Archean Chemical Industries Ltd - Rating upgraded to 'CRISIL A/Stable', Rated amount enhanced for Bank Debt

CRISIL Ratings has upgraded its rating on the long-term bank facilities of Archean Chemical Industries Ltd (ACIL) to 'CRISIL A/Stable' from 'CRISIL A-/Stable'.

The upgrade reflects the sustained healthy business risk profile supported by market leadership in the export of liquid bromine, diversified product portfolio, longstanding relationships with customers and healthy operating efficiency due to lower cost of production. The upgrade also considers the high entry barrier due to the quantum of investment required and long gestation period (4-5 years) for brine field development, limited availability of natural resource, and hence moderate competitive intensity.

The rating reflects the company's adequate financial risk profile because of a large networth of around Rs 1,700 crore as on March 31, 2024, and healthy cash surplus of Rs 400 crore. These strengths are partially offset by the inherent volatility in realisations of products, customer concentration with top 10 customers contributing about 70% of the revenues of ACIL in fiscal 2024, vulnerability of output to heavy rains, and exposure to risks associated with single location plants.

Business risk profile is supported by a diversified product base. Revenue declined 7% on-year in fiscal 2024 due to moderation in volumes and realisations of bromine, which fell 7% and 35%, respectively. The decline in bromine realisations to Rs 247 per kilogram (kg) in fiscal 2024 from Rs 278 per kg in fiscal 2023 was after a steep increase in fiscals 2022 and 2023 due to supply chain issues. However, improvement in volumes of industrial salt, backed by enhanced capacity and stable prices, partially offset the fall in revenue. This altered product mix, which led to moderation in operating profitability to 36.2% in fiscal 2024 (though still healthy) from 45.7% in fiscal 2023. The fall in margin was limited due to reduction in power costs by Rs 35 crore due to reduction in the input costs, higher process efficiency and with commissioning of 66 kilovoltamperes (kVA) lines.

The company enters into 3 to 9-month fixed price contracts for bromine and 12 to 24-month fixed price and volume contracts for industrial salt, which provide adequate revenue visibility. While bromine prices have started to recover, due to long term contracts, its realisation will decline in fiscal 2025 because of weak offtake from the export markets, albeit volumes are expected to register growth. Industrial salt volumes are expected to continue their growth trajectory with planned capacity expansion of 6 million tonne (MT) in fiscal 2025 from 4.8 MT. Despite moderation in bromine prices, supported by better performance of the industrial salt segment, incremental revenue from phase 1 of bromine derivative products and revenue from newly acquired entity, Oren Hydrocarbon Pvt Ltd (OHPL), will support growth. With improving bromine realisation, and offtake in bromine derivative products and OHPL, revenue is expected to cross Rs 1,500-1,700 crore.

Bromine derivatives plant has been constructed under wholly owned subsidiary, Acume Chemical Pvt Ltd (ACPL), at a project cost of Rs 251 crore and will have capacity of 28,000 metric tonne per annum (TPA). Phase 1 of the project included capacity of 18,000 MTPA to manufacture clear brine fluids (CBF), and catalyst for Poly terephthalic acid(PTA) synthesis (HBr) has been completed and will commence commercial operations in the second quarter of fiscal 2025. Phase 2, which involves flame retardants, was earlier expected to be completed in fiscal 2024 itself. However, due to muted demand scenario and increased pricing pressure, the project is now expected to be completed by the end of fiscal 2025 or early fiscal 2026. ACIL had increased bromine capacity to 42,500 MTPA in January 2023 from 28,500 MTPA for captive consumption. Due to integrated nature of operations, ACPL is expected to make operating profits from the first year of its operations.

ACIL won the bid to acquire OHPL, which was under liquidation, in January 2024 through its wholly owned subsidiary, Ideallis Chemicals Pvt Ltd (ICPL), for a consideration of Rs 77 crore. The product profile of OHPL includes mud chemicals that find application in oil drilling. This will complement the CBF, which will be produced in ACPL and is used in oil drilling. The acquisition will enable ACIL to offer an expanded basket of products. OHPL's plants have not been operational for the past 4-5 years, and refurbishment and other necessary approvals will have to be completed for operating the plant. ACIL is awaiting final approval from the National Company Law Tribunal during which it has started the phased refurbishment of its plants. Peak revenue of OHPL was Rs 400-450 crore and operating profitability 10-12% in fiscal 2016/17 The company is expected to incur operational losses in fiscal 2025, but gradually improve profitability over the medium term.

ACIL completed its initial public offering (IPO) in November 2022, from which it raised Rs 1,432 crore. Of this, Rs 805 crore was from a fresh issue of shares and and part of it was used to redeem the non-convertible debentures (NCDs) of India Resurgence Fund(IRF), while the rest were offer for sale. ACIL incurred capital expenditure (capex) of Rs 200 crore in fiscal 2024 towards phase 1 of the bromine derivatives project, expansion of industrial salt capacity, commissioning of 66 kVA lines and acquisition of OHPL. ACPL had contracted Rs 90 crore of long-term debt to fund phase 1, while the remaining was funded through internal accrual. At a consolidated level, annual capex is Rs 150-200 crore in fiscals 2025 and 2026 towards phase 2 of the bromine derivatives project, expansion of industrial salt capacity and refurbishment of OHPL's plant. Additional debt of about Rs 76 crore will be contracted for the capex, and the rest will be funded through internal accrual. As on March 31, 2024 on a consolidated basis, debt was Rs 61 crore and cash surplus over Rs 400 crore. Supported by healthy networth of ~Rs 1,700 crore as on March 31, 2024, gearing is expected to be strong at less than 0.1 time as on March 31, 2025. Debt protection metrics were robust, with debt/earnings before interest, depreciation, tax and amortization (Ebitda) and interest coverage ratios of 0.12 time and 59.07 times, respectively, in fiscal 2024. Though phase 2 of the project at ACPL is expected to be debt funded, financial risk profile will remain healthy over the medium term due to high cash generation.

Shares of Archean Chemical Industries Limited was last trading in BSE at Rs. 736.05 as compared to the previous close of Rs. 727.50. The total number of shares traded during the day was 83975 in over 3395 trades.

The stock hit an intraday high of Rs. 747.50 and intraday low of 723.55. The net turnover during the day was Rs. 61649059.00.

Source : Equity Bulls

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