Detailed Rationale

CRISIL Ratings has reaffirmed its 'CRISIL A1+' rating on the short-term bank facilities of Rashtriya Chemicals and Fertilizers Limited (RCF).

 

The rating continues to reflect the established market position of RCF and its strong operating efficiency in the urea production business. Plants are operating at healthy utilisation levels, within the prescribed energy norms. Complete execution of energy saving products should further improve profitability of urea manufacturing units.

 

Any rise in feedstock (natural gas) prices does not impact the margin of the urea division as it is compensated through subsidy receipts from the government. However, shortage of complex fertilizers globally, which led to a spike in its prices, could affect their profitability in the medium term. While the margin from the industrial chemicals segment has improved in fiscal 2021 and during the first nine months of fiscal 2022, its sustenance remains a monitorable as the business is highly commoditized and cyclical.

 

Financial risk profile has improved significantly in fiscal 2021, aided by reduction in working capital debt and additional subsidies announced by the government under the Aatmanirbhar Bharat Package 3.0 in November 2020. Disbursement of the additional subsidy, which was added to the revised estimate for the fiscal 2021 fertiliser subsidy budget on February 1, 2021, has substantially improved the capital structure. Receivables reduced to 65 days as on March 31, 2021, from the previous high of 178 days as on March 31, 2020.

 

The government has hiked the subsidy budget further by Rs 60,593 crore from the initial allocation of Rs 79,530 crore in fiscal 2022, considering the unprecedented rise in raw material prices (especially pooled gas prices) and imported fertilizer rates. While these additional receipts will curb the rise in subsidy arrears, their timely disbursement is a key rating monitorable. Similarly, budgetary support in addition to Rs 105,222 crore announced for fiscal 2023, may be required to compensate for the increase in raw material and imported fertiliser prices. Timely announcement and disbursement of this additional subsidy will help maintain the financial position of the company and remains a key rating sensitivity factor.

 

These strengths are however, partially offset by susceptibility of the overall operating performance to cyclicality in the industrial products business segment and any change in regulations for the fertilizer industry.

Key Rating Drivers & Detailed Description

Strengths:

• Healthy business risk profile

RCF is the third-largest player in the domestic urea industry, in terms of production capacity, accounting for 10% of the total production. The company has a strong position in Maharashtra, Karnataka and Andhra Pradesh. Diversity in revenue streams across the urea, complex fertilisers and industrial chemical products segments, also shields the overall margin from any unfavourable conditions in any particular segment and lends stability to the cash flow position.

 

• Healthy operating efficiency of the urea production division

Strong operating efficiency is driven by the urea manufacturing plants, operating at healthy utilisation rates, with energy consumed below the prescribed norms and the additional Rs 350 per tonne provided by the government. As pre-specified norms form the basis for reimbursement of feedstock cost to fertiliser companies, lower energy consumption results in better profitability. The Thal and Trombay plants operated at energy levels of 5.920 and 6.408 giga calorie (Gcal)/tonne (against energy norms of 6.20 and 6.50 Gcal/tonne), respectively, in the first nine months of fiscal 2022. Further, complete execution of energy saving projects would further reduce the energy consumed, thus improving the profitability earned from this business segment.

 

• Improved financial risk profile

RCF used the additional subsidy announced under the Aatmanirbhar Bharat Package 3.0, mainly to repay working capital debt, thereby improving its capital structure and debt protection metrics substantially. Adjusted debt to adjusted networth improved to 0.63 time as on March 31, 2021 (1.53 times as on March 31, 2020). Adjusted interest coverage and net debt to OPBDIT ratios improved to 4.24 times in fiscal 2021 (1.58 times in fiscal 2020) and 0.85 times as on March 31, 2021 (16.25 times a year earlier), respectively.

 

Despite the unprecedented rise in raw material prices (especially pooled gas) and imported fertiliser rates, additional subsidies (Rs 60,593 crore added to initial allocation of Rs 79,530 crore) announced by the government, should curb rise in subsidy arrears for fiscal 2022. With RCF being appointed as a canalising agency to facilitate urea imports on behalf of the Government, its requirement for funding limits has increased, considering the rise in imported urea prices. While an addition in subsidy budget is expected for fiscal 2023, to compensate for the rise in raw material and imported fertiliser prices, its timely announcement and disbursement is a key rating sensitivity factor.

 

While the company would continue to undertake capital expenditure (capex) for periodic efficiency along with its committed investment towards its joint venture, any major debt-funded capex or investment that constrains the capital structure, would be a key rating sensitivity factor.

 

Weaknesses:

• Cyclicality in the industrial products and complex fertiliser business

The industrial chemicals business is highly commoditised and cyclical. Thus, players are exposed to fluctuation in international prices and the import duty structure for the key product, methanol. While profitability from this segment has improved in fiscal 2021 and first nine months of fiscal 2022, its sustenance is to be seen.

 

Profitability in the complex fertiliser business remains susceptible to availability and prices of key raw materials in the international market. The current global shortage, which has led to a spike in prices, could hurt the margin in the medium term.

 

Profitability in the industrial chemicals and complex fertiliser businesses will remain constrained by intense competition from cheaper imports and availability of raw material in the international market, respectively.

 

• Exposure to regulatory risks in the fertiliser industry

Given the strong thrust of the government on self-sufficiency in food grain production, the fertiliser industry is strategic but highly controlled. Hence, players are susceptible to regulatory changes. The government is focused on reducing subsidy without increasing prices, by urging companies to adopt more efficient methods for urea production. Accordingly, the government has tightened energy consumption norms, thereby impacting profit of urea players, unless they improve energy efficiency. The revised energy norms for the Thal and Trombay plants of RCF became applicable from April 1, 2018, and October 1, 2020, respectively. Impact of these norms is partially mitigated by the 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 are key rating sensitivity factors.

Liquidity: Strong

RCF enjoys strong financial flexibility, driven by access to a large unutilised bank limit to support any funding requirement, given the regulated nature of the industry. Bank limit of Rs 6,590 crore was utilised at an average 14% (including commercial paper) over the 12 months through January 2022. Healthy cash accrual should suffice to cover the debt obligation over the medium term. Furthermore, easy access to low-cost financing from banks/financial markets also supports liquidity.

Rating Sensitivity factors

Downward factors

• Significant weakening of operating performance, leading to lower-than-expected profit
• Sizeable rise in subsidy receivables beyond 200 days, weakening the financial risk profile
• Larger-than-expected debt-funded capex or investments impacting the capital structure
• Substantial adverse impact of any regulatory/policy changes

About the Company

RCF was incorporated in 1978, following the reorganisation of the erstwhile Fertiliser Corporation of India Ltd. It has plants in Trombay and Thal. The Thal unit primarily manufactures urea apart from some industrial products and has capacity of 20 lakh tonne per annum (tpa). The Trombay unit manufactures various industrial products and has capacity of 3.3 lakh tpa for urea and 6.9 lakh tpa for complex fertilisers. The industrial chemicals portfolio includes more than 15 products, such as methanol, methylamines, di-methyl formamide, ammonium nitrate melt, nitric acid and ammonia. The company has expanded its revenue streams and product portfolio through traded sales of imported di-ammonium phosphate and muriate of potash. GoI holds 75% of RCF’s equity, while financial institutions and the public own the remaining.

 

Over the nine months ended December 31, 2020, profit after tax (PAT) was Rs 469 crore on total income of Rs 8,808 crore against Rs 222 crore and Rs 6,072 crore, respectively, for the corresponding period of the previous fiscal.

Key Financial Indicators

Particulars	Unit	2021	2020
Operating income	Rs crore	8,277	9,487
PAT	Rs crore	375	207
PAT margin	%	4.53	2.18
Adjusted debt/adjusted networth	Times	0.63	1.53
Adjusted Interest coverage	Times	4.24	1.58

*As per CRISIL Ratings’ analytical adjustment

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	Working Capital Demand Loan@	NA	NA	NA	14985	NA	CRISIL A1+
NA	Proposed Working Capital Facility@	NA	NA	NA	1015	NA	CRISIL A1+

^@Interchangeable with buyers credit, short term loan, letter of credit, bank guarantee