By Neermoy Shah

India Ratings and Research (Ind-Ra) has assigned I G Petrochemicals Limited’s (IGPL) proposed INR200m non-convertible debentures (NCDs) a ‘Provisional IND A’ rating with a Stable Outlook. A list of IGPL’s outstanding ratings is at the end of this commentary.

The final rating will be assigned following the closure of the issue upon the receipt of final documentation, conforming to the information already received by Ind-Ra. The NCDs are likely to be repaid over five years and proceeds from the issue will be used to refinance IGPL’s existing bank loans.

KEY RATING DRIVERS

Improvement in Profitability and Credit Metrics: The rating 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. 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 rating also reflects 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: 
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 a single product to a great extent.


RATING SENSITIVITIES

Positive: Maintenance of net financial leverage below 1.5x on a sustained basis and successful diversification into value-added products, which entail greater stability in EBITDA margins, while improving or maintaining the credit metrics at the current levels, could be positive for the rating. 

Negative:
Net leverage being sustained above 1.5x could lead to a negative rating action. 


COMPANY PROFILE

Incorporated in 1988, IGPL commenced production in 1992. It manufactures PAN, which is essential in making items such as polyvinyl chloride products, shoe soles, cables, pipes, hoses, leather cloth and films for packaging. The company’s unit is located at Taloja in Navi Mumbai and has a total installed capacity of 169,450mtpa.

IGPL's outstanding ratings (including the above) are as follows:
- Long-Term Issuer Rating: ‘IND A’; Outlook Stable
- INR250m fund-based working capital limits: ‘IND A’/Stable
- INR821.6m term loans: ‘IND A’/Stable
- INR3,350m non-fund-based limits: ‘IND A1’
- Proposed INR200m fund-based limits: ‘Provisional IND A’/Stable
- Proposed INR200m non-fund-based limits: ‘Provisional IND A1’
- Proposed INR200m NCDs: assigned ‘Provisional IND A’/Stable



SOLICITATION DISCLOSURES

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. 

DISCLAIMER

ALL CREDIT RATINGS ASSIGNED BY INDIA RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTPS://WWW.INDIARATINGS.CO.IN/RATING-DEFINITIONS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE WWW.INDIARATINGS.CO.IN. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. INDIA RATINGS’ CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE.

Applicable Criteria

Analyst Names

  • Primary Analyst

    Neermoy Shah

    Senior Analyst
    India Ratings and Research Pvt Ltd Wockhardt Towers, 4th floor, West Wing Plot C-2, G Block. Bandra Kurla Complex Bandra (East), Mumbai 400051
    +91 22 40001721

    Media Relation

    Mihir Mukherjee

    Manager Corporate Communications and Investor Relations
    +91 22 40356121