Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AA+/Stable/CRISIL A1+’ ratings on the bank facilities and commercial paper of Chambal Fertilisers and Chemicals Limited (Chambal).

 

The ratings continue to reflect the established market position of Chambal, and the superior operating efficiency of its fertiliser plants. Operating performance remains comfortable with revenue of Rs 15323 crore and EBITDA (earnings before interest, tax, depreciation and amortisation) of Rs 1877 crore for the first nine months of fiscal 2024 compared to Rs 24174 crore and Rs 1709 crore, respectively, for the corresponding period last fiscal. The dip in sales is mainly due to the fall in gas & commodity prices in the urea & imported fertilizer segment as well as the strategic decision to lower trading volumes of complex fertilisers due to the downward revision in nutrient based subsidy (NBS) rates in the second half of fiscal 2024. The manufacturing plants operated over 100% and within the prescribed energy norms leading to energy efficiency savings. The profitability of the urea division remains immune to the rise seen in feedstock (natural gas) prices, with the increase compensated through subsidy receipts from the government. Crop protection chemicals business contributed to ~5% of revenue in the first nine months of fiscal 2024 with healthy profitability. Further ramp up aiding cash flow diversification away from subsidy dependent segments will remain monitorable.

 

Financial risk profile of the company remains strong, driven by improved capital structure and strong debt protection metrics. The Company had reported net cash surplus of Rs 1,447 as on December 31, 2023 and is expected to remain net cash surplus as on March 31, 2024 compared to reported net debt of ~Rs 1,391 crore as on March 31, 2023 due to healthy accruals and lower working capital intensity. This was despite ~Rs 700 crore buyback by the company completed in February 2024.

 

Chambal has no large debt funded capital expenditure (capex) or investments planned in the near term. CRISIL Ratings notes that the TAN (technical ammonium nitrate) capital expenditure (capex) is progressing as per timelines and the capex will be largely funded via internal accruals. Any cost or time overruns in the project phase and its impact on the accruals post implementation will remain monitorable.

 

Moreover, the government has extended financial support to the fertilisers sector through additional subsidies in the past two fiscals. The announced subsidy of around Rs 1.64 lakh crore in fiscal 2025 will be sufficient to meet the requirement. This, combined with healthy accrual and surplus liquidity, should be sufficient to cover working capital requirement. Hence, the ratio of net debt to operating profit before depreciation, interest and taxes (OPBDIT) is expected to remain below 1 time over the medium term. This will remain key monitorable.

 

The above strengths are partially offset by exposure to regulatory risks. Any tightening of energy efficiency norms for the urea plants particularly Gadepan I and Gadepan II or change in policy for Gadepan III impacting the operating performance will remain key rating sensitivity factor.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of Chambal and its subsidiaries because they have strong financial linkages.

 

Please refer Annexure - List of entities consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

Established market position in urea and diammonium phosphate (DAP), especially in north India

Chambal is the third largest overall player and the largest private player in the urea industry in India in terms of production capacity. Its share in the total domestic urea production was ~12% for fiscal 2023. It has a significant market share in north India including the trading segment, supported by its robust distribution network.

 

Chambal sold 2.59 million tonne of urea and 0.85 million tonne of DAP/muriate of potash/nitrogen phosphorus potassium during the first nine months of fiscal 2024 (2.67 million tonne and 1.4 million tonne, respectively, in the corresponding period of the previous fiscal). The volumes in the trading segment declined significantly due to a downward revision in NBS rates in the second half of fiscal 2024. This was a strategic decision taken by the management to conserve profitability. Expected upward revision in NBS rates and ramp up in trading volumes going forward will remain monitorable.

 

Favourable location of plants (near end-user markets and feedstock source), large capacity and low energy consumption are added advantages. The urea plants are near the Hazira-Bijapur-Jagdishpur gas pipeline, which ensures sufficient gas availability.

 

Superior operating efficiency

High operating efficiency is driven by plants functioning at more than 100% of capacity, energy consumption below the prescribed norms and additional fixed cost of Rs 350 per tonne provided by the government for urea players.

 

Overall profitability is driven by the Gadepan-III plant under the new investment policy. This policy is valid for 8 years till the end of December 2026. Any change in this policy impacting the profitability of this unit will remain monitorable.

 

Operating performance of the urea production division remains immune to the rise seen in feedstock (natural gas) prices, as it is passed through entirely, to be compensated through subsidy receipts from the government.

 

Excluding the months where the plants were shut for maintenance, the Gadepan-I and -II plants operated below the energy norm of 5.50 gigacalorie per tonne during fiscal 2024. The Gadepan-III unit consumed less than 5.00 gigacalorie per tonne which is best in class, improving the operating efficiency of the urea manufacturing business. The plants are expected to operate below the current prescribed norms over the medium term.

 

Strong financial risk profile

Adjusted gearing is estimated below 0.3 time as on March 31, 2024 compared to 0.5 time a year earlier. The Company had reported net cash surplus of Rs 1,447 as on December 31, 2023 and expected to remain net cash surplus as on March 31, 2024 compared to reported net debt of ~Rs 1,391 crore a year earlier due to healthy accruals and lower working capital intensity. Adjusted interest cover remains strong estimated over 10 times for fiscal 2024 compared to 6.5 times for fiscal 2023. Debt protection metrics are expected to remain strong over the medium term with healthy profitability and no large debt funded capex plans in the near term. The capex towards TAN plant will be largely funded via internal accruals. Overall, net debt to OPBDIT ratio is expected to remain below 1 time over the medium term. This will remain key monitorable.

 

Weakness:

Exposure to regulatory risks

Given the government’s thrust on self-sufficiency in food grain production, the fertiliser industry is strategic but highly controlled. Hence, players are susceptible to regulatory changes. The government has been focusing on reducing subsidies without increasing prices by urging companies to adopt efficient methods for urea production. In line with these measures, the government has tightened energy consumption norms under New Urea Policy (NUP 2015). The current energy norms are applicable till the end of fiscal 2025 which may further get tightened for players including Chambal and this is likely to impact the industry’s profitability. Further, the policy for reimbursement of plants under the New Urea Investment Policy 2012 (NUIP) beyond 8 years has not been announced yet and can have a material impact on the profitability for players under NUIP beyond policy regime. Any such change in policy regime is a key monitorable.

 

Despite regular subsidy payments in the recent 3-4 fiscals and adequate subsidy budget announced for fiscal year 2025, fertiliser companies are still susceptible to any delays in subsidy payments from the government, leading to high reliance on working capital debt. Deferment in the disbursement of subsidy on account of under-budgeting and change in the regulatory scenario will remain key rating sensitivity factors.

Liquidity: Strong

Cash and equivalents were ~Rs 3300 crore as of December 2023. Fund-based bank limit of Rs 4,000 crore was utilised minimally at around 4% on average over the 12 months through February 2024. Strong annual cash accrual expected over Rs 2000 crore over in the near term should adequately cover term debt obligations, dividend, routine capex and incremental working capital requirements of the company.

 

Environmental, social and governance (ESG) profile

CRISIL Ratings believes that the company’s ESG profile supports its already strong credit risk profile.

 

The chemical sector has a significant impact on the environment, due to the high greenhouse gas (GHG) emissions and hazardous waste generated by its core operations. In line with this, Chambal has been continuously focusing on mitigating its environmental and social risks to ensure minimal impact.

 

Key ESG highlights:

• The company has set up a zero liquid discharge plant for treatment of effluents, in its third urea plant (Gadepan-III plant), which has resulted in lower intake of fresh water from the river. The company has also developed a dense green belt in the Gadepan campus.
• It aims to reduce its environmental footprint by investing in eco-friendly and reliable technologies and practices
• On the social front, the company continues to invest in ensuring a work environment, that is safe, hygienic, and humane
• The company’s governance structure is characterized by 50% of its board comprising independent directors, strong investor grievance redressal and extensive disclosure

 

There is growing importance of ESG among investors and lenders. Chambal’s commitment to ESG principles will play a key role in enhancing stakeholder confidence, given its high share of market borrowings in its overall debt and access to capital markets.

Outlook: Stable

Business and financial risk profiles will sustain over the medium term, supported by strong market position, healthy operating efficiency, and expectation of adequate subsidy budget allocation by the government.

Rating Sensitivity Factors

Upward Factors

• Significant growth in other business segments leading to diversification in revenue and higher accruals
• Sizeable reduction in total debt leading to a net cash* positive position on a sustained basis
• Substantial positive impact of any regulatory/policy change

 

*Net cash = cash and equivalents - total debt

 

Downward Factors

• Larger-than-expected, debt-funded capex/acquisition or significant stretch in working capital cycle leading to net debt to OPBDIT ratio persistently remaining above 2 times
• Substantial adverse impact of any regulatory/policy change

About the Company

Incorporated in 1985 and based in Kota, Rajasthan, Chambal has the largest installed urea capacity of 3.30 million tonne in the private sector in India. Its significant market share in north India is supported by its strong Uttam Vir brand and robust distribution network. The company also trades in complex fertilisers , crop protection chemicals and specialty nutrients.

 

During the first nine months of fiscal 2024, the company achieved profit after tax (PAT) of Rs 1179 crore on a total income of Rs 15323 crore, against Rs 940 crore and Rs 24174 crore, respectively, during the corresponding period of the previous fiscal.

Key Financial Indicators (Consolidated)*

Particulars	Unit	2023	2022
Operating income	Rs crore	27,825	16,103
PAT	Rs crore	1,034	1,566
PAT margin	%	3.7	9.73
Adjusted debt/adjusted networth	Times	0.5	0.68
Interest coverage	Times	6.5	23.63

*As per analytical adjustment by CRISIL Ratings

Any other information: Not Applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs.Crore)	Complexity level	Rating assigned with outlook
NA	Cash credit	NA	NA	NA	4000	NA	CRISIL AA+/Stable
NA	Letter of credit and bank guarantee@	NA	NA	NA	2000	NA	CRISIL A1+
NA	Non-fund based limit	NA	NA	NA	2720	NA	CRISIL A1+
NA	External commercial borrowing^^	NA	NA	30-Sep-2027	3357.35	NA	CRISIL AA+/Stable
NA	Foreign currency term loan$$	NA	NA	30-Sep-2027	1216.21	NA	CRISIL AA+/Stable
NA	Commercial paper	NA	NA	7-365 days	4500	Simple	CRISIL A1+

@Letter of credit and bank guarantee limits are interchangeable

^^Equivalent to USD 510 million @ Rs 65.74 per US dollar

$$Equivalent to USD 185 million @ Rs 65.74 per US dollar

Annexure - List of Entities Consolidated

Names of entities consolidated	Extent of consolidation	Rationale for consolidation
Chambal Infrastructure Ventures Ltd	Full	Significant operational and financial linkages
ISG Novasoft Technologies Ltd	Full	Significant operational and financial linkages
CFCL Ventures Ltd	Full	Significant operational and financial linkages
ISGN Corporation	Full	Significant operational and financial linkages
Indo Maroc Phosphore S A, Morocco	Equity method	Proportionate consolidation