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 been improving since fiscal 2021, its sustenance remains a monitorable as the business is highly commoditized and cyclical.

 

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.

 

The above-mentioned 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 5.85 and 6.51 giga calorie (Gcal)/tonne (against energy norms of 6.20 and 6.50 Gcal/tonne), respectively, in fiscal 2022. Similarly, energy consumption levels have remained comfortable at 5.84 Gcal/tonne and 6.56 Gcal/tonne for the Thal and Trombay plants respectively, during the first quarter of fiscal 2023. 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

Additional subsidies announced by the government over the past two fiscals, has significantly improved the financial risk profile of the company. Adjusted debt to adjusted networth had improved to 0.63 time as on March 31, 2021 (1.53 times as on March 31, 2020). Similarly, adjusted interest coverage and net debt to OPBDIT ratios had 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.

 

While there has been an unprecedented rise in raw material prices (especially pooled gas) and imported fertiliser rates, the additional subsidies (Rs 60,593 crore added to initial allocation of Rs 79,530 crore) announced by the government, has curbed the rise in subsidy arrears for fiscal 2022.  

 

Adjusted debt to adjusted networth has marginally increased to 0.74 time as on March 31, 2022. Also, 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.

 

To address these hikes in 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 RCF’s overall financial position, would remain a key rating monitorable.

 

Also, 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 been improving since fiscal 2021, 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 24% (including commercial paper) over the 12 months through July 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.

 

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 from its core operations. In line with this, RCF has been continuously focusing on mitigating its environmental and social risks to ensure minimal impact.

 

Key ESG highlights:

• RCF has been implementing various energy conservation projects. One of the projects is on installation of gas turbines generator (GTG) of 2 x 25 MW along with heat recovery steam generator (HRSG) of 2 x 65 MTPH capacity, at Trombay.
• Other energy saving projects include revamping of CO2 compressor and turbine at RCF Thal unit.
• At Thal unit, domestic sewage is treated and completely recycled and utilized for horticulture/gardening.
• Effluent treatment plant upgradation is being taken up at Thal, for recycling of 75% of effluent generated into direct usable water, which will save around 5000 cubic meter consumption of fresh water.
• In fiscal 2021, the company commissioned solar rooftop facilities at Thal, Trombay and soil testing labs with an aggregate capacity of 2.16 MWp in order to increase clean energy consumption.
• To ensure CSR programmes, it has focused on community development and has invested in projects related to rural development, promoting health care, nutrition and education.
• Its governance structure is characterized by 42% of its board comprising independent directors, strong investor grievance redressal and extensive disclosure

 

There is growing importance of ESG among investors and lenders. RCF’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.

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.

Key Financial Indicators

Particulars	Unit	2022*	2021
Operating income	Rs crore	12,949	8,277
PAT	Rs crore	702	375
PAT margin	%	5.42	4.53
Adjusted debt/adjusted networth	Times	0.74	0.63
Adjusted Interest coverage	Times	8.93	4.24

* Based on provisional financials

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