Sheenlac Paints Limited

Brickwork Ratings reaffirms the ratings for the Bank Loan Facilities of Rs. 75.13 Crs. of Sheenlac Paints Limited (SPL or "The Company")

Particulars

Facilities**	Amount (Rs.Crs.)		Tenure	Rating#
Facilities**	Previous	Present	Tenure	Previous (29 Apr 2020)	Present
Fund Based	75.00	73.13	Long Term	BWR BBB-/Stable Assigned	BWR BBB - /Stable Reaffirmation
	(15.00)	(25.00)
	(0.00)	(30.00)
	12.00	0.00	Short Term	BWR A3 Assigned	_
	(0.00)	(24.00)
	(0.00)	(10.00)
	(0.00)	(10.00)
	(0.00)	(10.00)
	(0.00)	(10.00)
Non Fund Based	8.00	2.00	Short Term	BWR A3 Assigned	BWR A3 Reaffirmation
	(0.50)	(0.50)
	(0.00)	(10.00)
Grand Total	95.00	75.13	(Rupees Seventy Five Crores and Thirteen lakhs Only)

#Please refer to BWR website www.brickworkratings.com for definition of the ratings
**Details of Bank Loan facilities,consolidation or instruments are provided in Annexure
Note: Rating reaffirmed

RATING ACTION / OUTLOOK

The rating draws comfort from the established market position of the Company in the wood finish and paint thinner industry supported by the experienced management and comfortable capital structure and liquidity profile of the Company. However, the rating is constrained on account of the working capital intensive nature of operations, vulnerability of the profitability to volatility in raw material prices along with exposure to forex cover in the absence of adequate hedging mechanism. Further, the rating is also constrained by the exposure to the intense competition from established players in the paint & varnish industry along with cyclical demand in the end-user industry.

The company has been affected by the decline in demand and temporary shutdown of operations in March and April 2020 due to nationwide lookdown to contain the COVID-19 pandemic. However, the gradual easing of restrictions and the onset of festive seasons resulted in improved demand across the decorative and industrial paint segment in the second half of FY2021 and hence the company could achieve better performance than the pre COVID level. The operating margin as per the FY2021(provisional) financials has fallen significantly on account of the inflationary pressure on the input materials, increase in the advertisement & marketing expenditure of the company along with increase in sales discount & rebate during FY2021 which could not be passed on to the customers.

The company has a comfortable capital structure and does not have any ongoing or future debt funded capital expenditure plan. Further, any incremental working capital requirement is expected to be funded through internal accruals or promoter’s funds.

Outlook: Stable

BWR believes that SPL’s business risk profile will be maintained over the near to medium term considering the established market position in the wood finish industry, experienced management along with long standing relation with the customers and suppliers.

KEY RATING DRIVERS

Credit Strengths:

Established presence in the wood finish and paint thinner industry supported by experienced management :
The Company has an established presence in the paint & varnish industry with an operational track record for more than five decades. The Company has emerged as market leader in wood finishes and paint thinner segment primarily in the South Indian market and sells its products under the brand name “Sheenlac”. The Company is also expanding its market share in other product categories including decorative paints and automotive paints through mutually beneficial tie-ups with established players in these segments. The Company also benefits from the extensive experience of the top management, supported by a team of well qualified and experienced professionals as the second line of management.
Comfortable capital structure :
The Company has reported a comfortable financial risk profile marked by a comfortable debt to equity ratio which stood at 1.37 times as on 31.03.2021(provisional) as against 1.31 times in the previous year. Going forward, the debt to equity ratio is expected to improve further on account of infusion of share capital of promoters and absence of any majorly debt funded capital expenditure plan over the near to medium term. However, on account of increase in input prices and sales & advertising cost, the company has reported decline in operating margin impacting the debt coverage indicators.

Credit Risks:

Working Capital intensive nature of operations :
The operations of the Company are working capital intensive in nature driven by the high gross current asset (GCA) days which has increased from 125 days in FY2020 to 147 days in FY2021(provisional) driven by high amount of receivables. The Company extends higher credit in order to push sales in newer geographies mainly in the East and North Indian states and also due to major revenue derived during the last quarter of every year resulting in high receivables during the year end. The operations are expected to remain working capital intensive due to the inherent nature of the SPL’s business.
Profitability of the Company is susceptible to volatility in raw material prices and foreign exchange rate in the absence of adequate hedging mechanisms. :
The profitability of the Company is susceptible to the fluctuations in the raw material i.e. solvents and pigments as the same constitutes around 84.36% of the total cost of goods sold for FY2021(provisional). However, the Company was not able to pass the rise in prices to the customers due to the disruptions in the demand caused by the outbreak of the COVID-19 pandemic. Further, the profitability of the Company is exposed to volatility in foreign currency rates in the absence of adequate hedging mechanisms as import forms 10% of the raw material purchases. However, the operating margin of the company is protected to certain extent in the form of natural hedge received through the company's exports.
Exposure to intense competition from organised players in a fragmented industry and cyclicality in demand from end-user industry :
The Company faces intense competition from the established players in the organised sector considering its relatively smaller scale of operation as compared to these players. Further, the Company is dependent on demand from the real estate & furniture industry for its paint & varnishes and demand from the automobile & industrial component sector for the industrial paints.The demand from these sectors is cyclical in nature. However, the company is expected to benefit from the gradual shift from unorganised player to organised player in the paint industry led by better consumer awareness following the outbreak of COVID-19 pandemic.

ANALYTICAL APPROACH - Standalone

For arriving at its ratings, BWR has applied its rating methodology as detailed in the Rating Criteria detailed below (hyperlinks provided at the end of this rationale). BWR has principally relied upon the standalone audited financials up to FY20 and provisional financials for FY2021, publicly available information and clarification/information provided by the Company.

RATING SENSITIVITIES

Positive:

Significant improvement in the operating income and net cash accruals of the company resulting in strong financial risk profile and liquidity profile of the Company.
Significant reduction in the external debt of the Company and improvement in debt coverage indicators.

Negative:

Sustained decline in revenue or sharp decline in the market share in the wood finish and paint thinner segment.
Steep decline in operating profitability of the company due to increase in input prices or completion leading to deterioration in debt coverage indicators and liquidity profile of the Company.
Majorly debt funded capacity expenditure plan resulting in high leveraged capital structure.

LIQUIDITY INDICATORS - Adequate

The company has reported a significant decline in net cash accruals from Rs. 9.68 crores crores in FY 2020 to Rs. 3.48 crores in FY 2021(provisional) against annual debt repayment of Rs. 0.88 crores during FY2021(provisional). The current ratio stood at 1.23 times as on 31.03.2021(provisional) as majority of the current assets are funded through current liabilities. Further, the company’s average working capital limit utilisation stood at around 42 percent for the period from August, 2020 to July, 2021 for Axis Bank and average utlisation is around 25 percent for the period from October, 2020 to July, 2021 for HSBC Bank. The cash and bank balances stood at Rs. 1.62 crores as on 31.03.2021(provisional). Further, the repayment of around Rs. 9.89 crores is estimated to be due for the next three years and the company’s projected cash flows are adequate to cover these debt obligations. The company did not avail moratorium period under the COVID-19 relief scheme available during March to August 2020.However, the company has availed working capital term loan (WCTL) of Rs. 3.00 crores from Axis Bank under the GECL scheme and is expected to be repaid by December, 2021.

Also, the promoters are expected to infuse funds of around Rs. 5.00 crores over the next two years to support the working capital requirements of the company or any shortfall in the net cash accruals to meet the debt obligations.

ABOUT THE ENTITY

Sheenlac Paints Limited (SPL or “the company”) was initially established as a partnership firm under the name Sheenlac Paints Corporations in the year 1962. However it was reconstituted as a closely held public limited company in the year 2012 under the present name. The company is a Chennai based company engaged in manufacturing of thinner, wood polish, wood stainer, paint remover, automotive paints and ancillaries, wood finish and decorative paints. The company mainly has three product segments i.e. general products (thinner & wood products) which contributed around 69%, second is the wood finishes which contributed around 16%, then is the decorative paints which contributed 11% and remaining 4.39% is contributed by auto finished, primers and others products to the total revenue for FY 2021 (provisional). The company has three manufacturing units located at Ambattur, Poonamallee and Vadakanallur in the state of Tamil Nadu. The combined installed capacity of the units is 75,600 Kilo litres per annum (KLPA) with average capacity utilisation of around 61% for FY 2021 (provisional). SPL has a network of around 15,000 registered dealers with 8,000 active dealers spread across South Indian and Eastern Indian states. Around 70% of its revenue was generated from South, 25% from East and 5% from North India market for FY2021. The credit period allowed to customers ranges from 7 to 45 days.The company also sells to group company Sheenlac Paints Lanka Private Limited located in Sri Lanka as export sales which forms around 2% of the total sales for FY 2021. SPL uses the brand name J&N Paints for marketing its decorative paints, under agreement with Jenson & Nicholson Paints Private Limited (JNPPL). Further, SPL has also entered into a 50:50 joint venture with Noroo Paints & Coatings Company Limited and has formed Sheenlac Noroo Coatings India Private Limited for marketing its automotive paints. The main raw material procured by the company includes solvents and pigments. The company makes 100% advance to oil companies against purchases and other suppliers allow a 60 to 90 days credit period to the company.

KEY FINANCIAL INDICATORS (Standalone)

Key Parameters	Units	FY 19-20 (Audited)	FY 18-19 (Audited)
Operating Revenue	Rs.Crs.	424.97	428.70
EBITDA	Rs.Crs.	18.96	17.81
PAT	Rs.Crs.	5.33	5.97
Tangible Net Worth	Rs.Crs.	50.62	43.33
Total Debt/Tangible Net Worth	Times	1.31	1.85
Current Ratio	Times	1.27	1.23

KEY COVENANTS OF THE FACILITY RATED

The terms of sanction include standard covenants normally stipulated for such facilities.

STATUS OF NON-COOPERATION WITH PREVIOUS CRA

CRISIL vide its press release dated 21th May 2021, has migrated the ratings to Issuer Not Cooperating; based on best available information, as the company has not provided the requisite information for surveillance of rating.

ANY OTHER INFORMATION

Not Applicable

RATING HISTORY FOR THE PREVIOUS THREE YEARS (including withdrawal and suspended)

Facilities	Current Rating (2021)			2020		2019		2018
Type	Tenure	Amount (Rs.Crs.)	Rating	Date	Rating	Date	Rating	Date	Rating
Fund Based	LT	73.13	BWR BBB-/Stable (Reaffirmation)	29Apr2020	BWR BBB-Stable (Assigned)	NA	NA	NA	NA
FB SubLimit	LT	(25.00)	BWR BBB-/Stable (Reaffirmation)	NA	NA	NA	NA	NA	NA
		(30.00)	BWR BBB-/Stable (Reaffirmation)	NA	NA	NA	NA	NA	NA
Fund Based	ST	NA	NA	29Apr2020	BWR A3 (Assigned)	NA	NA	NA	NA
FB SubLimit	ST	(24.00)	BWR A3 (Reaffirmation)	NA	NA	NA	NA	NA	NA
		(10.00)	BWR A3 (Reaffirmation)	NA	NA	NA	NA	NA	NA
		(10.00)	BWR A3 (Reaffirmation)	NA	NA	NA	NA	NA	NA
		(10.00)	BWR A3 (Reaffirmation)	NA	NA	NA	NA	NA	NA
		(10.00)	BWR A3 (Reaffirmation)	NA	NA	NA	NA	NA	NA
Non Fund Based	ST	2.00	BWR A3 (Reaffirmation)	29Apr2020	BWR A3 (Assigned)	NA	NA	NA	NA
NFB SubLimit	ST	(0.50)	BWR A3 (Reaffirmation)	NA	NA	NA	NA	NA	NA
		(10.00)	BWR A3 (Reaffirmation)	NA	NA	NA	NA	NA	NA
Grand Total		75.13	(Rupees Seventy Five Crores and Thirteen lakhs Only)

COMPLEXITY LEVELS OF THE INSTRUMENTS - Simple

BWR complexity levels are meant for educating investors. The BWR complexity levels are available at www.brickworkratings.com / download / ComplexityLevels.pdf. Investors queries can be sent to info@brickworkratings.com.

Hyperlink/Reference to applicable Criteria

Analytical Contacts
Shashikala Umanath Hegde Senior Ratings Analyst Board : +91 22 2831 1426, +91 22 2831 1439 shashikala.h@brickworkratings.com	Vidya Shankar Principal Director - Ratings Board : +91 80 4040 9940 vidyashankar@brickworkratings.com
1-860-425-2742 \| media@brickworkratings.com

Sheenlac Paints Limited

ANNEXURE-I

Details of Bank Facilities rated by BWR

SL.No.	Name of the Bank/Lender	Type Of Facilities	Long Term(Rs.Crs.)	Short Term(Rs.Crs.)	Total(Rs.Crs.)
1	Axis Bank Ltd.	Cash Credit - Sanctioned	35.00	_	35.00
	Sub-Limit (Bank Guarantee) - Sanctioned		(0.50)
	Sub-Limit (Working Capital Demand Loan) - Sanctioned	(25.00)
2	Axis Bank Ltd.	Letter of Credit - Sanctioned	_	2.00	2.00
3	Axis Bank Ltd.	Term Loan - Out-standing	8.13	_	8.13
4	HSBC	Cash Credit - Sanctioned	30.00	_	30.00
	Sub-Limit (Bank Guarantee) - Sanctioned		(10.00)
	Sub-Limit (Import Letter of credit) - Sanctioned		(10.00)
	Sub-Limit (Import Line) - Sanctioned		(10.00)
	Sub-Limit (Overdraft) - Sanctioned	(30.00)
	Sub-Limit (Post Shipment Buyer loan in foreign Currency) - Sanctioned		(10.00)
	Sub-Limit (Post Shipment Buyer Loan in Indian Rupees) - Sanctioned		(10.00)
	Sub-Limit (Working Capital Demand Loan) - Sanctioned		(24.00)
5	South Indian Bank	Cash Credit - Sanctioned	_	_	0.00
6	South Indian Bank	Over Draft - Sanctioned	_	_	0.00
7	South Indian Bank	Cash Credit - Proposed	_	_	0.00
8	South Indian Bank	Drawee Bill discounting - Sanctioned	_	_	0.00
9	South Indian Bank	Letter of Credit - Sanctioned	_	_	0.00
Total			73.13	2.00	75.13
TOTAL (Rupees Seventy Five Crores and Thirteen lakhs Only)

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