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 plants operating at over 100% utilisation and within the prescribed energy norms. Profitability of the urea division will remain immune to the rise in feedstock (natural gas) prices as this is compensated through subsidy receipts from the government. The global shortage of complex fertilisers, which has led to a spike in its prices, could affect profitability in the medium term.

 

The financial risk profile remains comfortable, driven by improved capital structure and debt protection metrics. Additional subsidies announced by the government over the past two fiscals, has significantly improved the financial risk profile of the company. The government has continued to extend the required financial support to this sector. While initially a subsidy payout of Rs 105,222 crore was budgeted for fiscal 2023, it has approved an additional payout of Rs. 110,000 crore in May 2022, to account for the unprecedented rise in raw material prices and imported fertiliser rates. This is expected to keep the working capital position steady and not let any material built-up in the subsidy receivables in fiscal 2023. Timely disbursement of this additional subsidy will help maintain the financial position of the company and remains a key rating monitorable.

 

Chambal has no large cash outflows towards capital expenditure (capex) or investments over the near term. The ratio of net debt to operating profit before depreciation, interest and taxes (OPBDIT) is expected to remain below 1.5 times over the medium term.

 

The strengths are partially offset by 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:

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

Chambal is the largest private player in the urea industry in India in terms of production capacity. Its share in the total domestic urea production has increased to 13.4%, driven by ramp-up of its Gadepan-III plant. The company has maintained its share in the non-urea fertilisers segment. It sold 0.97 million tonne of DAP/muriate of potash/nitrogen phosphorus potassium during fiscal 2022, down from 1.64 million tonne in the previous fiscal because of global shortage of the fertilisers amidst the Russia-Ukraine war. It has a significant market share in north India, supported by strong brand (Uttam Vir) and 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, 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. Excluding the months where the plants were shut for maintenance, the Gadepan-I and -II plants operated below the energy norm of 5.500 gigacalorie per tonne during fiscal 2022 and first quarter of fiscal 2023. The Gadepan-III unit consumed less than 5.00 gigacalorie per tonne, improving the operating efficiency of the urea manufacturing business.

 

Chambal sold 3.31 million tonne of urea and 0.97 million tonne of DAP/muriate of potash/nitrogen phosphorus potassium during fiscal 2022 (3.35 million tonne and 1.64 million tonne, respectively, in the corresponding period of the previous fiscal). While uneven distribution of rainfall caused a marginal decline in urea sales, the global shortage of complex fertilisers impacted sales volume in the domestic market. During the first quarter of fiscal 2023, 0.81 million tonne of urea and 0.47 million tonne of DAP/muriate of potash/nitrogen phosphorus potassium were sold (0.81 million tonne and 0.29 million tonne, respectively, in the corresponding period of the previous fiscal).

 

Operating performance of the urea production division has remained immune to the ongoing rise in feedstock (natural gas) prices, as it is passed through entirely, to be compensated through subsidy receipts from the government. For profitability against production above reassessed capacity, wherein incentive is capped at import parity price of urea plus incidental charges, to also not be majorly impacted on considering that the imported urea prices are also high.

 

Production of the Gadepan-III unit has been restricted at 100% as there has been no defined policy for production above 100% for plants commissioned under the new urea investment policy. Amidst the rise witnessed in imported fertilizer prices, government has permitted Chambal to increase its output from this unit to beyond the installed capacity for this fiscal which will support its operating efficiency.

 

• Comfortable financial risk profile

Additional subsidies announced by the government over the past two fiscals were mainly used to repay working capital borrowings, thereby substantially improving the capital structure and debt protection metrics of the company. Adjusted debt to adjusted networth improved to 0.75 times as on March 31, 2021 (2.94 times as on March 31, 2020). Adjusted interest coverage and net debt to OPBDIT ratios improved to 8.63 times in fiscal 2021 (4.28 times in fiscal 2020) and 1.19 times as on March 31, 2021 (4.94 times a year earlier), respectively.

 

An unprecedented rise in raw material prices (especially pooled gas prices) and imported fertiliser rates mainly during the second half of fiscal 2022, has increased the dependence on subsidy receipts from the government. The additional subsidies of Rs 60,593 crore added to the initial budget of Rs 79,530 crore announced by the government has however restricted an increase in subsidy arrears for the previous fiscal.

 

To address the continued hike in raw material and fertiliser rates, the government has been extending the required funding support, through announcement of additional subsidies. While initially a subsidy payout of Rs 105,222 crore was budgeted for fiscal 2023, it has approved an additional payout of Rs. 110,000 crores in May 2022. This is expected to keep the working capital position steady and not let any material built-up in the subsidy receivables in fiscal 2023. However, a timely disbursement of this additional subsidy which would comfort Chambal’s overall financial position, would remain a key rating monitorable.

 

Chambal has no large cash outflow towards capex or investments over the near term. Overall, net debt to OPBDIT ratio is expected to remain below 1.5 times over the medium term.

 

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 subsidy 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, thereby impacting profits of urea players unless they improve energy efficiency. The impact of this norm is mitigated by the agreed additional fixed cost of Rs 350 per tonne allowed for all urea manufacturers.

 

Fertiliser companies are also susceptible to delays in subsidy payments from the government, leading to high reliance on working capital loans. Any deferment in the disbursement of subsidy on account of under-budgeting and any change in the regulatory scenario remain key rating sensitivity factors.

Liquidity: Strong

Cash and equivalent stood at around Rs 554 crore as on March 31, 2022. Fund-based bank limit of Rs 4,000 crore was utilised at around 12% on average over the 12 months through July 2022. The bank limit utilisation has reduced significantly after disbursement of additional subsidy by the government. Healthy annual cash accrual will adequately cover term debt obligation and any incremental working capital requirement over the medium term. Absence of any major capex adds to the financial flexibility. Also, reimbursements to Chambal in Gadepan-III and project-related interest and debt obligations are denominated in dollars, which provides a natural hedge.

 

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
• Chambal has also spent around Rs. 28 crore in CSR during fiscal 2022.
• The company’s governance structure is characterized by 56% 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

• Sustenance of total receivables (including subsidy receivables) below 30 days
• Significant 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 3.00 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 and pesticides.

Key Financial indicators (Consolidated)*

Particulars	Unit	2022	2021
Operating income	Rs crore	16,103	12,739
Profit after tax (PAT)	Rs crore	1,566	1,410
PAT margin	%	9.73	11.07
Adjusted debt/adjusted networth	Times	0.68	0.75
Interest coverage	Times	23.63	8.63

*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 & Bank Guarantee@	NA	NA	NA	2000	NA	CRISIL A1+
NA	Non-Fund Based Limit	NA	NA	NA	1800	NA	CRISIL A1+
NA	External Commercial Borrowings^^	NA	NA	30-Sep-27	3357.35	NA	CRISIL AA+/Stable
NA	Foreign Currency Term Loan$$	NA	NA	30-Sep-27	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