By Neermoy Shah

India Ratings and Research (Ind-Ra) has upgraded I G Petrochemicals Limited’s (IGPL) Long-Term Issuer Rating to ‘IND A+’ from ‘IND A’. The Outlook is Stable. Instrument-wise rating actions are given below:

Instrument Type

Date of Issuance

Coupon Rate

Maturity Date

Size of Issue (million)

Rating/Outlook

Rating Action

Proposed non-convertible debentures (NCDs)*

-

-

-

INR200

Provisional IND A+/Stable

Upgraded

Term loan

-

-

September 2021

INR434.6 (reduced from INR821.6)

IND A+/Stable

Upgraded

Proposed term loan^

-

-

-

INR750

Provisional IND A+/Stable

Assigned

Bank facilities#

-

-

-

INR3,989

IND A+/Stable/IND A1+

Upgraded

* The final rating will be assigned upon the issuance of NCDs and receipt of transaction documents by the agency. The proposed NCDs are likely to be repaid over a period of five years.

^ The ratings are provisional and shall be confirmed upon the sanction and execution of loan documents for the above facilities by RRKL to the satisfaction of Ind-Ra.

Details of bank facilities are given in the Annexure

KEY RATING DRIVERS

Improved Operating Profitability and Credit Metrics: The upgrade reflects a sustained improvement in IGPL’s EBITDA margins to 15.8% in FY17 (FY16:11.9%, FY15: 6.7%) largely driven by steady demand for the company’s product, phthalic anhydride (PAN). Although there was an increase in price of key raw material, o-Xylene in FY17, the demand for PAN more than offset the price increase with better realisation. Consequently, net financial leverage (adjusted debt/EBITDA) improved to 0.4x in FY17 (FY16: 1.02x, FY15: 1.93x) and EBITDA interest coverage to 9.1x (5.0x, 2.1x).

 

Market Leadership: IGPL is the largest PAN manufacturer in India accounting around 50% of the domestic production. As per management, IGPL is expected to maintain its leadership position owing to moderately high entry barriers, high investments of INR3 billion-4 billion and lack of product substitution. IGPL has a planned capex of around INR3.4 billion over the next three years to increase its PAN manufacturing presence in the country and diversify into downstream products. The expansion is likely to be largely funded through internal accruals and debt of around INR750 million-1,000 million. Hence, Ind-Ra believes that IGPL will continue to maintain a healthy financial risk profile despite the large capex plan. 

 

Strategically Located Manufacturing Unit: IGPL’s manufacturing unit located at Taloja, Navi Mumbai has proximity to the end-user industry, as 70% of the PAN produced in the country is consumed by users in Western India.

 

Comfortable Working Capital Cycle: IGPL had a net working capital cycle of 14 days in FY17 (FY16: 5 days). The company provides credit period of 30-60 days to its customers and majority of the sales are backed by letter of credit, which are discounted with bank. The company makes local purchases primarily from Reliance Industries Ltd (‘IND AAA’/Stable) against a 30-day credit on submission of bank guarantee, while the balance is imported against letter of credit of 180-270 days. The company maintains an average inventory of around 40-45 days. Ind-Ra expects IGPL to maintain its working capital cycle at similar levels in FY18 and FY19.

 

Strong Liquidity PositionIGPL prepaid its INR285 million term loan in FY17. As of 31 March 2017, the company has INR434.6 million of external commercial borrowings as long-term debt, which is to be repaid by FY22. Ind-Ra expects IGPL to generate healthy cash flow from operation in excess of INR1 billion annually over FY18 and FY19 on account of healthy profitability. IGPL’s peak bank-limit utilisation for the 12 months ended March 2017 was 43%.

 

Product Concentration Risk: Despite IGPL’s more than two decades of experience in PAN manufacturing and leadership position, Ind-Ra believes single-product portfolio is exposed to risk arising from any change in government regulations or increase in competition levels, thus impacting profitability. However, as per the management, since the company is among the lowest-cost PAN producers in the world, its economies of scale will mitigate the risk of single product to a great extent. Also, the successful diversification of downstream products would be one of the critical factors for the ratings.

Volatility in Crude Oil Prices: IGPL’s key raw material, o-Xylene is a crude derivative and its price is mainly driven by crude prices. Therefore, high volatility in crude prices will significantly impact IGPL’s EBITDA margins.


RATING SENSITIVITIES

Positive: Stabilisation of enhanced facilities, successful diversification into value-added products, which entails greater stability in EBITDA margins, while improving or maintaining the credit metrics at the current levels, could be positive for the ratings.

 

Negative: A significant decline in the EBITDA margins and/or lengthening of working capital cycle and/or drawdown of higher than expected debt which leads to net leverage above 1.5x on a sustained basis could be negative for the ratings.


COMPANY PROFILE

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

 

In FY17, IGPL acquired Mysore Petrochemicals Ltd - a group entity’s maleic anhydride unit with a capacity of over 6,500mtpa.


RATING HISTORY

Instrument Type

Current Rating/Outlook

Historical Rating/Outlook

Rating Type

Rated Limits (million)

Rating

18 August 2016

15 July 2015

16 July 2014

Issuer rating

Long-term

-

IND A+/Stable

IND A/Stable

IND A-/Stable

IND BBB+/Stable

Proposed NCDs

Long-term

INR200

Provisional IND A+/Stable

Provisional IND A/Stable

-

-

Term loan

Long-term

INR434.6

IND A+/Stable

IND A/Stable

IND A-/Stable

IND  BBB+

Proposed term loan

Long-term

INR750

Provisional IND A+/Stable

-

-

-

Bank facilities

Long-term/Short-term

INR3,789

IND A+/Stable/IND A1+

IND A/Stable/IND A1

IND A-/Stable/IND A1

IND  BBB+/IND A2+

ANNEXURE

Instrument Type

Date of Issuance

Coupon Rate

Maturity Date

Size of Issue (million)

Rating/Outlook

Rating Action

Fund-based working capital limits

-

-

-

INR250

IND A+/Stable

Upgraded

Proposed fund-based working capital limits

-

-

-

INR200

WD

Withdrawn (the company did not proceed with the instrument as envisaged)

Non-fund-based working capital limits

-

-

-

INR3,150 (reduced from INR3,350)

IND A1+

Upgraded

Proposed non-fund-based working capital limits

-

-

-

INR200

Provisional IND A1+

Upgraded

Forward contract limits

-

-

-

INR30

IND A1+

Upgraded

Proposed forward contract limits

-

-

-

INR159

Provisional IND A1+

Assigned


COMPLEXITY LEVEL OF INSTRUMENTS

For details on the complexity level of the instruments, please visit https://www.indiaratings.co.in/complexity-indicators.

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.

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India Ratings and Research (Ind-Ra) is India's most respected credit rating agency committed to providing India's credit markets accurate, timely and prospective credit opinions. Built on a foundation of independent thinking, rigorous analytics, and an open and balanced approach towards credit research, Ind-Ra has grown rapidly during the past decade, gaining significant market presence in India's fixed income market. 

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Applicable Criteria

Analyst Names

  • Primary Analyst

    Neermoy Shah

    Senior Analyst
    India Ratings and Research Pvt Ltd 510-Sun Squre, Above IDFC Bank, Near Hotel Regenta, Off. C.G. Road, Navrangpura, Ahmedabad 380009
    +91 79 49110703

    Media Relation

    Mihir Mukherjee

    Manager Corporate Communications and Investor Relations
    +91 22 40356121