By Ashish Agrawal

India Ratings and Research (Ind-Ra) has upgraded Indian Potash Limited’s (IPL) Long-Term Issuer Rating to ‘IND AA-’ from ‘IND A+’. 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

Long-term loans

-

-

March 2026

INR2.255 (reduced from INR2.925)

IND AA-/Stable

Upgraded

Fund-based working capital

-

-

-

INR15.0

IND AA-/Stable /IND A1+

Long-term upgraded; Short term affirmed

Non-fund-based working capital**

-

-

-

INR86.745 (increased from INR86.075)

IND AA-/Stable /IND A1+

Long-term upgraded; Short term affirmed

Commercial paper*

-

-

7-365 days

INR8

IND A1+

Affirmed

 

*Carved out of the fund-based limits.

**These limits are fungible with fund-based limits.

The rating upgrade factors in IPL’s strengthened business profile, coupled with its continued healthy financial profile and the well-managed board approved risk management framework it follows. The company has also strengthened its financial reporting standards to a quarterly financial audit system, commensurate with the revised rating category. These factors have allowed IPL to perform reasonably well across the agricultural cycles without undertaking undue risks on the balance sheet. On the business front, IPL continued to demonstrate healthy sales volume in 9MFY21, despite the COVID-19-led disruptions, due to increased demand and an established marketing network. IPL has ensured greater raw material security through backward integration with an acquisition of 27.3% stake Jordan Phosphate Mines Company (JPMC) in May 2018, the complete benefits of which have started to flow to IPL now. Additionally, Ind-Ra believes IPL will benefit from its ongoing efforts to diversify geographically and improve forward integration while reducing its dependence on the key product muriate of potash (MOP). This will further position IPL as a complete fertiliser player. Furthermore, IPL has maintained its profitability metrics since the past several years. The company has also witnessed a significant reduction in borrowings costs and the overall debt levels, given the higher clearance of the subsidy backlog by the government of India (GoI). An overall reduction in the borrowings costs, both through lower interest rates and reduced borrowing, will result in higher return on capital, and greater cash flow availability to fund revenue growth and capex over the near-to-medium term.

KEY RATING DRIVERS

Continued Dominant Fertiliser Trading Operations: IPL is India’s largest MOP trader with 60.4% share in the overall MOP imports in FY20 (FY19: 57.4%; FY18: 55.7%). Given MOP production/export is globally controlled by five-six players, IPL benefits from its long-standing relationships with these players, thereby allowing it to source MOP on a cost-competitive basis. IPL also trades diammonium phosphate (DAP), urea and nitrogen-phosphorous-potash (NPK) fertilisers. Ind-Ra expects IPL to continue to be a dominant player in the fertiliser trading business, primarily in MOP and DAP, given its presence at 14 ports across India for the import of fertilisers, its relationship with suppliers, and the economies of scale and distribution network.

Sustained EBITDA Margin: IPL’s EBITDA margins remained comfortable at 4.0% during 9MFY21 (9MFY20: 4.2%; FY20: 5.0%, FY19: 4.7%), supported by an improvement in the fertiliser segment volumes and yoy improved gross margins for key product MOP, but moderated by yoy lower gross margins for DAP (owing to the lower realisations and discounts given during 9MFY21). IPL’s EBITDA margin has improved gradually over the last four years to 5.0% during FY20 from 4.7% in FY17 despite the trading nature of operations and the historical losses incurred in the sugar and other segments given only partial integration.

IPL’s fertiliser trading segment’s margins are driven by i) the price of the end product, which depends on the imported prices and exchange rate movements ii) the demand-supply of DAP and MOP iii) inventory level and iv) per tonne subsidy provided by government on NPK fertilisers. The yoy improvement in the EBITDA margin in FY20 was due to the improved sales realisations and better gross margins on key trading products, coupled with the improved profitability of the sugar segment, where the operating EBIT increased to INR304 million in FY20 from negative INR402 million in FY19.

Ind-Ra estimates the company’s margins to have sustained above 4.0% in FY21 and to continue to do so in FY22, driven by steady trading margins, coupled with IPL’s strong sourcing arrangements and distribution reach which aid the management of operating margins. Also, the agency believes the forward integration of sugar plant to distillery and bio-compressed natural gas will likely result in a strong improvement in the sugar segment profitability over the near-to-medium term.

Strong Revenue Improvement likely in FY21: IPL’s revenue increased 20.5% yoy to INR137.5 billion in 9MFY21 (FY20: INR144.8 billion) driven by a 38.2% yoy increase in trading volumes to 6.5 million metric tonne (mmt) (FY20: 6.2mmt; FY19: 6.6mmt). The average import price for DAP was also higher in 9MFY21 (USD347 per tonne) as compared with that in 9MFY20 (USD339 per tonne), which supported the overall sales realisation. The revenues were, however, partially moderated by a decrease in the average import prices of the key product MOP (to USD237 per tonne in 9MFY21 from USD287 per tonne in 9MFY20) and other NPK products. While the revenues are poised to have increased in FY21 based on the 9MFY21 performance, Ind-Ra expects a moderation in sales volumes in FY22 due to lower yoy demand to result in yoy lower revenues, which would be supported by better yoy realisations on MOP and DAP.

Liquidity Indicator - Adequate: IPL’s cash and cash equivalent were comfortable at INR3.3 billion at end-9MFY21 (FYE20: INR5.4 billion; FYE19: INR7.5 billion). Furthermore, IPL has large fund-based and non-fund-based sanctioned limits both within (INR76.4 billion) and outside the consortium of banks (INR51.1 billion), for which, the overall utilisation stood at 55% over the 12 months ended February 2021. IPL primarily relies on non-fund-based limits such as letters of credit and buyer’s credit (which form over 90% of the non-fund-based limits) for its trading operations and the purchase of input products while the utilisation of the fund-based limits and commercial papers remains low.

IPL’s cash flow from operations turned negative at INR6.0 billion at FYE20 (FYE19: positive INR23.9 billion), owing to an increase in the year-end working capital requirements. IPL’s working capital cycle increased to INR44.0 billion in FY20 (FY19: INR34.7 billion), due to an increase in the total receivables to INR54.0 billion (INR43.0 billion). Ind-Ra expects IPL's cash flow from operations to have improved meaningfully in FY21, given the increased cash collections during 9MFY21 and a reduction in the subsidy receivables to INR25.0 billion at end-February 2021, resulting in an additional free-up of working capital. IPL had scheduled debt repayments of INR2.0 billion in FY21 and has repayments worth INR1.2 billion in FY22. The company benefits from its strong ownership (large and reputed co-operatives and fertiliser companies) and its strong banking and capital market relationships, which provide it access to low-cost banking finance, capital markets and inter-corporate deposits, thus ensuring strong financial flexibility.

Improvement in Credit Metrics to Sustain: IPL’s net adjusted leverage (net debt/EBITDA adjusted for subsidy and other government receivables) improved to 0.6x in 9MFY21 (9MFY20: 1.3x; FY20: 0.5x), supported by an increase in operating EBITDA to INR5.5billion (INR4.8 billion; INR7.2 billion). The net debt increased to INR39.3 billion at end-9MFY21 (end-9MFY20: INR33.0 billion; FYE20: INR33.4 billion), owing to an increase in the subsidy receivables to INR34.9 billion (INR22.7 billion; INR30.1 billion). However, the GoI started clearing the fertiliser sector’s subsidy backlogs in 4QFY21, resulting in a reduction in the subsidy receivables of IPL to decline to INR25.0 billion and a corresponding decrease in its outstanding debt at end February-2021. The INR42.6 billion of gross adjusted debt at end-9MFY21 comprised short-term debt of INR40.7 billion and long-term debt of INR1.9 billion.

IPL’s gross interest coverage (operating EBITDA/gross interest expense) too improved to 5.0x in 9MFY21 (9MFY20: 2.9x; FY20: 2.9x) due to a decline in its average borrowing as well as the average borrowing cost to less than 4% in 9MFY21 from around 6.5% in FY20, leading to a fall in the interest expense to INR1.1 billion (INR1.7 billion; INR2.5 billion).

Ind-Ra expects the credit metrics to sustain over the near-to-medium term, given the strong likelihood of a reduction in subsidy receivables and working capital borrowings coupled with continued operational cash accruals.

Capex Being Incurred to Achieve Revenue Diversification: IPL has been taking steps to diversify its business profile by entering into sugar, cattle feed and dairy products segments, whose combined share in the overall revenue stood at 9.6% in 9MFY21 (FY20: 12.3%; FY19: 7.8%). Additionally, these businesses help strengthen IPL’s ties with farmers. IPL’s strategic investment in JPMC has now started to provide a stability to DAP procurement (also witnessed during 9MFY21) as well as paying out dividends (FY20: INR446 million) that improve its return on equity profile. The dividend payouts are likely to increase over the near-to-medium term, given the improvement in JPMC’s operations.

To further diversify its revenue stream, IPL is incurring a debt-funded capex of INR2.4 billion over FY21-FY22 towards its two distilleries and a bio-compressed natural gas plant. The company is also looking for other modest investments in related manufacturing entities to achieve backward-integration benefits while diversifying the revenue base. Given IPL’s strategic capex/investment plans, the agency expects a meaningful improvement in operating margins and revenue stability over the medium term as the capex benefits will start to accrue by then.

Price and Forex Risk: IPL continues to be exposed to forex, price and inventory markdown risks, primarily due to its presence in fertiliser trading. Given IPL’s high inventory levels, any adverse revision in NPK rates by the GoI or a decline in imported prices could result in inventory losses. Moreover, given IPL has large payables/letters of credit outstanding denominated in the US dollar/the euro, any significant depreciation in the Indian rupee could result in a forex loss as was observed during 4QFY20. However, IPL has, over the years, managed these risks through both prudent inventory management and forex hedging policies. The company witnessed a forex gain of INR1.4 billion in 9MFY21, owing to largely favourable exchange rates (FY20: forex loss of INR3.8 billion; FY19: forex loss of INR1.8 billion).


RATING SENSITIVITIES

Positive: Any change in the business profile with an increased share of revenues and profitability coming in from the manufacturing operations, improved levels of backward and forward integration, while sustaining the improvement in credit metrics and continued adequate liquidity, could be positive for the ratings. 

Negative: Any deterioration in the liquidity profile or the working capital cycle, or higher-than-expected debt-led capex/acquisitions, leading to any deterioration in the profitability and credit metrics, could be negative for the ratings. 

 


COMPANY PROFILE

IPL was incorporated in 1955 as Indian Potash Supplying Agency by the Ministry of Commerce and Industry with the objective of import-handling, promotion and marketing of potash in the entire country. It was renamed IPL in 1970. IPL’s key shareholders include various state co-operatives, which hold over 70% share in it, with Indian Farmers Fertiliser Cooperative being the largest shareholder at 33.99% holding. 

IPL is engaged in the import and trading of fertilisers such as urea, MOP, DAP and sulphate of potash. In addition, it operates six sugar mills with a total capacity 21,000 tonnes canes per day and produces cattle feed and processes milk at its plant in Uttar Pradesh. 

FINANCIAL SUMMARY

Particulars

9MFY21

FY20

FY19

Revenue (INR billion)

137.5

144.8

154.3

EBITDA (INR billion)

5.5

7.3

7.5

EBITDA margin (%)

4.0

5.0

4.9

Total debt (INR billion)

42.6

38.8

33.4

Interest expense (INR billion)

1.1

2.5

2.8

Profit after tax (INR billion)

4.9

3.5

3.5

Source: IPL, Ind-Ra

Note: Figures as Ind-Ra adjusted



RATING HISTORY

Instrument Type

Current Rating/Outlook

Historical Rating/Outlook

Rating Type

Rated Limits (billion)

Rating

13 April 2020

23 September 2019

14 August 2018

Issuer rating

Long-term

-

IND AA- /Stable

IND A+/Positive

-

-

Long-term loans

Long-term

INR2.255

IND AA- /Stable

IND A+/Positive

-

-

Fund-based working capital

Long-/short-term

INR15.0

IND AA- /Stable /IND A1+

IND A+ / Positive /IND A1+

-

-

Non-fund-based working capital

Long-/short-term

INR86.745

IND AA- /Stable /IND A1+

IND A+ / Positive /IND A1+

-

-

Commercial Paper

Short-term

INR8

IND A1+

IND A1+

IND A1+

IND A1+



COMPLEXITY LEVEL OF INSTRUMENTS

Instrument Type

Complexity Indicator

Long-term loan

Low

Fund-based working capital limits

Low

Non-fund-based working capital limits

Low

Commercial Paper

Low

 

For details on the complexity level of the instrument, 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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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