.4 3.0 Interest Coverage (times) 3.6 4.3

Status of non-cooperation with previous CRA: Not applicable

Any other information: None

Rating history for last three years S. Instrument Current Rating (FY2020) Chronology of Rating History for the past 3 years No. Type Amount Amount Date & Rating Date & Rating in FY2019 Date & Date & Rated Outstanding in FY2020 Rating in Rating in (Rs. crore) (Rs. crore) FY2018 FY2017 February 27, March 15, December November 2, March 1, February 2020 2019 10, 2018 2018 2018 16, 2017 Non [ICRA]AA&; [ICRA]AA [ICRA]AA [ICRA]AA [ICRA]AA [ICRA]AA Convertible rating on (Stable) (Stable) (Stable) (Negative) (Negative) Long 1 Debentures 1,000 1,000 watch with Term developing implications Commercial Short 1,500 200 [ICRA]A1+ [ICRA]A1+ [ICRA]A1+ [ICRA]A1+ [ICRA]A1+ [ICRA]A1+ 2 Paper Term Term Loan Long 750 750 [ICRA]AA&; [ICRA]AA [ICRA]AA - - - Term rating on (Stable) (Stable) 3 watch with developing implications

Complexity level of the rated instrument ICRA has classified various instruments based on their complexity as "Simple", "Complex" and "Highly Complex". The classification of instruments according to their complexity levels is available on the website www.icra.in

Annexure-1: Instrument Details ISIN No Instrument Name Date of Coupon Maturity Amount Current Rating and Issuance/ Rate Date Rated Outlook Sanction (Rs. crore) [ICRA]AA&; rating Non Convertible 28-Feb- on watch with IN091A07174 1-Mar-2017 7.9% 1,000 Debentures 2020 developing implications NA Commercial Paper - - 7-365 days 1,500 [ICRA]A1+ [ICRA]AA&; rating on watch with NA Term Loan FY2019 - FY2026 750 developing implications Source: Nirma Limited

Annexure-2: List of entities considered for consolidated analysis Company Name Ownership Consolidation Approach Karnavati Holdings Inc (USA) 100.00% Full Consolidation Searles Valley Minerals Inc. (USA) 100.00% Full Consolidation Searles Domestic Water Company (USA) 100.00% Full Consolidation Trona Railway Company (USA) 100.00% Full Consolidation Searles Valley Minerals Europe (France) 100.00% Full Consolidation FRM Trona Fuels LLC (USA) 49.00% Equity Method Source: Nirma Limited

ANALYST CONTACTS K. Ravichandran Ankit Patel +91 44 4596 4301 +91 79 4027 1509 [email protected] [email protected]

Ravish Mehta +91 79 4027 1522 [email protected]

RELATIONSHIP CONTACT L Shivakumar +91 22 6114 3406 [email protected]

MEDIA AND PUBLIC RELATIONS CONTACT

Ms. Naznin Prodhani Tel: +91 124 4545 860 [email protected]

Helpline for business queries:

+91-9354738909 (open Monday to Friday, from 9:30 am to 6 pm) [email protected]

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