Rationale

 The ratings downgrade factors in the continued moderation in Himadri Speciality Chemical Limited's (HSCL) debt protection metrics due to a consistent decline in its operating margins in H1 FY2022, following a sharp decrease in FY2021 owing to reduced spreads between raw material costs and end-product realisations. Although HSCL has ramped up its enhanced capacities and is expected to achieve a volumetric growth in FY2022, pressure on the profitability is likely to result in subdued debt protection metrics and return indicators in the near term. While the run up in commodity prices has dampened the profitability, nevertheless, the company is expected to renegotiate its supply contracts due for renewal in March 2022 with certain key customers, which should improve its profitability, going forward. The long-term rating remains constrained by the cyclicality in the company's user industries viz. aluminium and steel manufacturing and weak financial position of its overseas subsidiaries. While HSCL's 60,000-MT specialty carbon black (CB) unit was commercialised in Q4 FY2020, the company is yet to manufacture value-added specialty products on a large scale and the specialty CB unit continues to manufacture the lower margin commodity grade CB. Market acceptance and the consequent scale-up of these specialty CB products would provide scope for improvement in its operating margins. The ratings, however, continue to draw comfort from HSCL's longs track record, large scale and backward integrated nature of manufacturing operations. Further, the company benefits from its established relationships with customers and suppliers. The ratings also favourably factor in the diversified products of the company, which find usage in the aluminium, graphite, dyes, tyres, paints and other chemical-related products manufacturing industries. ICRA notes that the company's 5-lakhmetric-tonne-per-annum (MTPA) coal tar distillation plant is the largest in India that produces coal tar pitch (CTP) of various grades and naphthalene for further processing into sulphonated naphthalene formaldehyde (SNF) and is integrated with CB manufacturing lines and a 20-MW power plant. Further, in the absence of any major debt-funded capex in the near-to-medium term, the company's capital structure is likely to remain comfortable, going forward. ICRA further notes HSCL's disclosure dated November 13, 2021 to the stock exchanges regarding clarification sought by the National Stock Exchange of India Limited (NSE) with respect to a compliant from an independent director on certain corporate governance issues. The company has sought complete details about the complaint and is expected to submit a reply in due course of time. ICRA will closely monitor developments pertaining to the said event and any adverse impact of the same on the company will also be a rating monitorable.

The Stable outlook on the long-term rating reflects ICRA's expectations that HSCL will continue to benefit from its established track record, large scale of operations and a healthy demand outlook for its products. The company's ability to reinstate its margins to historical levels through improvement in product realisations and commencement of production of specialty carbon black remains a key rating monitorable.