Astec life - Credit rating update (march 2023)
1…CAPEX
Company has planned a sizeable
capital expenditure over FY2023-FY2024, which will be funded by a mix of debt and internal accruals.
2…NEAR TERM CONSTRAINED PERFORMANCE
=Near-term operating performance is likely to remain constrained on account of challenges faced in
its key product segments of triazole fungicides.
=With higher than average channel inventory in these product segments in domestic and overseas markets on account of multiple reasons over the recent past (such as lower liquidation, unfavourable weather conditions and destocking strategies), the volume off-take as well as realisations have been muted over the past few
months, and expected to remain so over the near-term till the situation normalises.
=Consequently, Astec’s operating profit margin (OPM) has reduced from 23.9% (FY2022) to 14.1% (9M FY2023).
=Coupled with continued debt-funded capex, the credit metrics of the company are unlikely to materially improve over the near term.
3…NEW R&D CENTRE
=The company has also made investments towards a new R&D facility, which would augment its new product development capabilities and thus benefit from the opportunities that the global demand shift from China may present for the Indian entities.
=Company is commissioning a research and development (R&D) center in the coming months, and expanding its presence in the higher
margin contract development and manufacturing (CDMO)segment so as to mitigate the risks related to product concentration and protect itself from the volatilities of the commoditised enterprise market.
4…COMMODITY PRODUCTS AND CDMO
=Astec operates in the off-patent and commodity chemical markets, its
revenues remain susceptible to global demand and supply dynamics and the resultant pricing pressures as visible in the current year performance.
=As part of its efforts to
strengthen its business profile by reducing its dependence on commoditised enterprise products, the company has been focussing on increasing its revenue share from the higher-margin and predictable
CDMO segment.
= Accordingly, the share of CDMO segment in Astec’s revenues increased in 9M FY2023, and is expected to
further increase going forward.
5…RAW MATERIAL AND BACKWARD INTEGRATION
The ratings also consider the vulnerability of Astec’s profit margins to the fluctuations in raw material prices and its ability to pass on the same to its customers in a timely manner.
= Astec’s backward-integrated operations and continuous investments towards the same mitigates this risk also to an extent
6…PRODUCT DIVERSIFICATION
=Astec currently has a concentrated portfolio of products in the triazole segment
=Company’s planned efforts towards diversification by expanding in the herbicide segment, with the new products likely to result in margin expansion and reduce product concentration risk going forward.
=Astec ventured into herbicide manufacturing in August 2021, and has seen steady ramp up in the volume offtake for its herbicide product offerings.
= Furthermore, the company continues to invest in expanding capacities in this space. Such efforts undertaken by the company are expected to strengthen its business profile
over the medium term.
7…GEOGRAPHY DIVERSIFICATION (EXPORT)
=Revenues remain susceptible to the vagaries of monsoons and the seasonality associated with the agrochemicals sector;
=However, the latter is mitigated to an extent by its diversified geographical presence.
=Exports contributed 63% to Astec’s revenues in 9M FY2023, highlighting
the healthy geographic diversification
8…GODREJ PROMOTER
=Godrej Agrovet LimitedAstec’s parent entity, has been gradually increasing its stake in Astec (64.77% as on
December 31, 2022), which indicates the company’s strategic importance to GAVL and the Godrej Group.
=GAVL has also been providing financial support to Astec by way of inter corporate deposits (ICDs) in case of a need, and ICRA expects GAVL to
continue to do so, whenever needed.
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