Detailed Rationale

CRISIL Ratings has upgraded its rating on the long-term bank facilities of Brahmaputra Cracker and Polymer Ltd (BCPL) to 'CRISIL AA+/Stable' from 'CRISIL AA/Positive’. The rating on the short-term bank facilities has been reaffirmed at ‘CRISIL A1+’. CRISIL Ratings has also withdrawn the rating on Rs 383.43 crore of bank facilities on receipt of necessary documents as these facilities have been repaid. The withdrawal is in line with CRISIL Rating’s policy on withdrawal of ratings.

 

The upgrade reflects CRISIL Ratings’ expectation that BCPL’s credit risk profile will improve, contributed by sustained improvement in operating performance and timely receipt of entitled feedstock subsidy. Excluding the short-term hiccup caused by the Covid-19 pandemic, BCPL’s plant continues to operate at healthy utilisation levels exceeding 100%. While product cracks too have continued to remain healthy during nine months of fiscal 2022, BCPL’s margins are comforted by the feedstock subsidy it is entitled to receive to ensure post tax IRR of 10%; in case the margins cycle reverse.

 

In the month of December 2019, the Cabinet Committee on Economic Affairs (CCEA) had inter alia approved a proposal of providing BCPL a feedstock subsidy, for a tenure of 15 years of plant operations; to maintain a minimum Internal Rate of Return (IRR) of 10% (post tax) while also ensuring the bankability of the project. Sooner-than-anticipated receipt of this feedstock subsidy has significantly improved the financial risk profile of the company. BCPL has utilised a major portion of these subsidy receipts to retire a significant part of its term debt, enabling the company to become net debt free as on December 31, 2021. An allocation for Rs 138 crore of subsidy claimed for fiscal 2022 has been included in the union budget for fiscal 2023, disbursement is expected by first quarter of fiscal 2023. Going forward, such a trend of timely receipt is expected with the GoI's increased focus towards industrial development of the north-eastern region (NER).

 

The ratings also continue to factor in the technical, managerial, and financial support from the parent, GAIL India Ltd (GAIL), and the strategic importance of being in the north-eastern region.

 

These rating strengths are however partially offset by its moderate scale of operations and susceptibility of the core operating margins (excluding subsidy benefits) to the volatility in the product as well as feedstock prices which are highly cyclical in nature and are governed by global demand-supply scenario.

Analytical Approach

For arriving at the ratings, CRISIL Ratings has applied its parent notch-up framework to factor in the extent of support received from GAIL. GAIL holds a 70% stake in BCPL. As per Ind-AS, GAIL has treated BCPL as an associate and has accordingly not consolidated BCPL with itself. That’s mainly because GAIL does not have a majority representation on BCPL’s board. However, based on the articulation of continued support from GAIL and on having a common chairperson, CRISIL Ratings continues to factor in GAIL’s support for arriving at the ratings. CRISIL Ratings believes that BCPL will, in case of exigencies receive distress support from its parent GAIL for timely repayment of debt obligations. GAIL has extended corporate guarantees of Rs 875 crore for the loans that were initially availed from OIDB (Rs 41.61 crore outstanding as on December 31, 2021). BCPL also receives operational and managerial support from GAIL.

 

CRISIL Ratings has treated capital subsidy of around Rs 5,221.32 crore (as on December 31, 2021) received from the Government of India (GoI) as a part of the networth.

Key Rating Drivers & Detailed Description

Strengths

Technical, managerial and financial support from GAIL

As of December 31, 2021, GAIL has infused an equity of Rs 992 crore as part of its equity contribution towards the project. The company leverages its parent's established position in the domestic gas transmission and trading industry while negotiating term loan rates with banks and other financial institutions. Furthermore, the company has entered into a marketing/offtake agreement with GAIL for its entire production. BCPL’s board has representatives of GAIL, wherein the GAIL’s Chairman is also the Chairman for BCPL. GAIL is likely to continue to support BCPL because of the latter’s strategic importance.

 

Strategic importance on being located in the north-eastern region

BCPL was set up in accordance with the Assam Accord signed on August 15, 1985, to promote industrial and economic development in the state of Assam. As such, the project is of strategic importance to both GoI and the Government of Assam (GoA). At present, BCPL has been procuring the required feedstock namely natural gas from Oil India Ltd (one of the promoters) and Oil and Natural Gas Corporation Ltd. Furthermore, the required quantity of naphtha is being supplied by another promoter i.e. Numaligarh Refinery Ltd (NRL; ‘CRISIL AAA/Stable/CRISIL A1+’).

 

With a view to secure the operating performance of the company, the CCEA has approved a proposal of providing BCPL a feedstock subsidy, for a tenure of 15 years of plant operations; to maintain a minimum Internal Rate of Return (IRR) of 10% (post tax) while also ensuring the bankability of the project. Also, vide a notification issued by the Government of Assam in June 2020, for a period of 15 years i.e. upto fiscal 2031, BCPL has been exempted from payment of VAT, payable on the natural gas procured. This would result in an upfront cash inflow of around Rs 40-45 crore per annum (considering the current gas prices).

 

Improvement in core operating performance

Capacity utilisations have remained healthy with plants operating at more than 100% utilisation, as issues related to plant stabilisation and inadequate availability of feedstock has been resolved. The plant operated at an average utilisation of 99% during the nine months of fiscal 2022, due to performance of the first quarter being impacted by the second wave of Covid-19 pandemic. While a maintenance shutdown of 30 days is planned for fiscal 2023, the plant is expected to continue operating at healthy utilisation levels exceeding 100%.

 

BCPL’s plant is designed to operate on feedstock which should constitute 60% natural gas and 40% naphtha, natural gas being more remunerative. There has been an improvement in operating margins since fiscal 2021, mainly contributed by favourable global demand-supply scenario. The same has continued in nine months of fiscal 2022 and is expected to sustain for at least this fiscal. Operating margins remain insulated from the ongoing rise witnessed in LNG prices, since BCPL is entitled to meet its natural gas requirements through domestic sources. Since the feedstock subsidy receivable from the GoI ensures a 10% IRR for the plant, the said subsidy should secure the operating profits from volatility in spreads between the pricing of feedstock (naphtha and gas) and finished products; a concern generally faced by the petrochemicals sector.

 

Improved financial risk profile

Sooner-than-anticipated receipt of feedstock subsidy of Rs 2,743 crore has significantly improved the financial risk profile of the company. An allocation for Rs 138 crore of subsidy claimed for fiscal 2022 has also been included in the union budget for fiscal 2023, disbursement is expected by first quarter of fiscal 2023. BCPL has utilised a major portion of these subsidy receipts to retire a significant part of its term debt, enabling the company to become net debt free as on December 31, 2021. Going forward, such a trend of timely receipt of subsidy is expected with GoI's increased focus towards developing the NER. The company has moderate capex plans of Rs 387 crore over the medium term, to be majorly funded through internal accruals.

 

Weaknesses

Moderate scale of operations

BCPL is the only petrochemical plant in the north-eastern region, however it holds a market share of only 4% in the Polyethylene segment. With stabilisation in operations since 2019, the company has been operating at healthy utilisation exceeding 100%. While BCPL’s performance is currently secured by the entitled feedstock subsidy, these subsidy receipts are front-ended. Hence, the ability of the company to maintain the required cash surplus to manage its working capital requirements especially during industry downturns would be a key rating monitorable.  

Liquidity: Strong

BCPL’s liquidity position has significantly improved, contributed by timely feedstock subsidy receipts and improvement in standalone operating performance. As on December 31, 2021, BCPL had an outstanding debt of Rs 443 crore as compared to cash & equivalents maintained of Rs 574 crores. It prepaid loans of Rs 178.45 crore in January 2022. BCPL has moderate capex plans of Rs 387 crore over the medium term, to be majorly funded through internal accruals. It also has sanctioned working capital limits of Rs 350 crore, which is currently unutilised.

Outlook Stable

BCPL is expected to maintain its operating performance and healthy financial risk profile on back of timely receipt of feedstock subsidy, given its strategic importance to the GoI.

Rating Sensitivity factors

Upward factors

• Sustained improvement in operating performance, generating RoCE of above 15%
• Sustenance of timely receipt of feedstock subsidy from the GoI, enabling the company to remain net debt free

 

Downward factors

• Material change in support philosophy of GAIL towards BCPL
• Larger-than-expected debt-funded capex plans
• Sustained delay in feedstock subsidy receipts, increasing dependence on external funding wherein debt/EBITDA rises to above 3 times

About the Company

BCPL was set up in accordance with the Assam Accord signed on August 15, 1985, to promote industrial and economic development in Assam. The company has set up an integrated petrochemical complex with dual-feed technology at Lepetkata, Assam. As on March 31, 2021, GAIL held 70% stake in the company while Oil India Ltd (10%), NRL (10%), and GoA (10%) held the remaining stake.

 

BCPL has a capacity to produce 213,100 tonne per annum (tpa) of polyethylene (PE) products (high-density PE/linear low-density PE) and 57,800 tpa of polypropylene (PP). It commissioned its PP unit in June 2015 and PE unit in January 2016, which was inaugurated by the Prime Minister of India on February 5, 2016.

Key Financial Indicators

Particulars	Unit	2021	2020
Revenue	Rs crore	3,297	2,880
Profit after tax (PAT)	Rs crore	528*	1,302*
PAT margin	%	16.0	45.21
Adjusted debt/adjusted networth	Times	0.36	0.50
Interest coverage	Times	6.05	2.35

*Other income of Rs 211.64 crores in fiscal 2021 (Rs 205.95 crore in fiscal 2020) on account of capital subsidy over the life of useful assets has been reduced from PAT as this has been considered as part of the networth.

Any other information: Not applicable

Annexure - Details of Instrument(s)

^ Includes the following sub-limits:

1. LC limits (Inland & Foreign): Rs.90 Crore
2. BG limits (Inland): Rs. 10 Crore
3. Forward contract/ derivative limit: Rs.1.4 Crore