India Ratings Upgrades I G Petrochemicals to ‘IND A-’; Outlook Stable
July 2015: India Ratings and Research (Ind-Ra) has upgraded I G
Petrochemicals Limited’s (IGPL) Long-Term Issuer Rating to 'IND
A-’ from ‘IND BBB+’. The Outlook is Stable. A full
list of rating actions is at the end of this commentary.
KEY RATING DRIVERS
Partial Breach of Positive Rating Guidelines: The upgrade reflects IGPL’s partial breach of the positive rating guidelines of net debt/EBITDA below 2.0x and FFO interest coverage above 3.5x in FY15. It reported net debt/EBITDA of 1.94x (FY14: 3.42x) and FFO interest coverage of 2.07x (1.99x) in FY15. Net leverage has improved due to a reduction in total debt and an increase in EBITDA margins. The improvement in interest coverage would have been more if not for the increase in interest cost due to higher financial charges because of high bill discounting.
Improvement in EBITDA Margin: IGPL’s EBITDA margin improved 165bp yoy to 6.7% in FY15 (FY14: 5.0%, FY13: 5.8%) due to the capex completion and process improvement initiatives taken in FY14. However, there was high volatility in EBITDA margins during FY15 mainly due to falling crude oil prices. IGPL incurred an EBITDA loss in 3QFY15 on account of inventory write downs on ortho-oxylene. EBITDA margin increased to 16.9% in 4QFY15 because of stability in crude oil at lower prices. Ind-Ra expects the EBITDA margin to further improve in FY16 because of high demand of phthalic anhydride (PAN) and improved operational efficiency.
Volatility in Crude Oil Prices and Forex Risk: IGPL’s main raw material (ortho-oxylene) is a crude derivative. Thus, high volatility in crude prices will significantly affect the company’s EBITDA margin. It is also exposed to forex risk as exports form 19% of the total revenue and imported raw materials form 16% of the total raw material consumption. IGPL partially hedges its exports as well as imports using forward covers apart from having a natural hedge, reducing the risk to an extent.
Capex and its Benefits: From FY15, IGPL has started drawing benefits from capacity addition as well as process improvement initiatives. IGPL is extracting value-added products from its waste stream, which will enhance the profitability. Also, its furnace oil requirements have reduced. IGPL uses the steam generated during manufacturing process, and not grid power, to meet its power requirements.
Benefits from Anti-dumping duty: The government of India has imposed anti-dumping duties from January 2013 for five years on PAN imported from Korea RP, Taiwan (Chinese Taipei) and Israel. Also, China (largest producer of PAN in the world) has cancelled the anti-dumping duty on Indian PAN effective August 2014, which will benefit IGPL’s exports. Ind-Ra expects the anti-dumping duty will enable IGPL to protect its margin.
Positive Cash Flow from Operations; Moderate Liquidity: IGPL’s cash flow from operations has been positive since FY09. It increased to INR587m in FY15 (FY14: INR122m, FY13: INR350m) due to higher EBITDA levels. Funds flow from operations also increased to INR501m in FY15 (FY14: INR315m, FY13: INR560m). Free cash flow turned positive in FY15 to INR309m due to higher EBITDA and lower capex. The company’s working capital use of the fund-based limits was 91% on average and that of non-fund-based limits was 72% on average for 15 months ended June 2015. IGPL’s net working capital cycle increased to 11 days in FY15 due to lower payable days (FY14: one day, FY13: two days).
Capex Plans: IGPL has planned debt-funded capex of INR400m (70% debt and 30% equity) through FY16 and FY17 to manufacture downstream speciality chemicals. This capex will enable IGPL to diversify its product portfolio. Ind-Ra expects the credit metrics to remain stable post this capex.
Long Track Record and Market Leader: IGPL is a leading PAN manufacturer and according to the company’s management it has a market share of 40%-50% in India. IGPL has an operating track record of over two decades. The company is promoted by Dhanuka Group which has over four decades of experience in the PAN industry.
Positive: A sustained improvement in the EBITDA margins leading to the EBITDA interest cover being sustained above 4.0x would be positive for the ratings.
Negative: Limited improvement in the EBITDA margins leading to the EBITDA interest cover being sustained below 3.0x would be negative for the ratings.
Incorporated in 1988 by the Dhanuka family, IGPL commenced production in 1992. At FYE15, IGPL reported revenue of INR11,881m (FY14: INR12,043m) and debt of INR1,529m (INR2,088m). The total installed capacity of PAN was 1,66,110mtpa at FYE15.
- Long-Term Issuer Rating: upgraded to ‘IND A-’ from ‘IND BBB+’; Outlook Stable
- INR1,009.6m long-term loans (reduced from INR1,250m): upgraded to ‘IND A-’/Stable from ‘IND BBB+’
- INR230m fund-based limits (increased from INR200m): upgraded to ‘IND A-’/Stable from ‘IND BBB+’
- Proposed INR20m fund-based limits (reduced from INR50m): upgraded to ‘Provisional IND A-’/ Stable from ‘Provisional IND BBB+’
- INR3,050m non-fund-based limits (increased from INR2,535m): upgraded to ‘IND A1’ from ‘IND A2+’
- Proposed INR300m non-fund-based limits (reduced from INR815m): upgraded to ‘Provisional IND A1’ from ‘Provisional IND A2+’
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