By Bhanu Patni

India Ratings and Research (Ind-Ra) has affirmed National Fertilizers Limited’s (NFL) Long-Term Issuer Rating at ‘IND AA-’. The Outlook is Stable. The instrument-wise rating actions are as below:

Instrument Type

Date of Issuance

Coupon Rate

Maturity Date

Size of Issue (billion)

Rating/Outlook

Rating Action

Long-term loans - external commercial borrowings (ECBs)

-

-

September 2020

INR0.57

WD

Withdrawn (paid in full)

Fund-based working capital limits

-

-

-

INR40 (reduced from INR60)

IND AA-/Stable/IND A1+

Affirmed

Non-fund-based working capital limits

-

-

-

INR20

IND A1+

Affirmed

Commercial paper (CP)

-

-

7-365 days

INR40

IND A1+

Affirmed

CP

 

 

7-365 days

INR30

WD

Withdrawn (the company is not proceeding with the instrument as envisaged)

Proposed fund-based working capital

 

 

 

INR2.14

WD

Withdrawn (the company is not proceeding with the instrument as envisaged)

* CP is within the fund-based working capital limits. CP program and fund based working capital limits are interchangeable with total borrowing capped at lower of the drawing power or the sanctioned fund-based limits

Analytical Approach: To arrive at the ratings, Ind-Ra continues to take a bottom-up approach, factoring in the consolidated profile of NFL and its joint ventures (Urvarak Videsh Limited and Ramagundam Fertilizers and Chemicals Limited ‘IND A-’/Stable) and also factored in the availability of support from the government of India (GoI).

The affirmation factors in the continued strength of NFL’s business profile as reflected through its market position in northern India, its healthy market share in the urea segment, and the portfolio expansion achieved by the company through trading of fertilisers, which has enabled it to emerge as a complete one-stop fertiliser supplier for its consumers.  Furthermore, despite the drop in the urea division’s profitability post the tightening of energy-efficiency norms, NFL’s financial profile is likely to improve because of the substantial decline in its interest burden and subsequent improvement in its credit metrics, resulting from the clearance of the past subsidy receivables by the GoI.

KEY RATING DRIVERS

Subsidy Receivables Decline Materially: The GoI has provided extraordinary policy-level support to the fertiliser sector in the form of an additional fertiliser subsidy of INR626 billion in the revised FY21 budget estimate (RE). This is likely to clear the sector’s entire subsidy backlog and free up significant working capital funds. A large part of the outstanding dues has been cleared, with only around INR130 billion pending at end-February 2021 out of the INR1339 billion declared in the budget for the entire fertiliser sector. As a result, NFL's subsidy outstanding is likely to have declined to around INR16 billion at FYE21 (FYE20: INR69 billion; FYE19: INR65 billion), with the working capital utilisation having dropped to around INR4.3 billion at end-February 2021 (average utilisation for 9MFY21:INR63.4 billion). Given the backlog clearance and the subsidy payout mechanism through direct benefit transfer, Ind-Ra expects the receivables to remain comfortable at less than two months on an ongoing basis.

Credit Metrics to Improve: The total debt outstanding for FY21 is estimated to have fallen substantially to less than INR25 billion (9MFY21: INR70.3 billion, FY20: INR81 billion). The total debt in FY21 comprised long-term debt of INR7.5 billion (9MFY21: INR7.2 billion, FY20: INR7.8 billion), which was taken for energy-efficiency capex funding, while the remaining was working capital funding. The net leverage (net debt/operating EBITDA) is likely to have improved for FY21 (FY20:9.4x, FY19:7.8x) because of the decline in debt. However, Ind-Ra has been basing its rating triggers on the net adjusted leverage, which nets off the subsidy receivable from the overall debt. The net adjusted leverage is likely to remain between 1.0x-1.5x in FY21 and over the near to medium term (FY20: 1.3x, FY19: negative 0.1x), as earlier expected by Ind-Ra. However, the reduction in the subsidy receivables would result in two favourable developments - i) the cash flow from operations post the interest payouts would improve meaningfully ,giving room for NFL to expand its sales network, overall sales and allowing room for capex; and ii) the interest coverage (operating EBITDA/gross interest expense) is likely to have improved to 3.5x in FY21 (9MFY21: 3.4x, FY20:2.4x; FY19:2.9x), and could stand at 3.5x-5.0x post FY22.

Continued Government Support Despite Stake Dilution: The GoI holds 74.71% stake in NFL; however, in February 2021, the government announced a 20% stake dilution by way of offer for sale. Tenders for appointment of merchant bankers, legal advisers have already been floated by Department of Investment and Public Asset Management in this regard. However, Ind-Ra believes the GoI would continue to support NFL, as it would remain the majority shareholder and also because the company is a strategically-important entity in the fertiliser sector owing to its size, market share and distribution network. The government had supported NFL earlier by providing capital grants for Ammonia Feedstock Changeover Project at Nangal, Panipat and Bathinda units, for which the final payments were received in FY21. NFL also expects government support for the energy efficiency capex undertaken by the company. NFL is looking at either a relaxation in the energy efficiency norms applicable on the urea plants at Nangal, Panipat and Bhatinda during FY22-FY25 or support in the form of a one-time capital subsidy, which could help it recover its investments.

Liquidity Indicator- Adequate: NFL’s cash and bank balances are estimated to have increased in FYE21 (FY20: INR0.2 billion FYE19: INR0.2 billion), driven by the receipt of subsidies. It had fund-based and non-fund based working capital limits of INR130 billion as of February 2021; however, it has requested banks to reduce the limits under consortium arrangement as a large part of the subsidies have been released. The management expects the subsidy receivables to be INR12 billion-15 billion on an ongoing basis. Of the available limits, NFL's utilisation remained comfortable at 45% for the 12 months ended February 2021, including average CP outstanding of INR45 billion. The utilisation of fund-based limits had reduced substantially to 18% in February 2021, with CP of INR18 billion. NFL has access to low-cost banking finance, and capital markets, due to its sovereign ownership. NFL also uses the letter of credit facility for its imported product portfolio with a credit period of 30-45 days.

NFL has term debt repayments of INR1.4 billion in FY22 and FY23 each. The company’s cash flow from operations turned positive at INR25.2 billion at end-1HFY21 (FY20: negative INR4.8 billion) and is likely to have improved further in 2HFY21, given the decline in receivables. The ongoing energy efficiency capex, estimated at around INR11 billion, is likely to be completed in 1QFY22. Apart from this, NFL does not have any other major capex planned over the medium term; according to the management, the capex would continue to be INR1 billion-2 billion annually. However, NFL has also been nominated as a joint venture partner for setting up a 1.27 MMTPA urea unit in Assam at the facility of Brahmaputra Valley Fertiliser Corporation Limited with an equity contribution of 28%, entailing equity contribution of around INR5 billion-6 billion spread over the construction period. The existing techno-economic feasibility studies of the project are ongoing and the timelines for the start of the project and the capital outlay are yet to be finalised. NFL has requested Department of Investment and Public Asset Management for exemption from payment of dividend in FY21 owing to the capex programme; however, the cash flows would continue to be dependent on the dividend outgo (FY20: INR1 billion, FY19: INR0.6 billion).

Composition of EBITDA Undergoing Change: NFL's business profile has been undergoing a change from FY17, with a steady growth in the share of the trading segment in the company’s profitability.  Nearly 30% of the EBITDA was derived from the trading segment in FY21 against around 8% in FY17. This shift can be attributed to a reduction in energy-savings norms for the urea plant, a decline in the fixed cost applicable on the Vijaipur-I plant, and the absence of commensurate increase in the fixed cost subsidy by the GoI along with an increase in the operating costs in the urea operations. At the same time, the profitability of the trading operations increased on account of higher traded volumes and better per tonne profitability. The sale of traded products increased to 2.1mt in FY21 (FY20:2.1mt) from 0.2mt in FY17, driven by an increase in the urea and non-urea fertilisers segments; urea trading stood at 1.1mt in FY21 (FY20: 1.2mt). 

EBITDA to Moderate: Ind-Ra expects NFL's EBITDA levels to decline over FY21-FY22 (9MFY21: INR6.3 billion (adjusted for INR1.7 billion capital grant), FY20: INR8.5 billion) due to i) tighter energy efficiency norms applicable from 1 October 2020, leading to lower savings from production up to re-assessed capacity (RAC), ii) reduction in the fixed cost reimbursement for Vijaipur I; and iii) moderation in the trading margins per tonne in FY22 from FY21 levels. Ind-Ra estimates the EBITDA from the trading segment to be around INR2.5 billion during 9MFY21 (FY20:INR2.5 billion, FY19:INR1.6 billion), while that from the urea operations is likely to have been around INR3.3 billion (including capital grant) (FY20:INR6.5billion, FY19:INR8.5billion). While FY21 trading margins were higher owing to favourable demand supply situation, inventory gains and healthy market position, the margins earned on the trading remain susceptible to agroclimatic conditions, demand supply situation and the company ability to manage inventory and liquidate the same in a timely fashion.

Ind-Ra expects NFL’s urea operations to report an EBITDA of INR3.5 billion-4 billion during FY22 on a structural basis owing to tightening of the efficiency norms. In addition, the company is likely to derive EBITDA of INR2.5 billion-3.5 billion (before adjusting for un-allocable expense of INR0.5 billion-0.7 billion) from fertiliser trading and other products. Over FY22-FY23, as the new urea plants commence operations, the low margin volume of imported urea traded will decline to nil. However, NFL is likely to pick up similar volumes for marketing from Ramagundam Fertilizers and Chemicals ; therefore,  the traded fertiliser volumes and the contribution of traded urea to the EBITDA levels are unlikely to be impacted.

To manage the energy efficiency norms, NFL incurred a capex of INR11billion during FY20-FY21 to lower the actual energy efficiency to near normative levels. Given the tightening of norms, there remains limited room for recouping the capex incurred on energy efficiency, which could cause deterioration in the leverages. The energy efficiency norms for Nangal, Panipat and Bhatinda have been tightened to 6.5 gcal/t from 7.035/7.503/7.381 gcal/t respectively in 1HFY21 and to 5.5gcal/t for Vijaipur-I from 5.864 gcal/t. Historically, NFL has operated below the normative energy efficiency norms; however, post the revision, Ind-Ra believes the scope for operating below the new norms would remain limited. 


RATING SENSITIVITIES

Positive: Successful completion of the energy-efficiency capex, resulting in the energy consumption falling below normative levels, along with an increase in the operating profitability and improvement in the credit metrics, on a sustained basis, would be positive for the ratings. 

Negative: The company operating above the normative energy efficiency norms, low operating profitability, debt-led capex or investments, leading to the net adjusted leverage (after adjusting the fertiliser subsidy) exceeding 2.5x, on a sustained basis, and/or weakening of support from the government, would be negative for the ratings.


COMPANY PROFILE

Incorporated in 1974, NFL is the second-largest urea manufacturer in India, with a 15.5% market share at FYE18. It operates five urea plants: one in Panipat (0.51mmt), one in Bathinda (0.51mmt), one in Nangal (0.48mmt) and two in Vijaipur (0.86mmt each). The company produced 3.7mmt of urea (115% of reassessed capacity) in FY20.

FINANCIAL SUMMARY

Particulars

9MFY21

FY20

FY19

Net revenue (INR billion)

89.4

131.3

124.3

Operating EBITDA (INR billion)

6.3*

8.5

10.1

Operating EBITDA margin (%)

7.0

6.5

8.2

Gross interest expense (INR billion)

2.4

4.1

3.2

Net income (INR billion)

2.5

(1.7)

3.0

Debt (INR billion)

70.4

81.0

64.6

Source: NFL

* excluding capital grant


RATING HISTORY

Instrument Type

Current Rating/Outlook

Historical Rating/Outlook

Rating Type

Rated Limits (billion)

Rating

24 April 2020

13 November 2019

14 February 2019

Issuer rating

Long-term

-

IND AA-/Stable

IND AA-/Stable

IND AA/Negative

IND AA/Stable

Fund-based working capital

Long-/short-term

INR40

IND AA-/Stable/IND A1+

IND AA-/Stable/IND A1+

IND AA/Negative/IND A1+

IND AA/Stable/IND A1+

Non-fund-based working capital

Short-term

INR20

IND A1+

IND A1+

IND A1+

IND A1+

Long-term loans

Long-term

INR0.57

WD

IND AA-/Stable

IND AA/Negative

IND AA/Stable

CP

Short-term

INR40

IND A1+

IND A1+

IND A1+

IND A1+


COMPLEXITY LEVEL OF INSTRUMENTS

Instrument Type

Complexity Indicator

Fund-based working capital

Low

Non-fund-based working capital

Low

CP

Low

 

 

For details on the complexity levels 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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Analyst Names

  • Primary Analyst

    Bhanu Patni

    Senior Analyst
    India Ratings and Research Pvt Ltd DLF Epitome, Level 16, Building No. 5, Tower B DLF Cyber City, Gurugram Haryana - 122002
    0124 6687276

    Media Relation

    Ankur Dahiya

    Manager – Corporate Communication
    +91 22 40356121