By Aishwarya Arora

India Ratings and Research (Ind-Ra) has revised Kribhco Fertilizers Limited’s (KFL) Outlook to Positive from Stable while affirming its Long-Term Issuer Rating at ‘IND AA-’. The instrument-wise rating action is given below:

Instrument Type

Date of Issuance

Coupon Rate

Maturity Date

Size of Issue (billion)

Rating

Rating Action

Commercial paper (CP)

-

-

Up to 364 days

INR6

IND A1+

Affirmed

Commercial Paper (CP)

-

-

Up to 364 days

INR 2

WD

Withdrawn (the company did not proceed with the instrument as envisaged)

ANALYTICAL APPROACH: To arrive at the ratings, Ind-Ra continues to factor in KFL’s strong legal, operational and strategic linkages with its 100% parent, Krishak Bharati Co-Operative Limited (KRIBHCO).

The Positive Outlook reflects Ind-Ra’s expectation of an improvement in KFL’s profitability in FY22 due to i) completion of capex for improving gas consumption in FY21, and ii) likely completion of railway siding capex by FY22, which would reduce under recovery of freight costs from FY23. The outlook revision also reflects the agency’s expectation of a sustainable improvement in KFL’s and KRIBHCO’s credit metrics starting FY21, led by a structural reduction in subsidy levels, given the additional INR626 billion fertiliser subsidy disbursed in the revised FY21 budget. The disbursement cleared a significant backlog of subsidy outstanding for both the entities, leading to a significant decline in interest burden on account of lowering of working capital borrowings.

KEY RATING DRIVERS

Significant Decline in Subsidy Receivables: The government of India (GoI) has provided an 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 has resulted in clearing of the sector’s almost entire subsidy backlog and freeing up of significant working capital funds. A large portion of the outstanding dues has been cleared on the back of a large budget of INR1,339 billion declared for the entire fertiliser sector. As a result, the consolidated subsidy receivables for KRIBHCO and KFL reduced to INR20.28 billion at FYE21 (FYE20: INR60 billion, FYE19: INR61.45 billion), leading to a decline in the working capital borrowings to INR16.23 billion (INR50.65 billion, INR46.78 billion) and INR3.77 billion (INR17.27 billion, INR15.83 billion), respectively. Given the backlog clearance and the subsidy pay-out mechanism through direct benefit transfer, Ind-Ra expects the receivables to remain comfortable below two months on an ongoing basis.


EBITDA to Improve in FY22 led by Energy Savings: KFL’s energy efficiency remained robust at around 5.3Gigacalorie/tonne (GCal/t) in FY21, leading to continued savings during the year, owing to the tightening of the normative energy norm at 5.5Gcal/t by the Department of Fertilizers (DOF) effective 1 October 2020. KFL expects to further reduce its energy consumption to around 5.15 Gcal/t in FY22 and improve the energy savings to around 0.35 GCal/t in FY22 (FY21: 0.14Gcal/t; FY20:0.18Gcal/t), given FY22 will be the first full year of operations post the completion of capex in May 2021. This, coupled with an increase in the pooled gas prices to around USD11/metric million british thermal unit (mmbtu; FY21: USD9.5/mmbtu), is likely to result in gas efficiency savings of INR0.85 billion-0.90 billion for KFL during FY22, contingent upon the company’s ability to have lower-than-normative energy efficiency norms, pooled gas prices and exchange rates.


Furthermore, the completion of the railway siding capex by beginning of 4QFY22, would lead to a fall in the under-recovery of freight costs by around INR250/t, leading to an improvement in the EBITDA by INR250 million-300 million by FY23 Thus,  Ind-Ra expects KFL’s EBITDA to improve to INR2 billion-INR2.2 billion in FY22. KFL’s revenue declined to INR21.6 billion in FY21 (FY20: INR24.8 billion), largely owing to a decline in landed gas cost and a marginal decline in gas efficiency savings. Consequently, the operating EBITDA fell to INR1.7 billion in FY21 (FY20: INR1.8 billion). KFL recovered INR79 million from insurance companies in FY21 on account of the loss of production, which has been accounted in other income. Adjusted for the same, the EBITDA decline is marginal at INR77 million in FY21.


Improvement in Standalone Credit Metrics: KFL’s net leverage (net debt/operating EBITDAR) improved to 5.7x in FY21 (FY20: 11.9x, FY19: 10.6x) due to a decline in the gross debt to INR9.7 billion (INR22.6 billion, INR20.8 billion), owing to the decline in the subsidy receivables to INR4.1 billion (INR16.2 billion, INR15.4 billion). However, the subsidy adjusted net leverage (net debt less subsidy)/operating EBITDA) increased marginally to 3.3x in FY21 (FY20: 2.8x, FY19: 2.7x), given a marginal increase in long-term debt on account of the ongoing capex. The company expects to incur capex of INR1.5 billion during FY22 towards completion of railway siding, and building additional ammonia tank. This capex is likely to be funded by a mix of internal accruals and debt. KFL’s interest coverage (operating EBITDAR/gross interest expense) improved to 1.75x in FY21 (FY20: 1.42x, FY19: 1.48x), led by a decrease in interest cost due to the reduction in debt.

 

Ind-Ra expects KFL’s leverage to remain stable in FY22 on the back of a likely improvement in the EBITDA, which will offset the marginal increase in the long-term debt owing to the additional capex. However,  the interest coverage is expected to improve further to 2.5x-3.0x in FY22, given the likely improvement in EBITDA and sustenance of subsidy payouts to remain restricted to two-to-three months.

 

KRIBHCO’s borrowings also declined owing to a decline in the subsidy receivables to around INR16.2 billion in FY21 (FY20: INR43.8 billion). Its net leverage  improved significantly to 1.6x in FY21 (FY20: 9.9x) on account of the lower debt and an improvement in the EBITDA. The net leverage adjusted for subsidy turned negative in FY21 (FY20: 1.1x), owing to the decline in the short-term debt. KRIBHCO’s interest coverage improved  to 2.97x in FY21 (FY20: 1.7x) due to the increase in EBITDA and a decline in finance costs. KRIBHCO’s entire debt is in the form of short-term debt, which has been raised largely to fund the subsidy receivables from the GoI.

Continued Strong Linkages with Parent: 
KRIBHCO holds 100% stake in KFL since April 2016, after acquiring a 15% stake in KFL from STL Fertilizers Private Limited. KFL is strategically important to KRIBHCO as both companies operate in the same line of business. KFL accounts 28.6% of the consolidated urea manufacturing capacity of KRIBHCO. The parent has complete marketing rights over KFL’s urea production, therefore KFL benefits from the large distribution network of its parent. All bank facilities of KFL (except special banking arrangement loans which are secured by GoI receivables) are secured by unconditional and irrevocable corporate guarantees of KRIBHCO. Moreover, KFL’s directors are nominated by KRIBHCO. Ind-Ra expects the linkages between KRIBHCO and KFL to remain strong.

Decline in KRIBHCO’s Trading Margins to Be Offset by OMIFCO:
KRIBHCO’s revenue declined to INR94.9 billion in FY21 (FY20: INR99.9 billion), largely driven by an increase in soft gas prices. However, KRIBHCO’s EBITDA increased 9% yoy to INR5.5 billion in FY21, owing to an improvement in trading margins of di-ammonium phosphate (DAP) and nitrogen, phosphorus and potassium fertilizers. However, KRIBHCO’s urea manufacturing profitability reduced by around INR1 billion FY20 onwards, post a reduction in the fixed costs up to reassessed capacity to INR1,834/t as per the DOF’s notification in March 2020. Earlier, KRIBHCO was booking a minimum fixed cost of INR2,300/t effective 2 April 2014, the date from which the Modified New Pricing Scheme (NPS)-III policy was notified. Since the policy was retrospective, KRIBHCO witnessed a clawback of the subsidy booked of INR5.6 billion up to FY19 during FY20 as an exceptional loss, leading to a loss before tax of INR1.8 billion.

Ind-Ra expects KRIBHCO’s EBITDA to decline in FY22, given a likely decline in margins from the trading portfolio, owing to increasing DAP international prices. The company is restricted in the margins it can earn on DAP trading, given the subsidy and retail prices of DAP being fixed by the DOF. However, Ind-Ra expects the cash flows to remain largely stable as the reduction in margins is likely to be offset by receipt of dividends from Oman India Fertiliser Company S.A.O.C (OMIFCO; 25% stake held by KRIBHCO). KRIBHCO received dividends worth INR2.3 billion from OMIFCO during FY21 (FY20: INR0.97 billion). OMIFCO’s contract with the GoI for the sale of urea to India at a discounted price ended in July 2020, post which OMIFCO has been able to realise market prices, thus increasing its profitability. Consequently, the dividends received by KRIBHCO are likely to increase meaningfully in FY22, given the benefit of selling at market prices being realised for the full year, and the current increase in international urea prices. The same would largely offset the decline in the profitability from the trading operations.

Liquidity Indicator - Adequate
: KFL’s average utilisation of the fund-based working capital limits of INR29.95 billion was 28% for the 12 months ended June2021. The company’s cash balances stood at INR38 million at FYE21 (FYE20: INR1.4 billion). Also, KFL has access to low-cost banking finance and CPs, and has a strong financial flexibility. The cash flow from operations (after interest expense) surged to INR13.2 billion in FY21 (FY20: INR189 million), owing to a reduction in the subsidy receivables outstanding. KFL has an estimated capex of INR1.5 billion in FY22. Apart from this, KFL does not have any other major capex planned over the medium term. According to the management, the capex would mainly be towards maintenance capex of about INR350 million annually. As per the management, KFL may also look for an expansion in the sector with the support of its parent, however, the plans are not finalised yet. The company has scheduled term debt repayments of INR0.6 billion and INR0.94 billion in FY22 and FY23, respectively. Since the repayments are high, the company is likely to refinance a portion of the repayments during FY23-FY24 as done in the past.

KRIBHCO’s cash balances stood at INR7.7 billion at FYE21 (FYE20: INR 1.05 billion). The parent’s cash flow from operations turned positive to INR39.3 billion in FY21 (FY20: negative INR1.09 billion), led by the reduction in the subsidy receivables. As a result, the working capital cycle also improved to 62 days in FY21 (FY20: 160 days).


RATING SENSITIVITIES

Positive: An improvement in the operating performance and/or sustained improvement in the subsidy mechanism, leading to lower working capital debt and interest costs, resulting in an improvement in the credit metrics, all on a sustained basis, will be positive for the ratings. 

Negative:
  Any unfavourable changes in the fertiliser subsidy policy and/or large unexpected debt-led capex leading to deterioration in the credit metrics on a sustained basis and/or any weakening of the linkages with the parent will be negative for ratings.


COMPANY PROFILE

KFL operates a 0.86 million tonne per annum urea, natural gas-based plant in the Shahjahanpur district of Uttar Pradesh. 

KRIBHCO, set up in 1980, is registered under the Multi-State Cooperative Societies Act. The society produces urea, bio-fertilisers and hybrid seeds at its manufacturing facility in Hazira (Surat). KRIBHCO operates a natural gas-based urea plant having a capacity of  2.2 million tonnes per annum in Hazira, Gujarat.

KFL and KRIBHCO, on a consolidated basis, reported revenue of INR116.5 billion in FY21 (FY20: INR124.7 billion) and EBITDA of INR7.2 billion (INR6.8 billion). The interest coverage improved to 2.5x in FY21 (FY20: 1.6x) and the net leverage improved to 2.5x (10.4x). The debt stood at INR26 billion at FYE21 (FYE20: INR73.2 billion), whereas the subsidy receivables amounted to about INR20.3 billion (INR60 billion).

FINANCIAL SUMMARY

Particulars

FY21

FY20

Revenue (INR billion)

21.6

24.7

Operating EBITDA (INR billion)

1.7

1.78

EBITDA margin (%)

7.9

7.1

Gross interest expense (INR billion)

0.98

1.26

Interest Coverage (x)

1.75

1.42

Net Leverage (x)

5.7

11.9

Source: KFL, Ind-Ra



RATING HISTORY

Instrument Type

Current Rating/Outlook

Historical Rating/Outlook

Rating Type

Rated Limits (billion)

Rating

15 July 2020

15 July 2019

11 July 2018

5 April 2018

Issuer rating

Long-term

-

IND AA-/Positive

IND AA-/Stable

IND AA-/Stable

IND AA-/Stable

IND AA-/Stable

CP

Short-term

INR6

IND A1+

IND A1+

IND A1+

IND A1+

IND A1+


COMPLEXITY LEVEL OF INSTRUMENTS

Instrument Name

Instrument complexity

CP

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

    Aishwarya Arora

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

    Ankur Dahiya

    Manager – Corporate Communication
    +91 22 40356121