By Krishan Binani

India Ratings and Research (Ind-Ra) has affirmed I G Petrochemicals Limited’s (IGPL) Long-Term Issuer Rating at ‘IND A+’. The Outlook is Stable. The 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

WD

Withdrawn (the company did not proceed with the instrument as envisaged)

Term loan

-

-

FY21

INR377.8 (reduced from INR434.6)

IND A+/Stable

Affirmed

Proposed term loan

-

-

-

INR750

WD

Withdrawn (the company did not proceed with the instrument as envisaged)

Proposed long-term borrowing^

-

-

-

INR750

Provisional IND A+/Stable

Assigned

Bank facilities#

-

-

-

INR3,766 (reduced from INR3,989)

IND A+/Stable/IND A1+

Affirmed

^ The rating is provisional and shall be confirmed upon the sanction and execution of loan documents by IGPL to the satisfaction of Ind-Ra
Details of bank facilities are given in the Annexure


KEY RATING DRIVERS

Improved Operating Profitability and Credit Metrics: IGPL reported strong FY18 performance with a significant improvement in EBITDA margin to 23.4% (FY17: 16.2%), largely driven by an increase in price spread between the company’s end-product, phthalic anhydride (PAN) and raw material, orthoxylene. PAN prices increased in FY18 on account of robust demand while orthoxylene prices remained subdued due to an increase in domestic production. Consequently, net financial leverage (net debt/EBITDA) improved to 0.1x in FY18 (FY17: 0.4x) and EBITDA interest coverage to 17.9x (9.2x).


Market Leadership: IGPL is the largest PAN manufacturer in India accounting around 50% of the domestic production. The management expects the company to maintain its leadership position owing to moderately high entry barriers, relatively large investments of INR3 billion-4 billion and strong client relationships established over the last two decades.

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. The company also benefits from low procurement costs with proximity to feedstock supplier Reliance Industries Ltd (‘IND AAA’/Stable) and easy access to Jawaharlal Nehru Port Trust and Mumbai ports. 

Comfortable Working Capital Cycle: IGPL had a net working capital cycle of 14 days in FY18 (FY17: 12 days). The company provides a 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 against a 30-day credit on submission of bank guarantee, while the balance is imported against letter of credit of 180-270 days. It maintains an average inventory of 40-45 days. Ind-Ra expects IGPL to maintain its working capital cycle at similar levels.


Strong Liquidity Position: At 31 March 2018, the company had INR378 million of external commercial borrowings as long-term debt, to be repaid by FY21. Ind-Ra expects IGPL to generate healthy cash flow from operation in excess of INR1 billion annually over FY19-FY21 on account of the healthy profitability. Its average peak utilisation of the working capital limits for the 12 months ended June 2018 was 36%.


Large Capex Underway: IGPL has a planned capex of around INR4 billion over FY19-FY20 to increase its PAN manufacturing capacity and diversify into downstream products. Of this, INR3.2 billion will be spent to raise PAN capacity by 53,000 tonnes and INR0.8 billion in building downstream plasticizer capacity. The expansion is likely to be funded through a mix of internal accruals and debt of around INR2 billion. The incremental PAN capacity is expected to come on-stream in mid-2019, while the plasticizer capacity will be operational from October 2019. Given the strong anticipated cash flows, Ind-Ra believes that IGPL will maintain a healthy financial risk profile, despite the large capex plan.

Product Concentration Risk: Despite IGPL’s more than two decades of experience in PAN manufacturing and leadership position, Ind-Ra believes its 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 management, since the company is among the low-cost PAN producers in the world, its economies of scale will mitigate this risk to a great extent. Also, the successful diversification in downstream products would be critical for the ratings.


Crude Oil Price Volatility: IGPL’s key raw material, orthoxylene 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. The company mitigates this risk by signing 40%-45% contracts on fixed margin basis.


RATING SENSITIVITIES

Positive: Stabilisation of enhanced facilities, successful diversification into value-added products, which entails greater stability in the 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 elongation of the working capital cycle and/or drawdown of higher-than-expected debt, leading to the net leverage increasing 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 169,110 metric tonnes per annum.


IGPL acquired Mysore Petrochemicals Ltd - a group entity’s maleic anhydride unit with effect from 1 April 2017.

 

FINANCIAL SUMMARY

Particulars

FY18

FY17

Revenue (INR million)

 11,442

10,375

EBITDA (INR million)

 2,673

1,682

EBITDA margin (%)

 23.4

16.2

Total debt (INR million)

 867

822

Gross interest coverage (x)

 17.9

9.2

Net leverage (x)

 0.1

0.4

Source: IGPL


RATING HISTORY

Instrument Type

Current Rating/Outlook

Historical Rating/Outlook

Rating Type

Rated Limits (million)

Rating

10 July 2017

18 August 2016

15 July 2015

Issuer rating

Long-term

-

IND A+/Stable

IND A+/Stable

IND A/Stable

IND A-/Stable

Term loan

Long-term

377.8

IND A+/Stable

IND A+/Stable

IND A/Stable

IND A-/Stable

Proposed long-term borrowing

Long-term

INR750

Provisional IND A+/Stable

-

-

-

Bank facilities

Long-term/Short-term

INR3,766

IND A+/Stable/IND A1+

IND A+/Stable/IND A1+

IND A/Stable/IND A1

IND A-/Stable/IND A1

Proposed non-convertible debentures (NCDs)

Long-term

INR200

WD

Provisional IND A+/Stable

Provisional IND A/Stable

-


ANNEXURE

Instrument Type

Date of Issuance

Coupon Rate

Maturity Date

Size of Issue (million)

Rating/Outlook

Rating Action

Fund-based working capital limits

-

-

-

INR245 (reduced from INR250)

IND A+/Stable

Affirmed

Proposed fund-based working capital limits^

-

-

-

INR5

Provisional IND A+/Stable

Assigned

Non-fund-based working capital limits

-

-

-

INR2,900 (reduced from INR3,150)

IND A1+

Affirmed

Proposed non-fund-based working capital limits

-

-

-

INR450 (increased from 200)

Provisional IND A1+

Affirmed

Forward contract limits

-

-

-

INR30

IND A1+

Affirmed

Forward contract limits*

-

-

-

INR136 (reduced from INR159)

IND A1+

Assigned

* The final rating has been assigned following the receipt of sanction letter by Ind-Ra.

^ The rating is provisional and shall be confirmed upon the sanction and execution of loan documents by IGPL to the satisfaction of Ind-Ra.


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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About India Ratings and Research: 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

    Krishan Binani

    Associate Director
    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 40356162

    Media Relation

    Namita Sharma

    Manager – Corporate Communication
    +91 22 40356121