By Nitin Bansal

India Ratings and Research (Ind-Ra) has revised the Ramagundam Fertilizers and Chemicals Limited’s (RFCL) Outlook to Negative from Stable while affirming the Long-Term Issuer Rating at ‘IND A+’. 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#

-

-

30 June 2033

INR44.53

IND A+/Negative

Affirmed, Outlook Revised to Negative from Stable

Fund-based bank facilities

-

-

-

INR12.67

IND A+/Negative/IND A1

Affirmed, Outlook Revised to Negative from Stable

Non-fund-based bank facilities

-

-

-

INR4.0

IND A+/Negative/IND A1

Affirmed, Outlook Revised to Negative from Stable

Term loans

-

-

September 2024

INR5

IND A+/Negative

Assigned

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

The Outlook revision to Negative reflects RFCL’s lower-than-expected capacity utilisation in 9MFY22 due to technical issues with regards to plant stabilisation post commissioning in March 2021. Consequently, RFCL incurred EBITDA losses in FY22 as against Ind-Ra’s expectations of making profits from June 2021. The losses in FY22 are being funded by additional debt, leading to a stretch in the credit metrics. The management indicates the issues will be resolved by April 2022, post which the capacity utilisations shall improve to above 90% and the operations will become profitable in line with Ind-Ra’s expectations.

KEY RATING DRIVERS

Weak Capacity Utilisation in FY22: Post commissioning the project in March 2021, RFCL had faced boiler and water quality issues due to which it could start commercial production only in June 2021. However, the plant continued facing other challenges in production on account of damages in heat exchangers. The capacity utilisation remained around 20% during June-September 2021, leading to higher-than-expected consumption of natural gas and EBITDA losses of INR3.4 billion in 1HFY22. It could manage to fix the issues only temporarily and improved the capacity utilisation to around 60% in December 2021, leading to an improvement in gas efficiency and thereby a reduction in the losses. RFCL is likely to replace the heat exchangers during March-April 2022, post which the management expects the plant utilisation to exceed 90%. Given the plant is running for around nine months with no other issues faced, the management believes the plant shall not face any other major stabilisation issues. Ind-Ra would monitor the utilisation levels closely as continued lower capacity utilisation could result in a lower-than-expected debt service coverage ratio for FY23. 

Increase in Debt due to Loss Funding:
RFCL’s overall debt increased to INR49.7 billion on 31 December 2021 including a long-term debt of INR46 billion and working capital debt of INR3.7 billion of. Ind-Ra earlier estimated the overall long-term debt at INR44.5 billion as against the project cost of INR63.3 billion. However. given the expected losses incurred in FY22, the overall term debt is estimated to increase to INR49.5 billion on account of additional INR5 billion raised for cash flow mismatches. The capex on the replacement of heat exchangers remains low to the tune of around INR200 million which can be funded through pending disbursement of term loans. Ind-Ra expects the debt coverage service ratio to remain less than 1x for FY23 and exceed 1.3x post FY23 once the utilisation reaches at above 90% for the full year. The cash shortfall is likely to be met through the tied-up funding. However, any further delay in the improvement in capacity utilisation post 1QFY23 may impact the coverage ratio for FY23. 

Gas Efficiency to Improve:
RFCL’s cumulative plant efficiency was above 10Gcal/tonne for the June - December 2021 period as against the expected efficiency of 5Gcal/tonne, on account of the issues faced. However with the improving utilisation to around 60%, the efficiency improved to around 6.7Gcal/tonne in December 2021. RFCL expects the efficiency shall improve to 5Gcal/tonne once the plant utilisation reaches above 90% post the replacement of heat exchangers. At the efficiency of 5Gcal/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. 

Strong Sponsor Profile:
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 also supported the project by providing a letter of comfort for INR5 billion of unsecured loans taken during FY22. NFL is the largest government-owned urea manufacturer with five operating plants, while EIL is a leading government-owned engineering design and engineering, procurement and construction company. GAIL is the largest gas pipeline operator and gas supplier in the country. 

Liquidity Indicator - Adequate:
RFCL has tied-up INR12.7 billion of fund-based and INR4 billion of non-fund-based working capital limits for the plant’s working capital requirements. The company’s fund-based limit utilisation was 30% on 31 December 2021, and Ind-Ra expects it to rise with an increase in production in the coming months. The lenders have shifted the term loans payment to 4QFY22 from 3QFY22, given the delay in commercial operations. RFCL has term loan repayment obligations of INR0.9 billion and INR5.3 billion in FY22 and FY23, respectively, in addition to regular interest obligations on its debt. It has to create a debt service reserve account equivalent to one quarter of debt servicing by March 2022. Although there are no significant capex requirements, RFCL had INR1.7 billion of capex creditors to clear as of 30 December 2021. RFCL has undisbursed  INR3.5 billion of term loan tie-ups (long-term loan and unsecured term loan) which can be availed along with pending equity of INR440 million to come from promoters during 4QFY22. Ind-Ra expects the cash flow generation from the plant operations to improve substantially in FY23 which along with debt tie-ups would be sufficient for meeting interest and principal repayment obligations in FY23. Furthermore, Ind-Ra draws comfort from the presence of strong promoters to meet any shortfall servicing requirement. 

Also, RFCL’s liquidity would remain dependent on the quantum and timing of the subsidy receipts from the government, given 75%-80% of the urea realisation would be by way of subsidy. The fertiliser sector received additional budgetary support in FY22, with the overall additional subsidy allocation increasing to INR1.38 trillion from the initial budgeted subsidy of INR795 billion. The increased subsidy also factors in an increase in the urea subsidy requirement by an additional INR150 billion on account of a rise in the natural gas prices. Any shortfall in subsidy provisions and the resultant delays in the receipt of the subsidy could increase the working capital requirements, while RFCL already has a substantial gap in the working capital to fund such requirement for the near term. 

Low Fuel Availability Risk:
RFCL has tied up its entire natural gas requirement for urea production with GAIL. GAIL is supplying imported natural gas to RFCL at a delivered price of around USD14/mmbtu. The plant is part of the pooled gas mechanism. 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. The overall pooled gas prices have increased over 9MFY22, given the increase in RLNG prices. 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. 

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. However, the international urea prices have been increasing over the last few months and have touched an average of around USD500/tonne in 9MFY22, 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. 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, the risk of lower offtake is mitigated to a large extent, given the strategic importance of the plant for the government in light of the Make in India initiative and the aim of reducing import dependency. 


RATING SENSITIVITIES

Positive: An improvement in the capacity utilisation above 90% for continuous three months, along with achievement of the expected gas efficiency while maintaining adequate liquidity, on a sustained basis, could result in a positive rating action. 

Negative:
A longer-than-expected delay in the improvement in the capacity utilisation to 90%, along with lower-than-expected gas efficiency resulting in a further debt funding requirement and 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 commercial operations date in March 2021.

FINANCIAL SUMMARY
 

Particulars

1HFY22

FY21

FY20

Revenue (INR million)

2,632

-

-

EBITDA loss (INR million)

3,424

551.2

405.9

Loss after tax (INR million)

4,808

469.8

381.8

Gross interest coverage (x)

NA

NA

NA

Net adjusted leverage (x)

NA

NA

NA

Source: RFCL, Ind-Ra



RATING HISTORY

Instrument Type

Current Rating/Outlook

Historical Rating/Outlook

Rating Type

Rated Limits (billion)

Rating

25 June 2021

23 June 2020

6 May 2019

7 May 2018

Issuer rating

Long-term

-

IND A+/Negative

IND A+/Stable

IND A-/Stable

IND A-/Stable

IND A-/Stable

Term loan

Long-term

INR49.53

IND A+/Negative

IND A+/Stable

IND A-/Stable

IND A-/Stable

IND A-/Stable

Fund-based bank facilities

Long-term/Short-term

INR12.67

IND A+/Negative/IND A1

IND A+/Stable/IND A1

-

-

-

Non-fund-based bank facilities

Long-term/Short-term

INR4.0

IND A+/Negative/IND A1

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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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