By Aishwarya Arora

India Ratings and Research (Ind-Ra) has upgraded Fertilisers and Chemicals Travancore Limited’s (FACT) Long-Term Issuer Rating to ‘IND BBB+’ from ‘IND BBB’. The Outlook is Positive. The instrument-wise rating actions are given below:

Instrument Type

Date of Issuance

Coupon Rate

Maturity Date

Size of Issue (billion)

Rating/Outlook

Rating Action

Non-fund based working capital

-

-

-

INR2 (reduced from INR3)

IND BBB+/Positive/ IND A2

Upgraded


Analytical Approach: Ind-Ra continues to take a bottom-up rating approach to arrive at the ratings of FACT, and has notched up the ratings on account of the availability of strong and continued financial support from the government of India (GoI; holds 90% stake in FACT).

 

The upgrade factors in the improvement in FACT’s credit profile in FY21, led by i) an improvement in the core operating performance, with the EBITDA increasing to INR5.5 billion (FYE20: INR2.8 billion), supported by continued healthy capacity utilisation of 129% (124%) of its two major products factamfos and ammonium sulphate; ii) the timely tie-ups for the supply of natural gas and other raw materials, resulting in a strong visibility of continued operations; and iii) an improvement in the credit metrics (net leverage adjusted for subsidy improved to 0.8x (2.43x) and interest coverage (excluding GoI interest to 87.3x (5.6x)), owing to an improvement in the EBITDA and the structural reduction in the subsidy receivables outstanding to INR2.3 billion (INR5.3 billion), leading to a significant improvement in the fund flow from operations to INR5.6 billion (INR2.6 billion) and an improvement in the liquidity position. 

The Positive Outlook reflects Ind-Ra’s expectation of a continued improvement in FACT’s operating performance in FY22, coupled with a tangible improvement in its credit profile and capital structure, due to the likelihood of it receiving an approval for the restructuring of outstanding government loans (FYE21: INR17.7 billion) and the accrued interest (INR9.56 billion) during the remainder of FY22.

KEY RATING DRIVERS

Improved Operating Performance in FY21: In FY21, FACT’s plants saw an improvement in capacity utilisation for both the company’s major products, factamfos and ammonium sulphate, with their utilisation increasing to 136% and 109%, respectively (FYE20:133%, 98%). This, along with the soft raw material prices, led to an improvement in the absorption of fixed costs, resulting in improved EBITDA margins of 17% in FY21 (FY20: 10%; FY19: 0.5%). The absolute EBITDA improved significantly to INR5.5 billion in FY21 (FY20: INR2.8 billion; FY19: INR94 million). While Ind-Ra expects the margins to see some contraction over the near term, owing to the rising prices of key raw materials, the EBITDA is likely to remain comfortable for the rating level. FACT has tied up for undertaking an efficiency improvement project worth INR1.5 billion, which should uplift the EBITDA generation over the short-to-medium term. Moreover, FACT expects to restart its caprolactum facility in August 2021 and achieve sales of nearly 15,000 tonnes during FY22, which should aid the EBITDA further. The EBITDA will continue to depend on the company's ability to set the right price for its products, the monsoons, forex fluctuations and the policy environment; therefore, the sustained profitability of the business will be a key monitorable.

FACT’s overall operating performance is likely to remain healthy in FY22 as the company has been able to tie-up the required supply for regasified liquefied natural gas (RLNG), rock phosphate and phosphoric acid, which are the key inputs for the manufacturing of factamos and ammonium sulphate. 

Shortened Working Capital Cycle: The 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 the sector’s almost entire subsidy backlog and freeing up 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 subsidy receivables for FACT reduced to INR2.3 billion at FYE21 (FYE20: INR5.3 billion). This led to a decline in the overall trade receivables to INR2.4 billion at FYE21 (FYE20: INR5.4 billion). With the inventory reducing to INR5.2 billion in FY21 (FY20: INR5.6 billion) and the payables increasing to INR3.7 billion (INR2.1 billion); the overall working capital cycle shortened to 80 days (168 days, 200 days). although the current rising commodity pricing scenario could elevate the overall working capital requirements over the near term, Ind-Ra expects the receivables to remain comfortable around two months on an ongoing basis, given the backlog clearance and the subsidy pay-out mechanism through direct benefit transfer.

Improvement in Credit Metrics: The net leverage on external debt (net external debt/operating EBITDAR) continued to be negative in FY21 and the interest coverage (operating EBITDAR/cash interest paid) improved to 87.3x (FY20: 5.6x), led by an increase in the EBITDA and a reduction in the interest expenses (FY21: INR63 million; FY20: INR503 million). Ind-Ra expects FACT’s credit metrics to remain comfortable in FY22, led by a sustained operating performance and low reliance on external debt. At FYE21, the company had an external debt from a related entity of INR0.20 billion from Rashtriya Chemicals and Fertilizers Ltd. (‘IND AA'/Stable). 
Including the government debt of INR17.7 billion, FACT’s net adjusted leverage (net debt adjusted for subsidy receivables /EBITDA) improved to 0.8x in FY21 (FY20: 2.5x; FY19: 187x) and the interest coverage (EBITDA/gross interest expense) improved to 2.25x (0.96x,0.03x).

Liquidity Indicator - Adequate: FACT  has been placing a 100% lien on cash for providing bank guarantees and letters of credit, and not utilising its sanctioned non-fund-based limits from banks. The company had a total cash and cash equivalents of INR16.6 billion at FYE21 (FYE20: INR6.2 billion), including the lien on cash of INR5.2 billion (INR1 billion).

The improvement in the EBITDA and the structural reduction of subsidy receivables led to the cash flow from operations  improving to INR10.3 billion in FY21 (FY20: INR2.2 billion). The company continues to have nil tax pay-out, given the large accumulated cash losses and a negative net-worth of INR1.8 billion. However, Ind-Ra expects the networth to turn positive in FY22, given the continued healthy operations and profit after tax generation by the company (FY21: INR3.5 billion; FY20: INR9.8 billion).

Ind-Ra expects the liquidity profile to be maintained over the short term, given the high cash balances and the continued healthy EBITDA margins. Additionally, the company has 1,498.97 acres of land parcel that can be sold to support its liquidity. Furthermore, FACT’s liquidity position will remain dependent on the timeliness of the finalisation of the restructuring package, the timeliness of subsidy receivables from the GoI, and its ability to sustain the improvement in operations. FACT has a scheduled external term debt repayment of INR51 million during FY22 and FY23 each, thus providing a  robust debt service coverage ratio on the external debt (FY21: 48.3x; FY20: 5.6x). Furthermore, the cost of banking finance is high for FACT, owing to its negative net worth, and the company has limited access to the capital markets. Given the government debt of INR27 billion, including accrued interest becomes due in FYE22, Ind-Ra believes the GoI will continue to provide support to the entity by way of the relaxation of terms of the loan or an acceptance of the restructuring proposal submitted by FACT.

Continued Government Support and Financial Restructuring Key for Future: Ind-Ra continues to assess the linkages between FACT and the GoI and considers them to be strong. The company had a loan of INR17.7 billion at FYE21 (FYE20: INR17.7 billion) outstanding from the GoI. Additionally, the interest accrued on the same stood at INR9.56 billion (INR7.17 billion). Ind-Ra has considered these funds to be an extension of support from the GoI, as FACT has not been paying interest on the same. The principle and the interest accrued become due for payment in FYE22. However, the statutory auditors have classified this interest as interest accrued and due and consider it as non-payment of timely interest towards the GoI.

The management has submitted a restructuring proposal to the GoI to i) waive off the interest dues of INR14.43 billion, ii) convert the old GoI loan of INR2.83 billion into equity, and iii) convert the GoI loan of INR10 billion into an interest-free loan that would be repayable in 10 yearly instalments from FY23. According to the management, the proposal is under active consideration by the GoI, with the proposal recommended by NITI Aayog and the Ministry of Fertilizers for approval. Ind-Ra believes the outcome of the restructuring package remains a key monitorable. While arriving at the ratings, Ind-Ra has assumed that the liability of INR10 billion will remain on the books of the company in the form of interest-free loans repayable post FY23 from the GoI. The management does not expect any outflows towards the outstanding government loan in FY22. Ind-Ra believes the GoI would continue to support the company, as the entity has demonstrated an operational turnaround. 

Capex to Improve Efficiency and Enhance Capacity Delayed: FACT had plans to undertake a capex of INR6 billion over FY21-FY23, with INR1.5 billion to be directed towards the debottlenecking of plants and an expansion of their storage facilities, and the balance INR4.5 billon being utilised for the capacity expansion of the factamos plant by 1,000 tonnes per day (tpd) to 3,000tpd day in the Cochin division. The company intends to fund the entire capex out of the internal accruals and the cash balances, with the funds received through land sale in FY20, earmarked for the same. Owing to COVID-19-led disruptions, the company did not incur any expenses towards the planned capex during FY21. However, the company has tied-up for the same, and the expenditure is now likely to be completed by FYE24. The management does not expect any further delays. Ind-Ra expects the credit metrics of the company to improve meaningfully post the capex.

Strong Brand Name in South India: FACT has a strong brand recall of its key product factamfos in southern India, with  a market share of more than 60% of the nitrogen, phosphoric acid, potassium and sulphur (NPKS) fertiliser sold in Kerala and about  9.8% of NPKS sold in India during FY21. The company has two manufacturing plants in Kerala - in Udyogmandalam and Cochin - and produced 0.86 million metric tonnes (mmt) of factamfos during FY21 (FY20: 0.84 mmt). It has access to over 6,250 dealers across southern India.


RATING SENSITIVITIES

Positive: Any favourable movement in the debt restructuring coupled with a sustained improvement in the operating efficiency, leading to an improvement in the EBITDA and the credit metrics, all on a sustained basis, could lead to a positive rating action.

Outlook Revision to Stable: Any deterioration in the operating performance and/or liquidity, along with any larger-than-expected debt-funded capex and/or any weakening of support from the GoI, leading to a further decline in the credit metrics will be negative for the ratings.


COMPANY PROFILE

Established in 1943, FACT started commercial production of ammonium sulphate in 1947 in Udyogmandal. It has an installed capacity of 0.63mmt  of factamfos (20:20:0:13) and 0.23mmt of ammonium sulphate. FACT became a Kerala State Public Sector Enterprise on 15 August 1960, and the GoI became the largest shareholder on 21 November 1962. FACT set up a 50,000-tonne–per-annum caprolactam plant in Udyogamandal in 1990.  The Cochin Division of FACT was set up in 1973.

FINANCIAL SUMMARY

Particulars (INR billion)

1QFY21

FY21

FY20

Net revenue

7.4

32.6

27.7

EBITDA

0.8

5.5

2.8

EBITDA (%)

11

17

10.1

Interest

0.6

2.5

2.9

Profit after tax

0.4

3.5

9.8

Source: FACT, Ind-Ra

 



RATING HISTORY

Instrument Type

Current Rating/Outlook

Historical Rating/Outlook

Rating Type

Rated Limits (billion)

Rating

    3     August 2020

6 November 2019

Issuer rating

Long-term

-

IND BBB+/Positive

IND BBB/Stable

IND BB+/Stable

Non-fund-based limits

Long-/short-term

INR2

IND BBB+/Positive/ IND A2

IND BBB/Stable/IND A3+

IND BB+/Stable/IND A4+



COMPLEXITY LEVEL OF INSTRUMENTS

Instrument Type

Complexity

Non-fund-based limits

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.

ABOUT INDIA RATINGS AND RESEARCH

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. 

Ind-Ra currently maintains coverage of corporate issuers, financial institutions (including banks and insurance companies), finance and leasing companies, managed funds, urban local bodies and project finance companies. 

Headquartered in Mumbai, Ind-Ra has seven branch offices located in Ahmedabad, Bengaluru, Chennai, Delhi, Hyderabad, Kolkata and Pune. Ind-Ra is recognised by the Securities and Exchange Board of India, the Reserve Bank of India and National Housing Bank. 

India Ratings is a 100% owned subsidiary of the Fitch Group.

For more information, visit www.indiaratings.co.in.

DISCLAIMER

ALL CREDIT RATINGS ASSIGNED BY INDIA RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTPS://WWW.INDIARATINGS.CO.IN/RATING-DEFINITIONS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE WWW.INDIARATINGS.CO.IN. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. INDIA RATINGS’ CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE.

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
    124 6687246

    Media Relation

    Ankur Dahiya

    Manager – Corporate Communication
    +91 22 40356121