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ASIATIC COLOUR-CHEM INDUSTRIES LIMITED

Ratings

Facilities Amount (Rs.Crore)

Ratings Remarks

Long-term/Short-term Bank Facilities 37.00 CARE BB+/CARE A4+(Double B Plus)/(A Four Plus)

Assigned

Short-term Bank Facilities 22.00 CARE A4+(A Four Plus)

Assigned

Total Facilities 59.00

Rating Rationale

The ratings of Asiatic Colour-Chem Industries Ltd. (ACCIL) are constrained due to the susceptibility of its operating margins tovolatility in input costs being closely linked to movements in crude oil prices, foreign exchange fluctuation risk on its exports andsignificant derivative losses incurred by it in the past three years. The ratings are further constrained by the working capitalintensive nature of its operations, its low product diversity with high dependency on the leather industry and stiff competitionfrom Chinese as well as domestic dye manufacturers.

These constraints far outweigh the benefits derived from the promoters vast experience in the dyes industry, ACCILs long andestablished relations with its international clientele and favourable location due to cluster presence.

ACCILs ability to manage foreign exchange fluctuation risk, volatile input cost and improve profitability in the light of highcompetition along with efficient working capital management would remain the key rating sensitivities.

Background

Ahmedabad-based ACCIL, promoted by Mr Mahesh Agrawal, was incorporated in January 1995. ACCIL is a closely-held publiclimited company and is engaged in manufacturing and exports of Synthetic Organic (SO) Dyes (mainly Acid Dyes) which areused primarily in the leather industry. Being an Export Oriented Unit (EOU), exports comprise a significant portion of its totalincome. Mr Mahesh Agrawal, who has vast experience in the dyestuff industry, is actively involved in the day-to-day operationsof ACCIL. ACCIL also has other group concerns which operate in the same industry.

Operations

ACCILs plant is located in the chemical belt of Ahmedabad (Gujarat) with an installed capacity of 6,000 MTPA formanufacturing S. O. Dyes as on March 31, 2010. Stable chemical prices and revival of international demand had resulted in anincrease of sales volume by 18% in FY10 against FY09. However, sales realization for FY10 has declined by 9.70% against FY10mainly because the decline in material cost was passed on to the customers.

ACCIL derives 90% of its total revenue from Acid dyes which are mainly used in applying black and brown colour to leather andrest from direct and reactive dyes. Since demand for Acid dyes are highly dependent on demand for leather in internationalmarket, ACCILs business is exposed to business cycle risk of end-use industry (i.e. leather).

ACCIL is further exposed to foreign currency fluctuation risk as significant proportion of sales are being contributed fromexports. During FY10 exports comprised nearly 84% of its total income with major export destinations being Italy, Turkey,Singapore, Switzerland and Germany. High volatility in foreign currency exchange rates during the last three years has resultedin ACCIL incurring total foreign exchange loss of Rs.15.40 crore (Rs.4.90 crore for FY09, Rs.6.27 crore for FY10 and Rs.4.23

crore for FY11). Hence, operating margins for ACCIL are highly vulnerable to currency fluctuation risk.Raw materials used by ACCIL for manufacturing of dyes are mostly derivatives of crude oil with H-Acid, DASA and PNA beingthe three main input materials in terms of cost. Hence, its average raw material cost is correlated to the international crude oilprices. Further, during FY10, ACCIL procured 50% of its total raw material requirement from international market mainly fromHong Kong and China with Asiatic Hong-Kong International Ltd. (its 100% Chinese subsidiary) being its single-largest importsupplier.

Financial Analysis

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Total income of ACCIL had grown at a Compounded Annual Growth Rate (CAGR) of 0.59% during FY07-10. For FY10, totalincome for ACCIL had increased marginally by 1.14% on account of increase in sales volume of S. O. Dyes.

In line with trend in crude oil prices for FY10, average raw material cost of ACCIL has dipped resulting in higher PBILDTmargin against FY09. However, PAT margins for both FY09 and FY10 were adversely impacted due to huge derivative lossesincurred by ACCIL.

ACCILs solvency position has deteriorated as on March 31, 2010 mainly due to sanction of Working Capital Term Loan ofRs.6.00 crore by its banker and infusion of unsecured loans by the promoters of Rs.2.50 crore.

Interest coverage improved in FY10 despite higher interest expense because of improvement in PBILDT level.

ACCILs current ratio remained moderately low as on March 31, 2010. But, infusion of unsecured loans by the promoterscoupled with marginal increase in creditor days had improved the liquidity situation for ACCIL. However, the average utilizationof its fund-based working capital facilities during 11MFY11 remained high at 89%.

ACCILs operations continued to remain highly working capital intensive in FY10 because of the high credit period extended toits customers.

As per the provisional results for FY11, ACCIL earned a PAT of Rs.2.97 crore on a total operating income of Rs.107.40 crore.Further, improvement in the overall gearing as on March 31, 2011 was on account of pre-payment of WCTL of Rs.6.00 croretaken during FY10.

Industry Review

The global dyestuff industry (dyes and pigments) has witnessed a gradual shift of manufacturing facilities from the developedcountries to Asia, particularly China and India due to environmental considerations, availability of trained and inexpensivemanpower and the relocation of the end-user industries mainly textile and leather to the Asia-Pacific region.

The Indian dyestuff industry is widely fragmented between the organised and unorganised sectors. There are approximately 950dye manufacturing units in India of which 50 units are in the organised sector and 900 in the unorganised sector. The twowestern States of Maharashtra and Gujarat account for over 90% of the total dyestuff production in the country. However, in thecoming years, the share of the unorganised sector is expected to decline because the future would entail more capitalrequirements, greater level of technology, higher professional skills and stringent pollution control norms, which this sector isnot in a position to afford.

India has emerged as a global supplier of dyestuffs and dye intermediates, particularly for reactive, acid, vat and direct dyes. The

Indian dyestuff industry which accounts for approximately 6.80% of the world dyestuff production meets more than 95%requirement of the domestic market and has gradually also made its presence in the global market.

Surplus operational capacity of reactive dyes in India has encouraged exports. Reactive dyes normally account for the major sharein the total dyes exports of India, contributing almost 60%. However, the developed countries have levied new regulatoryrequirements on imports of chemicals such as Registration, Evaluation and Authorization of Chemicals (REACH) of EuropeanUnion, Global Harmonized System (GHS) of Australia and Japan etc. These regulations are bound to have adverse impact on thetrade of developing countries. Besides, compliance as per REACH norms will be additional cost for exports to EU.

The fortune of the dyes industry is dependent upon the fortunes of its major end-user industries like textile and leather. Thetextile industry is the single-largest user of dyestuffs in India accounting for nearly 70-75% of the total domestic dyeconsumption.

Stiff competition from China and some South-East Asian countries continue to constrain pricing flexibility although fiscal changesin China may reduce the intensity of the competition.

Foreign exchange risk and volatility in prices of dyes because of fluctuation in prices of crude oil and sulphur are areas of concernfor the industry.

Prospects

Prospects of ACCIL would be governed by its ability to improve profitability in a fragmented industry with volatile input costs.Further, efficient foreign exchange and working capital management would remain crucial. Furthermore, continuing itsrelationship with its key customers as well as compliance with the latest environmental norms would be crucial going forward.

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Financial Performance(Rs. Crore)

For the year-ended/As on 31/03/08 31/03/09 31/03/10

(12m, A) (12m, A) (12m, A)

Working Results

Income from Operations 103.94 93.13 94.20PBILDT 7.41 6.48 13.23

Depreciation 0.50 0.56 0.59

PBIT 6.90 5.93 12.64

Interest 2.78 4.59 5.34

PBT 4.12 1.34 7.30

PAT (After def Tax) 2.31 -3.75 0.66

Gross Cash Accruals 4.02 -4.34 1.23

Financial Position

Equity Share capital 6.57 6.57 6.57

T Net Worth 25.70 20.85 21.48

Key Ratios

Growth (%)

Growth in Total income 12.30 -10.40 1.14

Growth in PAT [after D. Tax] -62.28 -262.17 L to P

Profitability (%)

PBILDT / Total OI 7.13 6.96 14.04

APAT / Total OI 2.22 -4.03 0.70

ROCE 12.75 1.78 9.72

Solvency(times)

Debt Equity Ratio - - 0.28

Overall Gearing 1.14 1.89 1.96

Interest Coverage (PBILDT / Interest) 2.66 1.41 2.48

Term Debt/GCA 0.12 -0.01 4.91

Total Debt/GCA 7.27 -9.11 34.39

Liquidity (times)

Current ratio 1.27 1.14 1.11

Quick ratio 0.98 0.95 0.93

Turnover (days)

Avg. Collection Period 139 171 189

Avg. Inventory 53 61 56

Avg. Creditors 65 90 108

Op. cycle 127 142 137* L to P-Loss to Profit

DISCLAIMER

CAREs ratings are opinions on credit quality and are not recommendations to sanction, renew, disburse or recall the concerned bank facilities or to buy, sell orhold any security. CARE has based its ratings on information obtained from sources believed by it to be accurate and reliable. CARE does not, however,guarantee the accuracy, adequacy or completeness of any information and is not responsible for any errors or omissions or for the results obtained from the use ofsuch information. Most entities whose bank facilities/instruments are rated by CARE have paid a credit rating fee, based on the amount and type of bankfacilities/instruments.

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