Vam Organic: rating down graded

ICRA has downgraded the rating of the Rs. 20 crore non- convertible debentures (NCD) programme of Vam Organic Chemicals (VOCL) from LA minus to LBBB plus, which indicates moderate safety. The downgrade takes into account increase in the financial risk profile of VOCL due to increased debt levels. VOCL's capital structure is characterised by a high proportion of debt, which has increased over the last few years.

While the company has undertaken a debt-restructuring programme in FY 2001, which has led to reduction in its interest costs and an improvement in the maturity profile of its repayments, the interest and repayment burden remains substantial in relation to its cash accruals.

The rating also factors in the current high prices of VOCL's major products, continued growth in pyridine and picoline business and cost efficiency measures undertaken by the company. These strengths are however mitigated by the tight liquidity position, high repayment levels and susceptibility of VOCL's margins to a downturn in the petrochemical cycle.

VOCL commenced its operations in 1982 with manufacturing facilities for acetaldehyde and acetic acid and is currently the largest domestic producer of acetic acid and acid derivatives such as anhydride and vinyl acetate monomer (VAM). Its other products are polyvinyl acetate, pyridine and picoline, VP Latex, choline chloride and fertilisers.

It also markets adhesives under the brand Vamicol, and wood finish products. The company's business is organised into five main divisions: organic intermediates division (OID), performance chemicals division (PCD), speciality chemicals division (SPD), fertiliser division and new product lines like choline chloride and VP latex.

VOCL has the flexibility to change its product mix according to the market demand and price conditions in each product. Moreover, with different products catering to different end use sectors, VOCL enjoys a diversified customer base.

However, the nature of its manufacturing process gives rise to significant operational risk. Internationally, acetic acid is made predominantly through the petrochemical process that is carbonylation of methanol. Since VOCL uses the alternate molasses-based technology, its input costs are not related to its product realisations. This, coupled with volatility in the prices of its main input, molasses, makes VOCL's margins highly volatile. In addition, the growth in its key products is constrained by its capacity, which is almost fully utilised. Any further capacity additions would need substantial capital expenditure, entailing further debt requirements.

Over the last three years, VOCL has expanded its product line through acquisition of other businesses, namely enpro, anichem and the nira unit of Polychem, this coupled with capital expenditure on new projects such as capacities for lutidine, solid PVA and hotmelt resulted in substantial increase in debt levels. The increase in VOCL's gearing is also partly due to the addition of debt of the acquired companies.

The operating income of VOCL has increased from Rs. 4,09.80 crores in 1999-2000 to Rs. 543.70 crores in 2000-01 because of both higher product prices and increased volumes.

The operating profits have increased in the last two years from Rs. 49.40 crores in 1998-99 to Rs. 78.50 crores in 2000-01 because of higher product prices in organic intermediates division. This increase was despite an increase in power and fuel costs and decline in profitability in the other divisions like specialty chemicals, fertilizer, feed and VP latex.

The net cash accruals have almost doubled since 1998-99 due to the improved operating performance. The return on capital employed declined in 1999-2000 to 11.6 per cent but has improved marginally to 12.9 per cent in 2000-01. The profitability indicators are moderate but have shown an improving trend.

Corporate Bureau

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