By Ashish Agrawal

India Ratings and Research (Ind-Ra) has upgraded Ramagundam Fertilizers and Chemicals Limited’s (RFCL) Long-Term Issuer Rating to ‘IND A+’ 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

-

-

31 March 2032

INR39.4

IND A+/Stable

Upgraded

Fund-based bank facilities

-

-

-

INR12.67

IND A+/Stable/IND A1

Assigned

Non-fund-based bank facilities

-

-

-

INR4.0

IND A+/Stable/IND A1

Assigned

Long-term loans#

-

-

31 March 2032

INR5.13

IND A+/Stable

Assigned

 

#Long-term loan of INR0.06 billion is unallocated

shut down a day after commissioning due to technical issues, it resumed operations on 8 June 2021; the urea production also began during the second week of June 2021. The upgrade also reflects the Cabinet Committee on Economic Affairs’ approval to incorporate RFCL project under the umbrella of new investment policy (NIP 2012), which ensures a high return on investment for urea manufactured by RFCL.

The upgrade also factors in Ind-Ra’s expectation of i) ramp-up in ammonia and urea production in the near-to-medium term, given the plant has resumed operations and all the initial technical difficulties have been resolved and the production of urea has begun; ii) the drawdown availability of the balance term loan of INR5.07 billion and working capital facilities of
  INR16.67 billion post NIP 2012 approval from the government of India (GoI), Cabinet Committee on Economic Affairs; and iii) a likelihood of inclusion of RFCL under the gas pooling mechanism, which will reduce RCFL’s gas cost and bring it at par with other gas-based urea manufacturers, thereby lowering its working capital requirement. The matter is in the final stages of approval and pending final approval from the Department of Fertilizers, GoI.


KEY RATING DRIVERS

Plant Commissioned in March 2021: RFCL commissioned the urea project in March 2021 with a delay of three months from its revised scheduled commercial operations date (SCOD) of December 2020 due to i) COVID-19 led initial delays of about six months due to the nationwide lockdown and the subsequent lower deployment of labour than the pre-lockdown period; ii) delays in completion of civil contracts, water package, among others; and iii) technical issues faced during pre/post commissioning activities. RFCL’s urea plant had achieved 99.5% mechanical completion in May 2020. Overall, the commissioning date has been deferred by almost 24 months from the initial planned SCOD of March 2019. The commissioning was deferred to December 2019 due to continued pipeline commissioning delays, and water and power connectivity issues, and further to December 2020 due to further gas pipeline delays and COVID-19-led disruptions.


While the project SCOD has been achieved, the company faced a technical shutdown briefly after the SCOD due to boiler and water quality issues. RFCL manufactured ammonia during May 2021 but could not manufacture urea due to the water quality issues. Accordingly, there was no tangible urea production from the plant in April and May 2021. The management has informed Ind-Ra that the plant resumed operations on 8 June 2021 and the production of urea began during the second week of June 2021, with optimum urea production levels likely to be achieved during 9MFY22. Ind-Ra believes with the commencement of urea production and the expected ramp-up in the next few months, RFCL’s liquidity is likely to remain adequate to meet the term loan repayments, which will begin from December 2021. Ind-Ra estimates the possibility of a further plant shutdown to be minimal, as majority of the capex is completed, the technical issues have been resolved and the commencement of production of urea; the majority of the initial delays were due to extraneous factors.

Project Received NIP Deadline Extension:
The project is governed by NIP 2012 for the revival of closed urea units, which stipulated commissioning deadline as 6 October 2019 for the policy to be applicable. However, given the revised SCOD, RFCL exceeded the timeline stipulated by the policy. The company had sought an approval from the Department of Fertilizers for the extension of this deadline. The GoI’s Cabinet Committee has approved this matter on its meeting dated 9 June 2021. While the track record for subsidy dispensation under the policy to RFCL is yet to be seen, Ind-Ra draws comfort from the fact that Chambal Fertilisers and Chemicals Limited is receiving subsidy disbursement under this policy for its new Gadepan III plant. Furthermore, only Chambal Fertiliser Limited’s Gadepan III plant has been commissioned within the stipulated timelines, while three urea plants of Hindustan Urvarak & Rasayan Limited covered under this policy are likely to be commissioned during FY22-FY23, post the commissioning of RFCL’s urea plant. Considering the aforementioned factors, Ind-Ra does not anticipate any issue in subsidy disbursement to RFCL as per the policy.

 

Strong Profile of Sponsors: The ratings continue to factor in the strong credit profile of the key project sponsors - National Fertilizers Limited (NFL; ‘IND AA-’/Stable), Engineers India Limited (EIL) and Gail (India) Limited (GAIL; ‘IND AAA’/Stable). RFCL has received approval for the entire equity requirement to be infused in the same proportion as envisaged at the time of project initiation, of which 26% will be by NFL, 26.0% by EIL,11% by Fertilizer Corporation of India Limited, 11% by the government of Telangana, 14.3% by GAIL and 11.7% by Haldor Topsoe consortium. NFL is the largest government-owned urea manufacturer with five operating plants, while EIL is a leading design and engineering, procurement and construction company owned by the GoI. GAIL is the largest gas pipeline operator and gas supplier in the country.

 

Fully Tied-up Cost Overruns: RFCL has tied up for the additional debt as well as equity requirement on account of cost overruns led by the delay in the SCOD. The project incurred an additional cost of INR10.84 billion, resulting in the revision of the estimated project cost to INR63.38 billion as of March 2021 (original cost estimate: INR52.54 billion). The increase was largely due to higher interest expense incurred during the construction phase, as well as start-up and commissioning costs. At the revised cost estimate, the debt-to-equity ratio improved to 2.35x (3.0x at the initial capital cost), on account of a higher equity contribution towards cost escalation with the final debt of INR44.5 billion and equity of INR18.9 billion.

 

Till March 2021, RFCL had drawn around INR38.9 billion of the term debt and INR16.8 billion of the equity was infused for a capex of around INR58 billion. Furthermore, the balance INR5.07 billion of the term debt will be drawn shortly from the banks. To address the increase in project cost due to the delays, the company received the board approval for additional equity infusion. Of the total approved equity contribution of INR18.9 billion, around INR0.6 billion is pending to be received from the government of Telangana as of June 2021, which the management expects to receive gradually in the next few months. Given the project COD has been achieved, Ind-Ra does not anticipate any further cost escalation. Additionally, NFL and EIL have provided sponsor support undertaking to the lenders to infuse an additional equity into RFCL to meet cost overrun, if required. In line with the revision in the SCOD to December 2020, the scheduled repayments have been deferred to December 2021, considering 12 months of moratorium post the SCOD.

 

Likely Healthy Operating Performance: Ind-Ra expects RFCL to report healthy operating parameters since the project is commissioned, with FY23 likely to be the first full year of operations. At efficiency of 5 gigacalorie/tonne, and reimbursements subject to a floor and ceiling as per the NIP 2012, the agency believes the plant would be able to achieve an EBITDA of around USD145/tonne at 100% capacity utilisation. RFCL could benefit from operating at a better than normative efficiency level of 5 gigacalorie/tonne, which has been observed in newer plants, augmenting its EBITDA generation. Furthermore, Ind-Ra expects the project’s debt service coverage ratio to remain comfortable at above 1.3x over the medium term with a breakeven capacity utilisation factor of 65% for the first year, considering deferred repayment. A lower-than-expected offtake resulting in lower capacity utilisation could be a key risk, resulting in a lower-than-expected debt service coverage ratio and a higher-than-expected leverage.

 

Low Fuel Availability Risk: Based on the energy norm of 5.0 gigacalorie/tonne, RFCL requires 2 million metric standard cubic metres per day (mmscmd) of natural gas as feedstock for urea production. The company has entered into a gas sale and purchase agreement with GAIL for the sourcing of gas. GAIL is supplying imported natural gas to RFCL at a delivered price of USD12.2/metric million british thermal unit (mmbtu). GAIL will supply gas to RFCL on the pooled price (presently USD9/mmbtu) post RFCL’s inclusion in the pooled gas mechanism (likely by 1HFY22), resulting in lower prices. Under the pooling policy, all the urea manufacturing entities operating in the sector receive natural gas at a uniform price, as the higher gas price of any player is reflected in an increased pool price for all players. Thus, gas availability is not a risk. Ind-Ra expects the pooled gas prices to rise with the commissioning of new urea plants, given the pool will witness an increasing proportion of term liquefied natural gas. However, under the NIP 2012 policy, the gas cost increase is a passthrough in the form of a higher subsidy for urea, given the urea subsidy price is linked to the gas price with floor and ceiling of USD305/tonne and USD335/tonne, respectively, at a gas price of USD6.5/mmbtu.

 

Liquidity Indicator - Adequate: RFCL has tied up INR12.7 billion of fund-based and INR4 billion of non-fund-based limits for the plant’s working capital requirements; the management expects this should be available for use to RFCL by end-June 2021. It has term loan repayment obligations of INR1.8 billion and INR3.6 billion in FY22 and FY23, respectively, in addition to regular interest obligations on its debt and creation of a debt service reserve account of one quarter by March 2022. With no further significant capex requirements, Ind-Ra expects the cash flow generation from the plant operations to be sufficient for creating the debt service reserve account  and meeting interest and principal repayment obligations in the near-to-medium term.

 

Furthermore, RFCL’s liquidity would remain dependent on the quantum and timing of the subsidy receipts from the GoI, given 75%-80% of the urea realisation would be by way of subsidy. While the GoI has cleared significant subsidy backlogs for the urea sector, the subsidy allocation to the urea sector would increase further post the commissioning of new urea plants over FY22-FY23. Ind-Ra believes the subsidy payouts to the fertiliser sector to have streamlined post the introduction of the direct benefit transfer and the project will also not have the baggage of legacy receivables as observed in some of the newer plants. However, any shortfall in subsidy provisions and the resultant delays in the receipt of the subsidy could increase the working capital requirement, and thus, would remain a key rating monitorable in the near-to-medium term.

 

Low-to-Moderate Offtake Risk: As per NIP 2012, there is no guaranteed offtake from the plant. Additionally, there was a significant price differential between the imported urea prices of average USD281/tonne during FY21 and the urea price under the policy at USD375/tonne, with pooled gas cost at USD10/mmbtu. This differential could increase with the decline in imports from India in the global market post the commissioning of 7.69mmt of urea plants over FY19-FY23. Thus, the subsidy outgo by the GoI towards these plants could be significant. However, the international urea prices have been increasing over the last few months and have touched historical highs of USD 385/tonne in May 2021, given the increasing international demand. As a result, the differential between the imported urea price and the urea price under NIP 2012 is negligible. Thus, the offtake risk seems to have reduced significantly in the near term. 

Furthermore, Ind-Ra draws comfort from the demand-supply mismatch in India, with annual urea imports of 6-9mmt during FY16-FY21. Ind-Ra expects import substitution to take place as the plant is commissioned. Additionally, the location of the plant would ensure healthy offtake in the local area, as there is only one other plant (a 1.5mmtpa unit in Kakinada) to meet the urea demand for 3.1mmtpa in Andhra Pradesh and Telangana as well as implementation of Kaleshwaram irrigation project in Telangana, which has resulted in a larger irrigated area. RFCL has also signed an agreement with NFL for the marketing of its entire urea output under NFL’s brand name, which reduces marketing risk, given RFCL is a new entity. Also, given the strategic importance of the plant for the GoI in light of the Make in India initiative and the aim of reducing import dependency, the risk of lower offtake is mitigated to a large extent.


RATING SENSITIVITIES

Positive: Healthy offtake and timely receipt of subsidy as per the NIP 2012 coupled with healthy operating performance, while maintaining adequate liquidity on a sustained basis, could result in a positive rating action.

Negative:
Lower-than-expected offtake and delayed receipt of subsidy as per the NIP 2012 coupled with subdued operating performance, resulting in deterioration in liquidity on a sustained basis could result in a negative rating action.


COMPANY PROFILE

Incorporated in February 2015, RFCL is a joint venture company among NFL, EIL and Fertilizer Corporation of India. The company has been incorporated to set up a gas-based urea manufacturing plant in Ramagundam, Telangana. The project involves ammonia and urea capacities of 2,200 metric tonnes per day and 3,850 metric tonnes per day, respectively. RFCL resumed production of urea in June 2021 after declaring project COD in March 2021.

FINANCIAL SUMMARY

 

Particulars

FY21

FY20

Revenue (INR million)

-

-

EBITDA loss (INR million)

551.2

405.9

Loss after tax (INR million)

469.8

381.8

Gross interest coverage (x)

NA

NA

Net adjusted leverage (x)

NA

NA

Source: RFCL, Ind-Ra



RATING HISTORY

Instrument Type

Current Rating/Outlook

Historical Rating/Outlook

Rating Type

Rated Limits (billion)

Rating

23 June 2020

6 May 2019

7 May 2018

Issuer rating

Long-term

-

IND A+/Stable

IND A-/Stable

IND A-/Stable

IND A-/Stable

Term loan

Long-term

INR44.53

IND A+/ Stable

IND A-/Stable

IND A-/Stable

IND A-/Stable

Fund-based bank facilities

Long-term/Short-term

INR12.67

IND A+/ Stable /IND A1

-

-

-

Non-fund-based bank facilities

Long-term/Short-term

INR4.0

IND A+/ Stable /IND A1

-

-

-


COMPLEXITY LEVEL OF INSTRUMENTS

Instrument Type

Complexity Indicator

Term loan

Low

Fund-based bank facilities

Low

Non-fund-based bank facilities

Low

 

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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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