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The ratings reflect SPL’s comfortable credit metrics based on provisional FY16 financials with interest coverage (operating EBITDA/interest expense) and net leverage (total debt net of cash/operating EBITDA) of 3.7x (FY15: 1.7x) and 1.6x (3.2x), respectively. The credit metrics improved on the back of higher EBITDA margins of 9.7% in FY16 (FY15: 5.9%) and lower debt INR530m (INR589m) on account of a continued drop in raw material prices. SPL reported revenue of INR2,983m in FY16 (up 2% yoy) reflecting a moderate scale of operations.

The ratings are supported by SPL’s positive cash flow from operations (CFO) over FY14-FY16, which improved to INR121m in FY16 (FY15: INR96m) despite an increase in working capital requirement. CFO was adequate to meet the repayment obligation of INR11m in FY16. Ind-Ra expects CFO to remain adequate to meet the repayment obligation of INR7.3m in FY17.

The ratings are constrained by the high working capital intensive nature of SPL’s business with 96% of overall debt comprising working capital borrowings. The net-working capital cycle of the company increased to 90 days in FY16 (FY15: 69 days) due to an extended receivable cycle and a larger inventory to push decorative paint sales. Additionally, payable cycle reduced to 47 days in FY16 (FY15: 54 days) as better liquidity resulted in the early pay off to creditors. SPL’s maximum average utilization of the fund-based facilities was 91% for the 12 months ended December 2015.

The rating factor in fluctuations in SPL’s margins on account of price volatility in raw materials which are crude commodity derivatives. This is reflected in the margin improvement to 9.7% in FY16 from 5.2% in FY14 as crude prices continued to drop. SPL’s planned capex of INR80m (financed in a debt-equity ratio of 3:1) in FY17 is likely to provide cost efficiencies and facilitate increased decorative paints production. This will marginally increase its working capital requirements. Nevertheless, Ind-Ra believes that improved efficiencies as a result of the capex as well as the increase in the high-margin decorative paint business will cushion SPL’s margins against raw material price volatility, keeping the credit metrics comfortable for the ratings.

RATING SENSITIVITIES

Positive: Future developments that could lead to a positive rating action include:
– a substantial improvement in the scale of operations, while maintaining or improving the credit metrics above FY16 estimated levels
– a favorable change in the product mix or process efficiencies leading to a sustained improvement in the EBITDA margins

Negative: A sustained decline in EBITDA margins, leading to interest coverage falling below 2x could lead to a negative rating action.

COMPANY PROFILE

SPL has been manufacturing thinners and wood polishes since 1962. It was formally established as a proprietorship business under the name of M/s Sheenlac Paints Corp and was incorporated as a limited company in December 2013. Over the years, the company has expanded its product line to include sand sealers and decorative paints. It markets its products under the Sheenlac brand. The company has a monopoly in south India in its product line where it operates through a network of around 8,000 dealers. The company has five manufacturing facilities, including a captive plant for manufacturing semi-furnished thinners, all of which are located in Chennai.

SPL’s ratings are as follows:
– Long-Term Issuer Rating: assigned ‘IND BBB-’; Outlook Stable
– INR7.2m long-term loans: assigned ‘IND BBB-’; Outlook Stable
– INR575m fund-based limits*: assigned ‘IND BBB-’/Stable/‘IND A3’
-INR170m nonfund-based limits#: assigned ‘IND BBB-’/Stable/‘IND A3’

*include convertible to non-fund-based INR7m
#include convertible to fund-based INR50m

Since 1962

Since 1922

Since 1945