| Chambal Fertilisers and Chemicals Limited | ||||||
| Ratings reaffirmed at 'CRISIL AA / CRISIL A1+ '; outlook revised to 'Positive' | ||||||
| Rating Action | ||||||
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| 1 crore = 10 million | ||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has revised its rating outlook on the long-term bank facilities of Chambal Fertilisers and Chemicals Ltd (Chambal) to ‘Positive’ from ‘Stable’ while reaffirming the rating at ‘CRISIL AA’. The rating on the short-term bank facilities and commercial paper has been reaffirmed at ‘CRISIL A1+’.
The revision in outlook reflects expected improvement in the financial risk profile, driven by reduction in working capital borrowing mainly on account of revision in fertiliser subsidy budget allocation for fiscal 2021 from Rs 71,309 crore to Rs 133,947 crore. The central government announced an additional subsidy of Rs 65,000 crore under the Aatma Nirbhar Bharat Package 3.0 in November 2020, and subsequently added Rs 62,638 crore in the revised estimate of fiscal 2021 fertiliser subsidy budget on February 1, 2021. Disbursement of the subsidy will substantially reduce the subsidy arrears of Chambal (receivables as on March 31, 2020, and December 31, 2020, were 166 days and 149 days, respectively), resulting in significant reduction in the working capital borrowing and improvement in the capital structure and debt protection metrics. Chambal has already received a part of the total additional subsidy in January 2021 while the remaining is expected in the current fiscal.
Fertiliser demand increased significantly in the first nine months of fiscal 2021 due to above-normal monsoon with good spatial and temporal distribution. Chambal reported fertiliser sales of 4.3 million tonne during the first nine months of fiscal 2021, against 3.6 million tonne during the corresponding period of the previous fiscal. Operating performance remained strong driven by all the plants continuing to operate at high utilisation levels (more than 100%) well below the prescribed operating energy norms, and high fertiliser trading volumes.
The ratings continue to reflect the company’s established market position, superior operating efficiency of fertiliser plants and high financial flexibility. These strengths are partially offset by leveraged capital structure and exposure to regulatory risks. |
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:
Chambal is the largest private player in the urea industry in India by production capacity. Its share in total domestic urea production increased to 13.4% in fiscal 2020 from 10.4% in fiscal 2019, driven by ramp-up of Gadepan-III plant (around 100% plant utilisation). The company continues to maintain its share in the non-urea fertilisers segment. It sold 1.597 million tonne of DAP/muriate of potash/nitrogen phosphorus potassium during the first nine months of fiscal 2021 (1.074 million tonne during the corresponding period of the previous fiscal). It has a significant share in north India market, supported by its strong brand, Uttam Vir, and a robust distribution network. 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, thereby ensuring gas availability.
High operating efficiency is driven by plants operating at more than 100% utilisation and lower-than-prescribed energy norms as well as additional fixed cost provided by the government for urea players. The Gadepan-I and -II plants operated below the energy norm of 5.500 gigacalorie (Gcal) per tonne during the first half of fiscal 2021. The newly commissioned unit, Gadepan-III, also had better operating efficiency than in the last fiscal, further providing a boost to the operating margin.
Operating performance and efficiency in the first nine months of fiscal 2021 remained supported by healthy fertiliser sales volume of 4.3 million tonne (3.6 million tonne during the corresponding period of the previous fiscal). Utilisation was healthy at 118% (111% in the previous fiscal).
Profitability against production above reassessed capacity, wherein incentive is capped at import parity price of urea plus incidental charges, will be healthy in fiscal 2021 because of lower pooled gas prices. Gadepan-III production is restricted at 100% as there is no defined policy for production above 100% for plants commissioned under the new urea investment policy. Any favourable policy by the government of India for production above 100% for Gadepan-III should support operating efficiency.
The government has also approved the proposal for additional fixed cost of Rs 350 per tonne of urea. This additional fixed cost supports the profitability of Chambal.
Chambal has the ability to contract debt at competitive rates. Since a large part of project-related debt is in foreign currency and the company utilises commercial paper for meeting working capital requirement, borrowing cost is competitive. Also, large unutilised bank limit and healthy cash accrual aid financial flexibility. Cash accrual from the urea business continues to be stable because feedstock cost can be passed-through and operating efficiency is strong.
Weaknesses:
Chambal has a leveraged capital structure and modest debt protection metrics due to sizeable working capital borrowing (around 50% of the total debt as on March 31, 2020) following delay in subsidy disbursement by the government and debt contracted for the Gadepan-III plant. Gearing and the debt to operating profit before depreciation, interest and taxes (OPBDIT) ratios stood at 2.8 times and 5.0 times, respectively, as on March 31, 2020. Disbursement of additional subsidy from the government will clear most of the subsidy receivables. Gearing is expected below 1 time by the end of fiscal 2021 in absence of any major capital expenditure (capex) plans. Allocation of Rs 79,530 crore in the fertiliser subsidy budget for fiscal 2022 will prevent any material build-up of subsidy arrears in fiscal 2022. However, any large, debt-funded capex or acquisition will remain a key monitorable.
Given the government’s thrust on self-sufficiency in food grain production, the fertiliser industry is strategic but highly controlled. Hence, the players are exposed to any regulatory changes made by the government. Of late, the government has focused on reducing subsidy without increasing prices by urging companies to adopt efficient methods of urea production. In line with these measures, the government has tightened energy consumption norms in the past, thereby impacting profits of urea players unless they improve energy efficiencies. The impact of this norm is partly offset by the agreed additional fixed cost of Rs 350 per tonne by the government to all urea manufacturers.
Fertiliser companies are also susceptible to delays in subsidy payments from the government, leading to higher reliance on working capital loans. Any delay in the disbursement of subsidy on account of under budgeting and any changes in the regulatory scenario will remain key rating sensitivity factors. |
Liquidity: Strong Bank limit utilisation (including commercial paper) was 74% on average (fund-based bank limit of Rs 4,000 crore as on November 30, 2020) over the 12 months through November 2020. Utilisation should reduce significantly after full disbursement of additional subsidy by government. Healthy annual cash accrual will adequately cover term debt obligation over the medium term. Moreover, absence of any major capex over the medium term will add to the financial flexibility. Also, reimbursements to Chambal in Gadepan-III and the project-related interest and debt obligation are denominated in dollar, which provides a natural hedge. |
Outlook: Positive Chambal’s financial risk profile will improve over the medium term after full disbursement of additional subsidy from the government. The business risk profile will remain stable supported by strong market position and operating efficiency. |
Rating Sensitivity factors Upward factors
Downward factors
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About the Company Incorporated in 1985, Chambal is a Kota, Rajasthan, based company that has the largest installed urea capacity of 3.00 million tonne (1.27 million tonne at the Gadepan-III unit commissioned in January 2019) in the private sector. The company also trades in complex fertilisers and pesticides. In fiscal 2020, Chambal sold and transferred the assets and liabilities of its software subsidiaries. Also, after its subsidiary, India Steamship Pte Ltd, got liquidated and was struck off the Accounting and Corporate Regulatory Authority register, Chambal functions purely as a fertiliser and agricultural inputs entity. For the first nine months of fiscal 2021, the company’s profit after tax (PAT) was Rs 1,206 crore on total income of Rs 11,147 crore, against Rs 1,039 crore and Rs 10,315 crore, respectively, during the corresponding period of the previous fiscal. |
Key Financial Indicators - (Consolidated)*
*As per CRISIL Ratings |
Any other information: Not applicable |
| Note on complexity levels of the rated instrument: CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments. |
Annexure - Details of Instrument(s)
@ Letter of credit and bank guarantee limits are interchangeable ^^ Equivalent to USD 510 million @ 65.74 USD/INR rate $$ Equivalent to USD 185 million @ 65.74 USD/INR rate |
Annexure – List of entities consolidated
* India Steamship Limited stands dissolved from February 9, 2021 as NCLT has approved the dissolution of the company through voluntary liquidation ** liquidated on February 28, 2019 ***liquidated and name struck off from the register of ACRA on April 6, 2020 |
| Annexure - Rating History for last 3 Years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| All amounts are in Rs.Cr. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annexure - Details of various bank facilities | ||||||||||||||||||||||||||||||||||||||||||||||||
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