SKI Carbon Black (Mauritius) Ltd., Notes Assigned #BB# Outlook Stable

Stocks and Financial Services Press Releases Thursday March 8, 2018 11:49
SINGAPORE--8 Mar--S&P Global Ratings

SINGAPORE (S&P Global Ratings) March 8, 2018--S&P Global Ratings today said it has assigned its 'BB' long-term corporate credit rating to SKI Carbon Black (Mauritius) Ltd. (Birla Carbon). The outlook is stable. We also assigned our 'BB' long-term issue rating to the company's proposed US$600 million senior secured notes.

Our ratings are subject to our review of the issuance documentation.

Mauritius-based Birla Carbon is 100% privately owned by the Aditya Birla family. Birla Carbon and some other Aditya Birla Group companies act as investment holding companies for the group's interests in Thai Carbon Black PCL, Alexandria Carbon Black Co. S.A.E, and Indigold Carbon Mauritius Ltd. Birla Carbon owns 100% of SKI Carbon Black (India) Pvt. Ltd.

The rating reflects our expectation that Birla Carbon's leverage will be higher than peers' owing to the company's planned debt-funded dividends to its parent. Birla Carbon's position as the second-largest company by revenues in the carbon black business, its diversified geographical presence, and its long-term customer relationships temper this weakness.

Birla Carbon is likely to remain concentrated in the traditional rubber grade carbon black business. This segment contributed about 84% of the company's revenues in fiscal 2017 (year ended March 31, 2017). Birla Carbon's peers Cabot Corp. (the largest company by revenues in the carbon black business) and Orion Engineered Carbons S.A. have a more diversified product profile, with rubber grade carbon black accounting for only 49% and 77%, respectively, of revenues.

We see specialty carbon black as a niche diversification opportunity for Birla Carbon, with potential for higher margins. The company's share in this segment has been growing rapidly over the past few years, although the share is still lower than its peers'.

Birla Carbon's greater dependence on tire-grade carbon black results in higher customer concentration. Tire manufacturing is highly concentrated in a few players such as Compagnie Generale des Établissements Michelin, Bridgestone Corp., Pirelli Tyre S.P.A, and Continental Aktiengesellschaft. Birla Carbon's top five customers account for roughly 40% of its revenues of about US$1.6 billion, with the top customer accounting for about 9%. We believe the company has very long relationships with these customers which help maintain steady demand for its products.

In our view, Birla Carbon's geographic business diversity is good and comparable to Cabot's and better than Orion's. However, each of these players have relative strengths in some micro markets. For example, Birla Carbon has a large presence in fast-growing India, where its peers are almost non-existent.

We expect emerging markets to grow faster than the rest of the world in terms of demand for carbon black. This should benefit Birla Carbon, which has a stronger presence than peers' in Asia (excluding China). The company is already benefitting from a demand-supply mismatch in these markets. In the absence of any meaningful capacity addition over the next two to three years, and given our crude price expectations, we believe Birla Carbon will maintain its price advantage.

In our view, Birla Carbon's profitability (EBITDA margin) of 18%-20% is comparable to that of Cabot and Orion. In the tire-grade carbon black segment, Birla Carbon's margin is similar to Cabot's but superior to Orion's 14%-16%. Birla Carbon's margins are supported by pricing benefits in key markets and the company's lower cost of feedstock from the U.S. Gulf Coast compared to companies that source feedstock from Chinese coal tar based players. Higher cost of coal tar and an environmental crackdown on coal usage in China has pushed up feedstock prices in the country. Raw material costs (most of which are passed through) account for about 70% of the cost of sales and can induce volatility in margins.

Birla Carbon's proposed debt-funded shareholder distribution of US$600 million is likely to increase its leverage. We expect the company's debt-to-EBITDA ratio to be 3.8x-3.2x in fiscal 2019 and fiscal 2020, while the ratio of funds from operations (FFO) to debt should remain below 20.0% during the period. We anticipate that faster revenue growth and resilient cash flows from operations will help improve Birla Carbon's leverage over the next 12-24 months, unless the company engages in debt-funded capital expenditure or shareholder distributions that are more than our base case.

Our adjusted credit metrics are calculated on a proportionately consolidated basis, including the effective economic interest of Thai Carbon, and Alexandria Carbon's financial position. We believe such an approach better reflects Birla Carbon's debt-servicing ability than the fully consolidated figures. We do not make similar adjustment to Indigold's financial position because the company guarantees Birla Carbon's proposed notes.

We consider Birla Carbon to be directly owned and controlled by the Aditya Birla family. However, we expect the company to operate independently of the group. We believe any extraordinary support will flow directly from the family office. Therefore, Birla Carbon's ownership linkage to the Aditya Birla Group does not influence our assessment of the company's credit profile.

In case Aditya Birla Group enters into significant related party transactions that are contrary to our expectations, we are likely to reassess Birla Carbon's relationship with Aditya Birla Group.

The stable outlook on Birla Carbon reflects our expectation that the company's leverage will improve owing to favorable carbon black prices and a resilient operating performance over the next 18-24 months. We estimate that Birla Carbon's EBITDA margin will be 18%-20% and its FFO-to-debt ratio will approach 20% over the period. We expect the company to be prudent in capital spending and make no outsized acquisitions or shareholder distributions.

Any unforeseen market deterioration, potentially from oil-price swings or a cyclical downturn in Birla Carbon's operating conditions, that result in the company's FFO-to-debt ratio approaching 15% could weigh on the rating. We could also lower the rating if Birla Carbon makes any unexpected outsized capital spending, acquisitions, or dividends or payments to minority shareholders.

We are unlikely to upgrade Birla Carbon over the next 12-24 months, unless the company outperforms our expectations such that its ratio of FFO to debt moves sustainably above 30%. Revenue growth in excess of 15% and stable EBITDA margins of 18%-20% without any outsized acquisitions or shareholder distributions could trigger an upgrade.

Latest Press Release

KTC launches HungryWhat to Eat? campaign and provides members the option to choose and dine deliciously with up to 30% discount.

"KTC" or Krungthai Card Public Company Limited, by Mrs. Pranaya Nithananon, Vice President - Credit Card Business, launches "Hungry…What to Eat?" campaign to respond to members' needs by providing various options at renowned restaurants, including...

GEM Report Shows Most Entrepreneurs Start Businesses Out of Opportunity Not Necessity

The 2017/18 Global Entrepreneurship Monitor (GEM) reports that that entrepreneurship levels remain stable around the world and opportunity-driven entrepreneurship predominates. A robust 74% of entrepreneurs around the world have started businesses in...

Qatar asks U.S. to investigate UAE bank for financial warfare

Qatar has asked U.S. regulators to investigate the U.S. subsidiary of the largest bank in the United Arab Emirates, accusing it of "bogus" foreign exchange deals designed to harm its economy as part of a blockade by Gulf neighbors. The Central Bank of...

IMF Staff Completes a Staff Visit to Cambodia

- Cambodia's near-term economic outlook remains positive with GDP growth at around 7 percent. - Policies should focus on managing macro-financial risks, safeguarding fiscal sustainability and advancing reforms to support growth, resilience and...

IMF Staff Concludes Visit to Bosnia and Herzegovina

An International Monetary Fund (IMF) staff mission, led by Nadeem Ilahi, visited Banja Luka and Sarajevo during March 7-15, 2018, to assess recent economic developments and the implementation of structural reforms envisaged in the arrangement supported...

Related Topics