By Ashish Agrawal

India Ratings and Research (Ind-Ra) has upgraded Zuari Agro Chemicals Limited’s (ZACL) Long-Term Issuer Rating to ‘IND B’ from ‘IND D’ and placed on Rating Watch Evolving (RWE). The instrument-wise rating action is as follows:

Instrument Type

Date of Issuance

Coupon Rate (%)

Maturity Date

Size of Issue (billion)

Rating

Rating Action

Long-term loan

-

-

November 2023

INR1.1 (reduced from INR1.3)

IND B/RWE

Upgraded and placed on RWE


Analytical Approach: Ind-Ra has changed its analytical approach for ZACL’s rating review. The agency has now taken a standalone view of ZACL as opposed to the earlier approach wherein Ind-Ra had been taking a consolidated profile of ZACL, its subsidiaries - Mangalore Chemicals and Fertilisers Limited (MCFL) and Adventz Trading DMCC, and its joint ventures - Zuari Maroc Phosphates Private Limited (ZMPPL) and MCA Phosphates Pte Limited, while arriving at the ratings. The consolidated approach reflected Ind-Ra’s assessment and the management’s articulation that support to ZACL could flow in from MCFL by way of extended credit and higher dividend from ZMPPL, which could aid any liquidity mismatch at ZACL and ensure timely debt repayment. Additionally, the consolidated approach factored in the legal and operational linkages among the entities as reflected in the fact that ZACL holds 53.03% share in MCFL and 100% in Adventz Trading DMCC, and MCFL, ZACL and ZMPPL are in a similar line of business. The change in the approach reflects the weaker-than-expected linkages between these entities indicated by the delays in providing support and/or the absence of support provided by these entities to ZACL at the time of need. 

The rating upgrade reflects ZACL’s timely debt repayment since January 2020. ZACL was able to regularise its overdues with the help of the release of the government of India’s subsidy, which reduced to INR6.8 billion at end-March 2020 from INR16.4 billion at end-April 2019. In addition, ZACL received INR2.7 billion unsecured loans from its promoter entities that helped regularise the overdues and also received support (albeit delayed) by MCFL and ZMPPL by way of extended payment terms. 

The upgrade also incorporates the operationalisation of ZACL’s urea plant since January 2020 and the likelihood of continued urea operations in the near term. The urea operations were supported by the resumption of gas supply from GAIL (India) Limited (‘IND AAA’/Stable) after ZACL entered into a tri-partite agreement with GAIL and the State Bank of India (SBI; ‘IND AAA’/Stable) under which all the urea subsidy inflow will be accumulated in an escrow account with SBI from which GAIL will be paid its gas dues. ZACL’s nitrogen-phosphorous-potash (NPK) plants faced multiple shutdowns and restarts for the majority of FY20, owing to the unavailability of funds and /or other raw materials. 

 The RWE reflects the restructuring exercise being undertaken by ZACL to lower the balance sheet stress through the sale of non-core assets. During February 2020, ZACL transferred its nutrient and allied business (consisting of specialty fertilisers, retail, crop protection & crop-care business) to its 100% subsidiary Zuari Farmhub Limited (ZFL) at an equity consideration of INR7.86 billion effective March 2020 with only bulk fertilisers business remaining under ZACL. Subsequently, ZACL has also accepted an in-principle offer of the OCP group, a Moroccon fertiliser entity, to invest USD46.5 million in ZFL, which would again bring in significant cash flows and help alleviate ZACL’s liquidity concerns. 

In addition, ZACL has also been looking at other measures of monetisation over the short-to-medium term like the sale of land parcels, the monetisation of fertilisers assets of ZACL and INR4 billion rights issue. Subsequently, during June 2020, ZACL in-principally agreed to sell its Goa fertiliser plant to Paradeep Phospates Limited (PPL) for USD280 million (INR21 billion). ZACL and the OCP group hold 50% each of the total equity capital of Zuari Maroc Phosphates Private Limited (ZMPPL) and ZMPPL, in turn, holds 80.45% of the share capital of PPL. The completion of both the transactions is likely to happen by FYE21. 

Ind-Ra believes post the finalisation of these two transactions, ZACL, at a standalone level, will not have any tangible operating assets other than a small single super-phosphate unit in Maharashtra and will primarily be a holding company of ZFL and MCFL. Furthermore, Ind-Ra will continue to monitor the progress of above two transactions and their impact on ZACL’s credit profile.

KEY RATING DRIVERS

Liquidity Indicator – Stretched:  ZACL’s average maximum utilisation of the fund-based limits was 83% for the 12 months ended June 2020. The cash and cash equivalents at FYE20 were INR928 million (FYE19: INR336 million) and ZACL also received steady profits (FY20: INR822 million; FY19: INR553 million) from ZMPPL. 

Its net working capital cycle eased to negative 5 days in FY20 (FY19: 192 days) owing to a reduction in trade receivables to INR8.2 billion (FY19: INR24.1 billion) and inventory to INR2.5 billion (INR12.3 billion) amid continued high payables of INR14.0 billion (FY19: INR15.0 billion). Accordingly, the cash flow from operations improved to INR18.2 billion in FY20 (FY19: negative INR3.3 billion), despite a decline in the absolute EBITDA to negative INR4.4 billion (INR0.9 billion). The company has availed principal and interest moratorium under the Reserve Bank of India’s COVID-19 regulatory package for term loans over June-August 2020. It has scheduled term debt repayments of INR2.6 billion and INR1.3 billion in FY21 and FY22, respectively, which are likely to be met through a combination of additional debt tie-ups, asset monetisation, extended payment terms from MCFL and ZMPPL and the sale of the fertiliser plant and/or from the promoters. Ind-Ra will continue to monitor ZACL’s liquidity profile and asset monetisation progress that remain key rating drivers.

Subdued FY20 Performance: During FY20, ZACL’s revenue declined 58% yoy to INR20.1 billion and EBITDA declined to negative INR4.4 billion (FY19: INR0.9 billion), owing to multiple shut-downs of the urea and NPK streams at its Goa plant during FY20. This, coupled with continued high borrowings, led to high interest expense (FY20: INR4.2 billion, FY19: INR3.8 billion) and impacted the credit metrics of the entity that remain stretched. The interest coverage (operating EBITDA/gross interest expense) dipped to negative 1.1x in FY20 (FY19: 0.2x) and the subsidy adjusted net financial leverage (adjusted net debt less subsidy receivables/operating EBITDA) turned negative 1.9x in FY20 (FY19: 20.5x) owing to the negative EBITDA. 

The ratings are constrained by ZACL’s high dependency on the timely receipt of subsidy receivables, leading to a stretched working capital cycle and high working capital borrowings, and vulnerability to forex fluctuations and agroclimatic conditions. 

The ratings are supported by ZACL’s strong regional market positon in Maharashtra and Karnataka, its diversified revenue profile, the likelihood of cash inflows from asset monetisation activities, the promoters’ combined experience of over five decades in the fertilisers industry and favourable supply demand scenario for the Indian fertiliser sector. 

Update on Dispute with JV partner: With respect to ZACL’s investment of INR1,194 million in the rock phosphate mining project (which is under development) through MCA Phosphate Pte Limited (MCAP), a joint venture company, there had been a deadlock between ZACL and its JV partner Mitsubishi about certain impairments recorded in the financial statements of MCAP for FY16 and FY17. The International Chamber of Commerce (ICC) passed its final order on 7 May 2020 basis which i) ZACL will reimburse JV partner USD216,900 for fees paid by JV partner to the ICC, ii) the JV partner will exercise its call option to purchase ZACL's shares of MCAP for USD216,900 and iii) if ICC reimburses the parties for any fees previously paid to the ICC, ZACL will be entitled to 85% of such reimbursed fees, and Mitsubishi will be entitled to 15% of reimbursed fees. 

Basis the ICC order and stipulation agreement, ZACL has recognised an impairment loss of INR1.18 billion in the financial results. Also, ZACL will cease to consolidate MCAP as JV using the equity method of consolidation for the quarter ended and the year ended 31 March 2020. Ind-Ra does not envisage any potential liability on account of this JV investment.


RATING SENSITIVITIES

The RWE indicates that the ratings may be upgraded, affirmed or downgraded upon resolution. Ind-Ra will resolve the RWE within the next six months on the completion of the transaction and after receiving clarity on the funding of the same.


COMPANY PROFILE

Originally founded in 1967, ZACL was formed in 2012, following the demerger of Zuari Industries Limited into ZACL and Zuari Global Limited. ZACL is now the flagship company of Adventz Group (formerly KK Birla Group) and an agricultural conglomerate. The company is mainly present in the fertiliser sector in Maharashtra, operating in both urea and NPK segments. Its products are branded under the name Jai Kisaan, which has strong brand recall among farmers.

A part of the Adventz Group and a direct subsidiary of ZACL, MCFL manufactures both urea and complex fertilisers in Karnataka. MCFL has the annual capacity to manufacture 0.2 million metric ton (mmt) ammonia, 0.38mmt urea, 0.28mmt phosphatic fertilisers (di-ammonium phosphate and NPKS 20:20:00:13), among others. 

FINANCIAL SUMMARY 

Particulars (INR million)

FY20

FY19

Revenue

20,126

47,310

EBITDA

-4,460

900

EBITDA margin (%)

-22.2

1.9

Interest expense

4,246

3,771

Profit after tax

-1,890

-3,290

Source: ZACL, Ind-Ra



RATING HISTORY

Instrument Type

Current Rating/Rating Watch

Historical Rating/Outlook

Rating Type

Rated Limits (billion)

Rating

24 May 2019

15 May 2019

18 January 2019

Issuer rating

Long-term

-

IND B/RWE

IND D

IND

BB+/Negative

IND A-/Stable

Long-term loan

Long-term

INR1.1

IND B/RWE

IND D

IND

BB+/Negative

IND A-/Stable



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

    Ashish Agrawal

    Senior Analyst
    India Ratings and Research Pvt Ltd DLF Epitome, Level 16, Building No. 5, Tower B DLF Cyber City, Gurugram Haryana - 122002
    0124 6687241

    Media Relation

    Ankur Dahiya

    Manager – Corporate Communication
    +91 22 40356121