By Aishwarya Arora

India Ratings and Research (Ind-Ra) has assigned Indian Farmers Fertiliser Cooperative Limited (IFFCO) a Long-Term Issuer Rating of ‘IND AA’. The Outlook is Stable. The instrument-wise rating actions are as follows: 

Instrument Type

Date of Issuance

Coupon Rate

Maturity Date

Size of Issue (billion)

Rating/Outlook

Rating Action

Fund-based limits

-

-

-

INR236.45

IND AA/Stable/IND A1+

Assigned

Non-fund based limits

-

-

-

INR63.75

IND AA/Stable/IND A1+

Assigned

Commercial paper programme

-

-

Up to 365 days

INR1.56

IND A1+

Assigned

Long-term loans

-

-

March 2025

INR11.63

IND AA

Assigned

Provisional fund-based limits*

-

-

INR0.17

Provisional IND AA/Stable/Provisional IND A1+

Assigned

* The rating is provisional and shall be confirmed upon the sanction and execution of loan documents for the above facilities by IFFCO to the satisfaction of Ind-Ra.

KEY RATING DRIVERS

Healthy Business Profile: IFFCO has a healthy position in the domestic market, with a 20% share in urea sales, 40% in total nitrogen, phosphorous, potassium and Sulphur (NPKS) and 45% in di-ammonium phosphate (DAP) fertilisers produced in FY20. The ratings also factor in IFFCO’s strong distribution reach, leading to a steady increase in sales of urea and NPK fertilisers to 9.02 million metric tonnes (mmt) in FY20 (FY19: 7.97mmt) and in trading volumes to 4.5mmt (3.7mmt). IFFCO’s revenue increased to INR294.12 billion in FY20 (FY19: INR278.51 billion) due to the increased sales volumes. IFFCO’s 1HFY21 revenue moderated to INR137.1 billion (1HFY20: INR142.2 billion) despite the increase in the volumes, owing to a reduction in the natural gas prices. The society produced 4.5mmt and imported 2.1mmt of fertilisers in 1HFY21 (1HFY20: 4.4mmt; 1.8mmt).

The company has invested nearly INR22 billion towards investments in its joint ventures, subsidiaries and associates, which ensures adequate availability of raw material and strengthens IFFCO’s relationships with farmers.

Strong Sectoral Growth: The Indian fertiliser sector has witnessed a strong 24.8% yoy increase in point-of-sales of fertiliser volumes over 7MFY21 to 41.43mmt; this includes 13.1% yoy growth for urea; 50.2% for DAP, and 31.6% for NPKS, led by increased sowing and acreage; improved labour availability; a favourable monsoon; an increase in reservoir levels across key fertiliser consumption areas, and better fund availability with farmers.

In the medium term, Ind-Ra expects the growth of the industry to be driven by the additional subsidy allocation of INR650 billion announced by the government in November 2020 and the ongoing Direct Benefit Transfer programme, which is ensuring faster disbursement of subsidy. Furthermore, IFFCO is conducting trials to launch nanotechnology in fertilisers by way of three new products - nano zinc, nano copper and nano nitrogen. This could act as an effective alternative for subsidised fertilisers. The approval for these products is underway and IFFCO plans to start the construction of plants for nano fertilisers in FY22.

Improvement in Operating Performance: IFFCO’s operating EBITDA increased to INR22.3 billion in FY20 (FY19: INR19.6 billion; FY18: negative INR2.5 billion; FY17: INR17.4 billion), with the EBITDA margins improving to 7.88% (7.03%; negative 1.23%; 7.88%) due to increased sales. The weighted-average capacity utilisation improved to 114% in FY20 (FY19: 111%) while the weighted-average energy efficiency of 5.286 GigaCalorie/tonne (5.339 GCal/t) remained below the government norms, and the energy savings were sustained despite the new tighter norms applicable from FY19. However, given the fall in domestic gas prices, the pooled natural gas prices have fallen, which the agency believes will reduce energy savings. This fall in prices, however, will be favourable for finance cost as the same would decline, given the likely lower subsidy burden.

IFFCO’s EBITDA during 1HFY21 increased to INR12.7 billion (1HFY20: INR10.3 billion) and the EBITDA margins expanded to 9.3% (7.2%), led by the higher volumes and soft raw material prices. However, the society’s operating profitability remains dependent on factors such as raw material price fluctuations, monsoons and the timeliness of subsidy receipt from the government of India.

Liquidity Indicator -Adequate: IFFCO has access to INR236 billion of fund-based and INR64 billion non-fund-based limits, which were 53% and 23%, respectively, average utilised in the 12 months ended September 2020. Furthermore, INR36.16 billion of unencumbered cash balances at end-1HFY21 (FYE20: INR19.6 billion) strengthen IFFCO’s liquidity. IFFCO had a total debt of INR118.6 billion outstanding at end-1HFY21 (FYE20: INR148.4 billion), comprising a long-term debt of INR11.63 billion (INR13.5 billion) and a short-term debt of INR106.99 billion (INR134.9 billion).

The society’s cash flow from operations turned positive at INR1.02 billion in FY20 (FY19: negative INR25.24 billion; FY18: INR45.8 billion). The society’s cash flow from operations remained negative-to-low over FY19-FY20 than the previous years due to an increase in the working capital requirements, led by an increase in the subsidy receivables to over INR100 billion in 1HFY21 (FY20: INR93 billion; FY19: INR74 billion). A similar trend was seen for most sector players, and these receivables continue to be dependent upon the government’s subsidy policies. Accordingly, the debtor days increased to 153 days in FY20 (FY19: 135 days). IFFCO continues to have low payable days of 24 in FY20 (FY19: 22) and inventory days of 58 (58). The total working capital cycle remains extended at 179 days in FY20 (FY19:172 days) owing to the high subsidy receivables. IFFCO purchased a sizeable INR35.6 billion raw material from its subsidiary, Kisan International Trading FZE, in FY20 (FY19: INR37.1 billion), of which INR2.4 billion was payable outstanding at FYE20 (FYE19: INR4.1 billion).

IFFCO has investments of INR18.03 billion in AAA/AA rated instruments over which the society earned returns of INR2.89 billion in FYE20 (FY19: INR2.5 billion). Additionally, the society has access to capital markets to meet its short-term funding requirements. IFFCO had free cash flows post dividends of negative INR9.5 billion in FY20 (FY19: negative INR38.8 billion), given its investments in joint ventures and subsidiaries of INR4.7 billion (INR6.9 billion) and capex of INR4.8 billion (INR5.8 billion). IFFCO did not avail of the Reserve Bank of India-prescribed moratorium on any of its facilities. IFFCO pays out 10%-15% of its profits, in line with the cooperative’s maximum payout ratio of 20% as dividends to the member shareholders of the cooperative. Being a cooperative, IFFCO needs to call for capital from the member cooperatives, and in the past 10 years, IFFCO has called for capital only during FY19 of nearly INR2 billion.

Mostly Maintenance Capex Plans: IFFCO incurred a capex of INR4.8 billion in FY20 (FY19: INR5.8 billion), primarily towards the maintenance activities of all the plants; and the management expects to incur an annual maintenance capex of INR4.5 billion. In addition, IFFCO plans to incur a capex of approximately INR21 billion in the medium term, of which INR6 billion would be towards the construction of five nano fertiliser plants; INR10 billion towards Train F (NPK fertilisers) and INR5 billion towards the capacity expansion of its phosphatic plant in the Paradeep unit (Odisha).

The society plans to raise funds for these projects in a 70:30 debt: equity ratio, with the equity portion being generated through internal accruals. Ind-Ra believes IFFCO should be able to generate free cash flow of INR3 billion-4 billion annually, enough to fund the equity portion of the above capex, given its annual interest outflow of INR10 billion-11 billion; EBITDA of INR20 billion-25 billion; low repayments of INR3.75 billion; maintenance capex of INR4.5 billion and post meeting the tax payout, dividends and equity margin required for working capital. A higher-than-expected capex or lower-than-expected subsidy allocation could result in increased net  leverage.

Investments in Joint Ventures to Aid Revenue Diversification: IFFCO has INR22.14 billion investments in JVs, subsidiaries, and associates and the total return through dividend and rental income from these investments amounted to INR1.7 billion in FY20 (FY19: INR1.9 billion). The JVs Oman India Fertiliser Company SAOC (investment of INR3.29 billion); Industries Chimiques Du Senegal (INR0.62 billion) and Jordan India Fertilizer Company Ltd (INR7.73 billion) help the entity to avail benefits of backward integration by ensuring consistent and timely raw material supply and to diversify into related businesses.

The entity also has investments in other profitable entities namely, IFFCO-TOKIO General Insurance (INR3.79 billion), Indian Potash Limited, IFFCO e-bazaar, and Kisan International Trading FZE. It recently invested INR2.62 billion in Triumph Offshore Private Limited and an entity involved in the liquefied natural gas business. The society’s investment strategy revolves around ensuring higher income to the farmers, making IFFCO a one-stop-shop for a farmer’s needs and ensuring raw material self-sufficiency for its trading and manufacturing operations.

Moderate Credit Metrics: IFFCO’s net adjusted leverage (net debt/EBITDA adjusted for subsidy and other government receivables) improved to 1.59x in FY20 (FY19: 2.30x) and the interest coverage (EBITDA/gross interest expense) increased to 2.1x (1.97x). The improvement in credit metrics was driven by the increase in the EBITDA levels despite an increase in the year-end debt levels owing to the higher subsidy outstanding. Ind-Ra expects IFFCO’s metrics to remain comfortable in the medium-to-long term, given its consistent EBITDA generation and moderate debt-led capex plans. 

Forex Dependency: 
IFFCO has a high dependency on imports for both its raw materials and traded products; the total imports of such products amounted to INR101.9 billion in FY20 (FY19: INR115.8 billion). The society has an active treasury team to hedge the foreign exchange risk by entering into forward contracts, with the foreign contracts of INR23.7 billion outstanding at FYE20 (FYE19: INR77billion). The society has a flexible hedging policy, and selectively enters into such contracts depending upon the prevailing currency market conditions; owing to which, despite  depreciation in the rupee in FY20, the society recorded a net gain of INR118 million (FY19:INR325.7 million). Nevertheless, the society continues to be exposed to the risk of foreign currency rates fluctuations, given such high levels of net imports. Furthermore, Ind-Ra will continue to monitor the outcome of the recent Enforcement Directorate inspection on  IFFCO, though the company management does not expect the same to have any bearing on the financials and the business operations.

 


RATING SENSITIVITIES

Positive: Favourable structural changes in the urea subsidy policy, leading to the timely receipt of subsidy receivables and higher profitability, would be positive for the ratings. 

Negative: 
Any deterioration in the operating performance, significant lowering of energy efficiency savings along with any large debt-funded capex and/or any weakening of support from the government of India, in terms of unfavourable policy changes for subsidies leading to net adjusted leverage exceeding 2x on a sustained basis after adjusting fertiliser subsidy would be negative for the ratings.


COMPANY PROFILE

IFFCO, established in 1967, is India's largest cooperative society which is wholly owned by Indian cooperatives. The society has production units in Kalol (Gujarat), Aonla (Uttar Pradesh), Phulpur (Uttar Pradesh), Kandla (Gujarat), and Paradeep (Odisha), with a total capacity to produce 8.5 mmt of fertilisers, including 4.2mmt installed capacity for urea and 4.3mmt for nitrogen, phosphorous, potassium, sulphur based fertilisers and water soluble fertilizers. The entity also produces industrial chemicals such as zinc sulphate, and bentonite sulphur. Additionally, in 2020, IFFCO retained its 1st position in fertilisers and agro-chemicals in Fortune 500 companies in India, apart from securing the 57th position in the list of Fortune 500 companies in India.

FINANCIAL SUMMARY

Particulars

1HFY21*

FY20

FY19

Revenue (INR billion)

137.1

294.1

278.5

EBITDA (INR billion)

12.7

22.3

19.6

EBITDA margin (%)

9.3%

7.6%

7.0%

Gross interest expense (INR billion)

4.1

10.6

10.0

Debt (INR billion)

118.6

148.4

144.1

Source: Ind-Ra, IFFCO

*Unaudited and provisional




COMPLEXITY LEVEL OF INSTRUMENTS

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Analyst Names

  • Primary Analyst

    Aishwarya Arora

    Management Trainee
    India Ratings and Research Pvt Ltd DLF Epitome, Level 16, Building No. 5, Tower B DLF Cyber City, Gurugram Haryana - 122002
    124 6687246

    Media Relation

    Ankur Dahiya

    Manager – Corporate Communication
    +91 22 40356121