By Nitin Bansal

India Ratings and Research (Ind-Ra) has upgraded the Southern Petrochemical Industries Corporation Limited’s (SPIC) Long-term Issuer Rating to ‘IND BBB+’ from ‘IND BBB’ with a Stable Outlook. The instrument-wise rating actions are given below:

Instrument Type

Date of Issuance

Coupon Rate

Maturity Date

Size of Issue (million)

Rating/Outlook

Rating Action

Fund-based working capital limits^

-

-

-

INR700 (increased from INR200)

IND BBB+/Stable /IND A2

Upgraded

Proposed working capital limits *

-

-

-

INR4,800)

IND BBB+/Stable /IND A2

Assigned

Proposed working capital limits #

 

 

 

INR1,420

IND BBB+/Stable /IND A2

Assigned

Term loan

-

-

February 2022

INR80

IND BBB+/Stable

Assigned

* The provisional rating of the proposed working capital facilities has been converted to final rating as per Ind-Ra’s updated policy as the general terms and conditions of the proposed facilities are likely to be the same. 
# Amount is unallocated.

The upgrade reflects a likely improvement in SPIC’s EBITDA in FY22, given the likely increase in gas efficiency related savings due to the revised normative gas efficiency norms being applicable for the entity from March 2021. The revised norms are applicable as SPIC has started gas-based production post gas pipeline connectivity to the plant got completed in March 2021. The upgrade also reflects Ind-Ra’s expectation of a sustainable reduction in SPIC’s subsidy receivable levels, given the backlog clearance by the government, which would improve liquidity and reduce the reliance on external borrowings.

KEY RATING DRIVERS

Gas Pipeline Connectivity Complete:  As per a Department of Fertilizer notification dated 17 June 2015, SPIC is one of the three plants allowed to operate on naphtha on existing provisions till the plant receives an assured supply of gas. SPIC’s plant is connected to the Ramanathpuram-Tuticorin Gas Pipeline from 13 March 2021 wherein gas is being made available through Oil and Natural Gas Corporation Limited (ONGC, ‘IND AAA/Stable’) gas fields under a supply agreement for 0.9  million standard cubic meters per day (mmscmd). The pipeline is a part of the overall Ennore-Tuticorin Gas pipeline project being executed by Indian Oil Corporation Ltd  (‘IND AAA’/Stable). SPIC is receiving around 0.6mmscmd of its total requirement of 1.5mmscmd of gas. Management expects the volumes to improve in 2HFY22 from ONGC gas fields, however the availability to fulfil 100% requirement will improve only post the entire pipeline construction is complete with RLNG being made available through the Ennore terminal. Till such time, SPIC is allowed to partly manufacture urea from naphtha.

 

Revision in Energy Efficiency to Improve Profitability: As per the New Urea Policy 2015, SPIC would be allowed the normative gas efficiency of 7.382Gcal/t for five years from FY22-FY26 post connectivity to the gas pipeline. SPIC actual efficiency reduced to 6.42Gcal/t in FY21 (FY20: 6.97Gcal/t) and the management expects to reduce it to around 5.8Gcal/t by 4QFY22, given the company has switched to gas along with likely completion of energy efficiency capex in 3QFY22. Given the difference between the normative and actual efficiency is likely to increase to 1.1-1.3Gcal/t in FY22 (FY21: 0.04Gcal/t, FY20: 0.21Gcal/t), Ind-Ra estimates the EBITDA to improve to INR1.4 billion-1.6 billion for the year (1QFY22: INR0.43 billion, FY21: INR0.7 billion, FY20: INR1.12 billion). The profitability would further be supported by i) eligibility for an additional fixed cost reimbursement of INR150/t, given the plant is now using gas and is also eligible to produce urea beyond the reassessed capacity, ii) a likely reduction in forex losses as the import of naphtha would reduce and gas cost reimbursement is based on the actual payment for pooled gas price including currency conversion. SPIC incurred some under-recovery in 1QFY22 due to the high cost of naphtha; however, the same has been offset largely due to the increase in efficiency savings. 

The profitability would see a further boost post conversion to an entire gas-based plant as the gas cost remains a pass through and subsidy would be covered under the pooled gas subsidy mechanism. However, given the delays in gas pipeline projects, the RLNG availability to the plant could take slightly longer and till such time the plant would continue its operations on part naphtha and part natural gas. 

Significant Decline in Subsidy Receivables
: The government 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. Also, a large portion of the outstanding dues has been cleared on the back of the large budget of INR1,339 billion declared for the entire fertiliser sector. As a result, the subsidy receivables for SPIC reduced to INR2.2 billion at FYE21 (FYE20: INR10.9 billion, FYE19: INR10.5 billion). Ind-Ra expects the receivables to remain comfortable below two months on an ongoing basis, given the backlog clearance and the subsidy pay-out mechanism through the direct benefit transfer.

High Trade Payables, Borrowings Likely to Increase:
Historically, SPIC’s trade payables have remained high, given the inadequate bank lines to support the high subsidy receivables and capex for the gas plant conversion and improvement in efficiency. During FY21, the trade payables declined to INR9.7 billion (FY20: INR11.8 billion, FY19: INR12.1 billion), however it was not in line with the decline in receivables by INR8.7 billion. SPIC utilised the remaining cash flows in FY21 for reducing its borrowings (by INR3 billion), increasing inventory (by INR2 billion) and for capex (by INR1.7 billion). Since the capex of around INR4.6 billion over FY18-FY21 was funded through internal accruals, the reliance on external borrowings reduced to INR0.6 billion in FY21 (FY20: INR2.3 billion). 

The management has confirmed the outstanding trade payables are not interest bearing in nature, however Ind-Ra believes SPIC’s liquidity may come under pressure considering the payables are not directly from related parties. As per related-party disclosures, SPIC’s payables to related parties declined to INR683 million in FY21 (7% of total payables; FY20: INR1,839 million, 16%); the balance payables consist of other domestic/international traders of naphtha. Since the reliance on import of raw material is declining from beginning FY22, management is looking to arrange additional funding to clear the payables which may increase the external borrowings
in the interim. The management has also confirmed to arrange additional parent support by way of extended payables or funds arrangement in case of inadequate bank tie-ups. 

Comfortable Leverage Ratio:
SPIC’s net leverage (net debt/EBITDA) improved to 0.7x in FY21 (FY20: 3x) due to the decline in debt. However, the net leverage would increase intermittently in case SPIC ties up additional limits for clearing the payables. Also, post the production will move entirely to gas based, SPIC would need to make payments for timely gas procurement and in case of any increase in the subsidy from the existing period, the need for additional borrowings may increase. However, Ind-Ra believes the net leverage would remain comfortable on account of a commensurate improvement in the EBITDA. SPIC interest coverage remained comfortable at 5x in FY21 (FY20: 3.3x). 

Liquidity Indicator  Stretched:
SPIC’s liquidity improved during FY21 on account of the reduction in subsidy receivables, although the creditors period remains stretched. The receivable period declined to 53 days in FY21 (FY20: 192 days). SPIC had cash and cash equivalents of INR529 million at FYE21 (FYE20: INR641 million). The total debt outstanding at end-FY21 reduced to INR1 billion (FY20: INR4.1 billion). SPIC has to rely on an extended credit period from suppliers due to the low support it receives from the banking system. 

SPIC external repayment obligations stands at INR110 million for FY22 for which the cash flows shall remain adequate. Although the interest expenses declined to INR142 million in FY21 (FY20: INR342 million) due to the decline in borrowings and interest-bearing payables, the interest expenses may increase in case of an additional tie-up of working capital loans to clear the payables. Ind-Ra expects SPIC’s liquidity profile to remain dependent on the extension of payable days allowed by the creditors and timeliness of the subsidy receivables from the government on account of inadequate funded lines.


RATING SENSITIVITIES

Positive: Factors that could lead to a positive rating action include:

·       entire production moving to the gas-based process along with an improvement in the operating efficiency below 6GCal/t leading to an improvement in the EBITDA

·       the receivable period sustaining below 60 days along with a sustained decline in naphtha payables with cash flows and/or tie-up of additional debt funding leading to an improvement in the liquidity

 

Negative: Lower-than-expected utilisation, higher-than-expected forex losses and lower-than-expected efficiency levels for FY22, leading to a lower-than-expected EBITDA, along with a decline in the interest coverage below 4x, could lead to a negative rating action.


COMPANY PROFILE

SPIC, listed on National Stock Exchange of India Limited, operates a  0.624 million metric tonnes naphtha/furnace oil-based urea plant in Tamil Nadu. 


FINANCIAL SUMMARY

Particulars (INR million)

FY21

FY20

Revenue

15,270

20,792

EBITDA

704

1,128

EBITDA margin (%)

4.6

5.4

Total debt

1,038

4,059

Interest expense

142

342

Source: SPIC, Ind-Ra



RATING HISTORY

Instrument Type

Current Rating/Outlook

Historical Rating/Outlook

Rating Type

Rated Limits (million)

Rating

19 November 2020

20 August 2019

19 June 2018

Issuer rating

Long-term

-

IND BBB+/Stable

IND BBB/Negative

IND BBB/Stable

IND BBB/Stable

Fund-based working capital limits

Long-term/Short-term

INR700

IND BBB+/Stable/IND A2

IND BBB/Negative/IND A3+

Provisional IND BBB/Stable

Provisional IND BBB/Stable

Proposed working capital limits

Long-term/Short-term

INR6,220

IND BBB+/Stable/IND A2

Provisional IND BBB/Negative

-

-

Term loan

Long-term

INR80

IND BBB+/Stable

-

-

-



COMPLEXITY LEVEL OF INSTRUMENTS

Instrument Type

Complexity Indicator

Term loans

Low

Fund-based limits

Low

Proposed working capital 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.

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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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Applicable Criteria

Analyst Names

  • Primary Analyst

    Nitin Bansal

    Associate Director
    India Ratings and Research Pvt Ltd DLF Epitome, Level 16, Building No. 5, Tower B DLF Cyber City, Gurugram Haryana - 122002
    0124 6687290

    Media Relation

    Ankur Dahiya

    Manager – Corporate Communication
    +91 22 40356121