KEY RATING DRIVERS
Improvement in Profitability
and Credit Metrics: The upgrade reflects the improvement in IGPL’s EBITDA
margins to 11.9% in FY16 from 6.7% in FY15, resulting in a sharp improvement in
its net financial leverage (adjusted debt/EBITDA) to 1.02x (1.93x) and EBITDA
interest coverage to 5.0x (2.1x). The improvement in margins was largely driven
by a sharp correction in the price of o-xylene, the company’s key raw material on
account of a decline in crude prices. A similar decline in the company’s
finished product – Pthalic Anhydride (PAN) – was avoided on account of steady
demand. However, IGPL’s margins have been volatile historically. Ind-Ra notes that the fluctuations in crude price will
have an impact on the margins. However, overall credit metrics would still
remain comfortable as long as the correction in margins is by 200-300 bps due
to fluctuation in crude prices.
Leadership Position: The ratings also reflect IGPL’s leadership position in the manufacture of PAN, with an approximately 45%-50% market share in India (according to management) as well as the strategic location of its manufacturing unit at Taloja in Navi Mumbai. This unit is close to the end-user industry, as 70% of all PAN produced in India is consumed by users in Western India.
High Capacity Utilisation: Ind-Ra notes that IGPL’s 169,450mtpa installed capacities are close to fully utilised and to achieve further growth, the company will have to invest in additional capacity or diversify into downstream or other products.
Healthy Liquidity: IGPL’s cash flow from operations over FY17 and FY18 are likely to be adequate to repay the maturing debt obligations of just about INR230m annually during the same period. Its peak bank-limit utilisation for the 12 months ended March 2016 also remained comfortable at 77%. IGPL is planning to raise non-convertible debentures of INR200m in FY17 to repay its term loans. Its ability to reduce interest rates will also be a sensitivity factor.
Government Support: The company benefits from anti-dumping duties imposed on PAN imported from Korea, Taiwan and Israel by the government of India from January 2013 to January 2018. On the other hand, China (the largest producer of PAN globally) cancelled the anti-dumping duty on PAN from India in August 2014.
Product Concentration: IGPL has a single-product profile. Although the company has more than two decades of experience in the manufacture of PAN and is a market leader, Ind-Ra believes that a single-product portfolio is at risk to any change in government regulations or an increase in competition levels. These factors could impact profitability. However, the company being one of lowest-cost PAN producers in the world (as per management), its economy of scale will mitigate the risk of single product to a great extent.
Additional information is available at www.indiaratings.co.in. The ratings above were solicited by, or on behalf of, the issuer, and therefore, India Ratings has been compensated for the provision of the ratings.
Ratings are not a recommendation or suggestion, directly or indirectly, to you or any other person, to buy, sell, make or hold any investment, loan or security or to undertake any investment strategy with respect to any investment, loan or security or any issuer.