By Aishwarya Arora

India Ratings and Research (Ind-Ra) has revised the Outlook on Rashtriya Chemicals and Fertilizers Limited’s (RCF) to Stable from Negative while affirming its Long-Term Issuer Rating at ‘IND AA’. The instrument-wise rating action is as follows:

Instrument Type

ISIN

Date of Issuance

Coupon Rate

Maturity Date

Size of Issue (billion)

Rating/Outlook

Rating Action

Non-convertible debentures (NCDs)

INE027A07012

August 2020

6.59%

August 2025

INR5

IND AA/Stable

Affirmed; Outlook revised to Stable

Proposed NCDs*

-

-

-

-

INR5

IND AA/Stable

Assigned

* Unallocated

ANALYTICAL APPROACH: To arrive at the ratings, Ind-Ra continues to consider the standalone profile of RCF along with the share of profit from its joint ventures - FACT-RCF Building Products Limited (50% stake), Urvarak Videsh Limited (33.3% stake) and Talcher Fertilizers Limited (33.3% stake). Additionally, Ind-Ra has factored into the ratings the equity commitment required for these joint ventures.

The Outlook revision reflects a higher-than-expected improvement in RCF’s operating and credit profile during FY21, as a result of i) higher core operating EBITDA margin of 8.3% in 9MFY21 (FYE20: 2.5%, FY19: 5%), owing to improved realisation in the non-urea fertilisers segment and the scaling up of the trading business, led by the commencement of trading of Suphala 20:20:0 and other grades of NPK fertilisers; ii) additional EBITDA and revenue contribution after the restart of RCF’s methanol plant and stabilisation of manufacturing operations; and iii) likely sustenance of a marked improvement in the credit metrics in the near to medium term due to a structural change in RCF’s subsidy levels, given the additional INR626 billion fertiliser subsidy in the revised FY21 budget estimate. Ind-Ra expects the said disbursement to clear a significant backlog of the company's subsidy outstanding, free-up significant working capital funds, and thus a decline in the finance costs. It therefore will boost RCF’s profit before tax and the return on equity in the short to medium term.

KEY RATING DRIVERS

EBITDA Margin Improvement in FY21: During 9MFY21, RCF saw an improved EBITDA margin of 8.3% (FYE20: 6%, FYE19: 5%), owing to the following factors i) higher realisations from non-urea fertilizers; ii) higher margins from the trading segment of 12% (9MFY20: 9.5%, FY20: 9.6%) owing to the starting of trading of Suphala 20:20:0 and other NPK products, iii) higher margins from the industrial segments of 15% (9MFY20: negative 2.1%, FY20: negative1.9%), led by the restart of the methanol and ammonia plants in FY21, as well as manufacturing of Isopropyl alcohol hand gel, iv) extension of applicability of tighter gas efficiency norms in Trombay plant. However, the EBITDA was limited by i) lower gas prices which reduced the absolute savings from energy efficiency ii) lower capacity utilisation in Thal plant of 96% (FY20: 102%; FY19: 100%) due to repairs while capacity use at the Trombay plant rose to 103% (96%; 121%). The company expects the production to improve beyond the re-assessed capacity in the short term, given the stabilisation in the Thal plant in 2HFY21.

In FY22, Ind-Ra expects the EBITDA to remain comfortable and supported by i) scaled-up trading operations of higher margin products within non-urea fertilisers; ii) an uptick in revenues from industrial products due to continued production of ammonia and methanol iii) the higher capacity utilisation of both the plants, and iv) an increase in the landed gas prices coupled with firm import parity price of urea, which would result in higher absolute energy savings. However, these benefits would be partially set off by the tightened energy efficiency norms in the Trombay plant. 

 

Policy Level Support to Reduce in Subsidy Receivables Backlog: The extra-ordinary policy level support to the fertiliser sector in the form of additional INR626 billion subsidy is likely to clear the entire subsidy backlog and free-up significant working capital funds in the near to medium term. Only around INR130 billion was due at February 2021 out of the INR1,339 billion declared in the budget for the entire fertiliser sector. This reduced RCF's outstanding fertiliser subsidy to INR21.4 billion in 11MFY21 (9MFY21: INR32.3 billion; FYE20: INR58.1 billion; FYE19: INR41.6 billion). The receivables included government dues of INR2.8 billion (9MFY21: INR1.2 billion; FYE20: INR16 billion; FYE19: nil) for the import of urea on the government's account, which are usually settled within two to three weeks. Ind-Ra thus expects the receivables to remain comfortable at less than two months on an ongoing basis.

 

Gross Debt Declines, Debt-funded Capex to Continue:  The net leverage on an annualised basis for 9MFY21 improved to 4.1x (FYE20: 8.3x; FYE19: 7.8x) and the subsidy adjusted net leverage (annualised) continued to be negative at 0.8x (FYE20: 1.7x; FYE19: 1.6x). This improvement in leverages was due to a decline in the gross debt to INR25.7 billion in 9MFY21 (FYE20: INR48.3 billion; FYE19: INR34.6 billion), led by a decline of working capital debt to INR10.5 billion (INR40.8 billion; INR28.8 billion), owing to the decline in the subsidy receivables outstanding. However, the long-term debt of the company increased to INR15.2 billion in 9MFY21 (FYE20: INR7.4 billion; FYE19: INR5.7 billion). 


The company incurred capex towards the Trombay plant’s energy efficiency improvement of around INR4 billion cumulatively in FY20-FY21 and invested INR3.7 billion was towards the Talcher JV; the company would continue to invest a balance of INR5.2 billion till FY25. The company plans to incur total capex of about INR5 billion in FY22, with INR2.5 billion likely to be invested in Talcher JV, and the balance on expanding storage, renewals and other revamp schemes. These capex plans are likely to be funded in a debt: equity ratio of 70:30. RCF's interest coverage improved to 3.5x in 9MFY21 (FYE20: 2.5x, FY19: 3.2x, FY18: 4.9x), given the improvement in the EBITDA margins as well as lower interest expenses. Despite the additional debt raised for the investments and capex, Ind-Ra expects the credit metrics to remain comfortable for the rating level in the near to medium term, given the continued EBITDA generation and reduction in interest cost due to lower working capital debt.

 

Strong Market Position, Well-diversified Product Profile: RCF is one of the largest producers of urea in India with a market share of 8%-9%. RCF is vertically integrated to produce non-urea fertilisers and other industrial chemicals.  The steady long-term demand for fertilisers, both urea and non-urea, and India’s dependence on import due to the persistent demand-supply gap augur well for RCF’s business. During 9MFY21, the company generated gross operating revenue of INR59.9 billion (FY20: INR96.9 billion; FY19: INR88.8 billion) with fertiliser business (urea and NPK)/industrial chemicals/trading contributing 77%/11%/12% (FY20: 83%/7%/10%; FY19: 85.1%/10.7%/4.2%)

 

Liquidity Indicator - Adequate: The company had outstanding cash and bank balances of INR3.3 billion at end-9MFY21 (FY20: INR21 million; FYE19: INR36 million), and fund-based working capital limits of INR52.6 billion, the utilisation of which stood at 18% for the 12 months ended February 2021. Also, RCF has access to low-cost banking finance, commercial papers, and has strong financial flexibility. Also, the working capital cycle shortened to 175 days as on 9MFY21 (FY20: 231 days; FY19: 209 days), due to a decline in the receivables to INR37.3 billion (including the government receivable for import of urea; INR61.5 billion; INR45.5 billion), and a reduction in inventory to INR8.7 billion (INR9.5 billion; INR14.8 billion). However, this impact was partially offset by a decline in payables to INR10.1 billion in 9MFY21 (FY20: INR11.6 billion; FY19: INR13.4 billion). The company has scheduled term debt repayments of INR1.7 billion in FY22. Ind-Ra expects the liquidity profile to remain comfortable in the near to medium term albeit with a dependency on timely subsidy receipts.  RCF did not avail the Reserve Bank of India-prescribed debt moratorium for its bank loans. 

 

Government's Stake Dilution to be Neutral for Linkages: The government holds 75% in RCF, however the same would reduce to 65%, with the government announcing a 10% stake dilution by way of an offer for sale. However, the company continues to see the support of government by way of subsidy disbursement, and Ind-Ra does not expect any changes in its operations or its linkages with the government otherwise in the medium to long term. Ind-Ra believes the support from the government to continue as the majority shareholder and the strategic importance of the company continues owing to its size, market share and distribution network. 

Contingent Liability Remains a Risk: 
To mop-up unintended gains made by fertiliser units in producing nitrogen using of domestic gas retrospectively from FY10, the Department of Fertiliser (DoF) had withheld subsidy worth INR1.99 billion from RCF. The matter is pending with an inter-ministerial committee of the government. However, the DoF released the withheld subsidy in full at end-FY20, against a bank guarantee of an equivalent amount. With the matter being largely settled at DoF level and guidelines being issued for recovery of unintended benefits, the DoF released the bank guarantees in FY21. However, as per the Ministry of Petroleum and Natural Gas directives, GAIL (India) Limited (‘IND AAA’/Stable) has retrospectively demanded a higher gas price (i.e. highest rate of RLNG used for production of urea) for the administrative price mechanism/domestic gas used in non-fertiliser/non-urea operations. For the quantities of gas consumed in non-urea operations effective from 1 June 2015 (from when gas pooling became applicable for urea),

RCF has recognised the liability on its books and made a provision of INR2.1 billion over 2QFY16-FYE20. GAIL, has sought a differential levy of INR14.5 billion over 1 July 2006-30 June -2019. RCF has represented the matter to the DoF, and this matter is also pending
 for arbitration. The management expects a favourable outcome for the same. Ind-Ra will continue to monitor the above issues and believes that any negative outcome would impact the credit profile of the entity.


RATING SENSITIVITIES

Positive: An increased diversification with a greater share of revenue and profitability coming from non-urea manufacturing operations, while sustaining the improvement in credit metrics and continued adequate liquidity, could 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 sovereign support, leading to the net adjusted leverage exceeding 1x on a sustained basis, after adjusting for the fertiliser subsidy, would be negative for the ratings.


COMPANY PROFILE

RCF operates two urea plants, one each at Thal (Raigad) and Trombay (Mumbai) with a capacity of 1.7mmtpa and 0.33mmtpa, respectively. The plants are vertically integrated to produce non-urea fertilisers and industrial chemicals.

FINANCIAL SUMMARY

Particulars

9MFY21

FY20

FY19

Revenue (INR billion)

59.9

96.98

88.9

EBITDA (INR billion)

4.99

5.8

4.4

EBITDA margin (%)

8.3

6.0

5.0

Gross interest expense (INR billion)

1.4

2.4

1.6

Debt (INR billion)

25.7

48.3

34.6

Source: Ind-Ra, RCF



RATING HISTORY

Instrument Type

Current Rating/Outlook

Historical Rating/Outlook

Rating Type

Rated Limits (billion)

Rating

15 October 2020

20 November 2019

5 April 2018

Issuer rating

Long-term

-

IND AA/Stable

IND AA/Negative

IND AA/Negative

IND AA/Stable

NCDs

Long-term

INR10

IND AA/Stable

IND AA/Negative

Provisional IND AA/Negative

Provisional IND AA/Stable



COMPLEXITY LEVEL OF INSTRUMENTS

Instrument Type

Complexity Indicator

NCDs

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

    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