Detailed Rationale

Crisil Ratings has downgraded its ratings on the bank loan facilities and non-convertible debentures (NCDs) of TCI Sanmar Chemicals S.A.E (TCI Sanmar) (TCIS) to ‘Crisil BB+/Stable/Crisil A4+’ from ‘Crisil BBB-/Negative/Crisil A3’

 

The rating action follows TCIS’s muted operational performance in fiscal 2025 with revenues estimated to decline by 10-12% year-on-year and operating profitability estimated at ~6% (14% in fiscal 2024) resulting in operating profits declining to an estimated $25-30 million, from $62 million in fiscal 2024 ($90 million in fiscal 2023) in fiscal 2024. Crisil Ratings expects the recovery in operating profitability to be gradual next fiscal and lower than anticipated, due to stiff competitive pressures, and reduction in export duty on products in Egypt. The modest operating profits and high interest obligations will further widen net losses and exert pressure on liquidity with cash accruals expected to be negative in this fiscal and next. Despite the muted profitability, the near term liquidity of TCIS is supported by sanction of additional working capital limits of $60 million from consortium of banks, equity infusion of $12 million by the holding company, Sanmar Holdings Ltd (SHL) and support from group entity, Sanmar Shipping Ltd (SSL, rated 'Crisil A+/Stable/Crisil A1'). 

 

The moderation in performance in fiscal 2025 is primarily driven by moderation in prices of polyvinyl chloride (PVC) on account of cheap imports from China and other countries in the domestic market and these sources does not have Anti-Dumping Duty in Egypt, unlike imports from the USA. TCIS was predominantly selling PVC in export markets despite higher realizations in domestic markets due to forex challenges in Egypt and to ensure availability of dollar to cover raw material expenses and debt servicing. Egypt’s forex position improved in March 2024 with foreign investments coming in, including from the International Monetary Fund. Therefore, TCIS was expected to enhance PVC sales in domestic Egyptian markets and improve its operating profitability. However, improvement in forex position and low import duty in Egypt attracted high supplies from China, EU which led to moderation in domestic realizations. In addition, Egyptian government revised the export incentives to ~3% of exports from 9% in fiscal 2025. The profitability of the PVC business is mainly dependent on prices of key raw material (ethylene dichloride [EDC]) and the end product. While the caustic soda prices improved year-on-year, steeper moderation in PVC prices impacted the PVC-EDC spreads resulting in moderation of operating profits to around $25-30 million for fiscal 2025. PVC realizations are expected to recover only gradually owing to continued imports from China. Hence, Crisil ratings expects the operating profits, despite improving next fiscal will remain around 10-11% compared to 15-18% expected earlier.

 

The company has high interest outgo of ~$85 million on account of steep increase in the benchmark rate – The London Interbank Offered Rate/Secured Overnight Financing Rate (LIBOR/SOFR) which has impacted the net profit. Despite the challenges faced with liquidity, TCIS has availed customer advances , trade advances from SSL and extended credit from SSL for procurement of EDC and and ensured that debt commitments (primarily interest commitments on long-term loans that are paid on bi-annual basis) were serviced in a timely manner. The support from SSL ensures a steady supply of EDC, enabling TCI to operate its PVC plant at over 90% utilisation.
 

The company has debt servicing obligations (interest and principal repayment) of ~$35 million due in March 2025. Factoring the reduction in pre-existing working capital lines of $92 million by $11 million in March 2025 as per restructuring terms and Debt Service Reserve requirement (DSRA) of $3 million, TCIS requires around $49 million by end of March 2025. Sanction of additional working capital lines of $60 million and equity infusion of $12 million in January 2025 will ensure sufficient liquidity is available to meet the obligations in March 2025. Besides, if need arises, trade advances from SSL and customer advances can be obtained to meet any shortfalls. TCIS is in discussions with its customers to obtain advances of around $35-50 million for the supply of caustic soda. Unlike PVC where the advances are secured at a discount, caustic soda prices are index linked, and the discounts are expected to be lower compared to PVC. The advances once obtained will improve the liquidity position of the company.

 

Due to the pandemic and its consequent impact on the business, the company had to opt for loan restructuring under the Reserve Bank of India’s circular dated June 7, 2019. The restructuring was approved by the consortium of lenders and implemented on June 30, 2021. Accordingly, the total outstanding term loan of $825 million was converted into sustainable debt of $589 million and the balance being unsustainable debt of $236 million. Out of the unsustainable debt, $118 million was converted in the form of 0.01% NCDs and the remaining $118 million was converted into equity in fiscal 2022 (lenders got 13.9% stake in the company in lieu of the same) The NCDs were issued to banks in September 2022. The first principal repayment on the restructured loan was made on September 30, 2021, and since then all payments have been made regularly.

 

As part of the restructuring, TCIS’s holding company, Sanmar Holdings Ltd (SHL), infused USD 17 million in the form of equity in fiscal 2022. This, along with healthy accrual, was used to prepay term debt of USD 75 million before September 30, 2022, which resulted in upgradation of the account to standard. After the pre-payment, the company has no significant debt obligation till the end of fiscal 2025, but for interest payments that are sizeable following the significant increase in LIBOR/SOFR rates.

 

Based on discussions with lenders, unsecured loans of $202 million extended by Sanmar Overseas Investments A.G. (SOIAG, immediate holding company of TCIS and step-down subsidiary of SHL), have been converted to equity pursuant to receipt of regulatory approvals. Further, as per restructuring terms, $58 million of equity was to be brought before December 2025 out of which $12 million has been infused in January 2025 and the remaining $46 million equity has to be brought in before December 2025. The management is in discussion with external strategic investors for the equity infusion. If deals with external investors does not materialize, the parent holding company, SHL is expected to infuse the funds.

 

The ratings reflect the diversified product profile of TCIS with its market leadership position in suspension PVC and caustic soda in Egypt, varied revenue streams catering to multiple end-user industries, longstanding relationships with customers, and healthy demand prospects for its products. Besides, the company also received support from SSL, its group company for purchase of raw material EDC

 

The ratings also factor in the five-decade-long experience of the promoters in the petrochemicals sector, coupled with the strong leadership team and parentage, and significant financial flexibility of SHL. Through its overseas subsidiary, SHL holds 88.96% stake in TCIS. These strengths are partially offset by the commoditised nature of products, which causes fluctuation in operating margin, and the sub-par financial risk profile with earnings impacted by forex-related challenges in Egypt

Analytical Approach

Crisil Ratings has taken a standalone view of TCIS.

 

Earlier, Crisil ratings considered unsecured loan of $202 million availed from SOAIG, 75% as equity and 25% as debt for arriving at the ratings as the loans are subordinated to lenders. On complete conversion, Crisil Ratings has now treated the entire quantum as equity.

 

Crisil Ratings has also not considered the extraordinary income in fiscal 2023 due to unrealized gain on extinguishment of unsustainable loan to NCD, as part of the profit after tax or net worth to arrive at the ratings.

Key Rating Drivers & Detailed Description

Strengths:

• Established market position in the PVC and caustic soda segments in Egypt, well-established presence in the export markets, and healthy demand prospects: TCIS has a diversified product profile with offerings of PVC, caustic soda and calcium chloride. It is the largest player in the PVC segment in the Middle East and North Africa region. There is a significant demand-supply mismatch in PVC in TCIS’s target markets due to rapid development of the construction industry and higher urbanisation on one hand, while supply is lower due to high entry barrier on the other hand. Furthermore, the Egyptian government has recently in Feb 25  increased the  anti-dumping duty to  13% from 9% on PVC resin imports from the USA, which supports the domestic manufacturers. However, anti-dumping duty is not levied against imports from other counties, resulting in company not able to get the benefit of ADD.

 

Caustic soda production is power intensive in nature. However, sharp increase in power costs in Europe made production unviable there in fiscal 2023. This led to a demand-supply mismatch resulting in higher realisations in fiscal 2023, this situation, however, normalised in fiscal 2024, resulting in moderation of caustic soda realisations. Drop in power cost due to depreciation of the Egyptian pound against the US dollar has increased competitiveness of caustic soda produced by TCIS. Caustic soda prices have increased in fiscal 2025 with improvement in demand.

 

Revenue visibility will be driven by steady demand for suspension PVC over the medium term. While PVC realisations are expected to be muted, TCIS will continue to benefit from the large demand-supply mismatch and its market leadership position. Furthermore, the company also has a sizeable presence in the export market.

 

• Support from SSL: TCIS is highly dependent on imports of EDC, which is the key raw material for PVC production, despite the fact that a part of EDC requirement can be manufactured captively through the ethylene plant. This is due to cost competitiveness of imported EDC and the mix of captive versus imported EDC will depend on the cost competitiveness of the latter. Due to long vintage and established relationships with suppliers, the company largely resorts to imports.

 

Amid forex challenges and scarcity of US dollars in Egypt, in order to ensure seamless procurement of EDC essential for sustenance of operations, SSL has extended support to procure and supply EDC to TCI with an extended credit period, pending tie-up of additional working capital facilities with banks. As regards receivables, sales are on cash and carry basis. Besides, the company is also managing working capital through collection of advances from customers. Average inventory holding period is also low at ~40-50 days. Besides the extended credit support, SSL also provides trade advances to support TCIS.

 

• Longstanding presence of the Sanmar group in the petrochemicals business: The Sanmar group has been manufacturing petrochemicals for over five decades. It is also present in other businesses such as shipping, metals, and engineering products. The promoters have scaled up the Indian chemicals business to over Rs 5,900 crore, and the group has an established position in the domestic market. The PVC/chemicals business, on a consolidated basis, generated revenue of over Rs 10,000 crore, lending significant scale to the group. This has also enabled the group to attract investments from marque investors such as the Fairfax group. It was also evident in the IPO of Chemplast Sanmar Ltd, wherein it raised Rs 3,850 crore during fiscal 2022.

 

Weaknesses:

• Vulnerability of profitability to fluctuations in PVC prices: Operating profitability of PVC manufacturing companies depends on prevailing prices of PVC and EDC. Cyclical downturns have caused the margin to fluctuate in the past, which is common in the petrochemicals industry. The Sanmar group has over five decades of experience in the petrochemicals industry and have managed impact of cyclicality in the past. PVC imports from the USA into Egypt attract a 13% anti-dumping duty, while there is no duty on Chinese imports. Any material change in the duty structure will be a monitorable.

 

• Sub-par financial risk profile: The financial risk profile has remained sub-par over the years due to erosion of net worth and continued losses in earlier years, and in fiscal 2024 and 2025. With infusion of $17 million equity by the promoters and better performance in fiscal 2022, net worth witnessed modest improvement. For fiscal 2023, the company has reported net profits of USD 53.9 million, which includes unrealized gain on conversion of debt. Excluding these gains, there has been a loss at the net profit level in fiscal 2023. In fiscal 2025, equity infusion of $12 million and conversion of unsecured loans of $202 million will partially offset the decline in net worth due to net losses. However, et losses are expected to continue next fiscal as well and will buttress impact of expected equity infusion, resulting in continued negative net worth.

 

In the medium to long term, any potential sizeable equity raise will improve the net worth and debt protection metrics, should proceeds be used to retire debt. The company is expected to undertake capital expenditure (capex) of ~$20 million per annum over the medium term towards routine maintenance and replacement of components at plants, so as to enhance efficiency.

 

Timely support, if required, is also expected to be forthcoming from the parent holding company. Any change in this stance will be monitorable.

 

• Exposure to risk related to forex availability: Following the economic impact caused by the pandemic and the Russia-Ukraine war, which further exacerbated inflationary pressures and affected tourism, the Central Bank of Egypt curbed the availability of US dollars for entities operating out of Egypt in fiscal 2023, and this has continued into fiscal 2024. TCI has a large requirement of US dollars, as it imports a sizeable portion of its raw material and needs to service dollar denominated debt. Therefore, to ensure sufficient availability of US dollars, the company has increased PVC exports, even though prices of PVC are lower in export markets than in the domestic market.

 

With positive developments with respect to investments in Egypt from ADQ, Abu Dhabi (Abu Dhabi Developmental Holding Company) and support from the International Monetary Fund, the US dollar availability situation has improved in Egypt.

Liquidity: Adequate

Overall liquidity benefits from likely access to funding support from its holding company, as demonstrated in the past. However, standalone liquidity remains stretched, as the working capital limit are completely utilized. Additional working capital lines of $60 million tied up in January 2025 have also been highly utilized. Interest payments are bi-annual for term debt. Despite lower operating profits, TCIS mobilised customer advances and received extended credit support from SSL, which enabled it to honor the interest obligations in September 2024 on time.

 

The company has debt servicing obligations (interest and principal repayment) of ~$35 million due in March 2025. As per restructuring terms, the pre-existing working capital lines of $92 million with Bank of Baroda and Arab African Bank will be reduced by $11 million in March 2025. Besides, DSRA has to be increased by $3 million factoring the principal repayment obligations in September 2025. TCIS requires around $49 million by end of March 2025. With equity infusion of $12 million, TCIS has reduced its utilisation in its pre-existing working capital lines by $11 million so as to factor the reduction due in March 2025. The advances obtained from SSL (~$50 million as of December 2024) has been brought down to ~$20 million. Hence, TCIS requires balance of around $38 million to meet its obligations which is expected to met by collections, trade advances or customer advances.

 

Sustained improvement in liquidity is dependent on better profitability at TCIS and receipt of export incentives outstanding from the Eqyptian government. TCI has interest obligation of around $80-85 million in fiscal 2026, with long-term principal repayment obligation of $12 million. While the operating profits are expected to be lower, tie up of additional working capital lines of $20-25 million with other banks, equity infusion of $46 million as per restructuring terms and support from SSL will help meet the debt obligations of TCIS.

 

Timely support, if required, is also expected to be forthcoming from the parent holding company.

Outlook: Stable

Crisil Ratings believes that TCIS is expected to maintain its established market position in the PVC segment in Egypt and in the European markets, and enhance its operating efficiency across businesses, supported by cost-reduction initiatives. The financial risk profile is expected to remain sub-par over the medium term, despite improving gradually, driven by improved product-raw material spreads/margins. While the company has raised additional working capital lines and timely support from the holding company of the Sanmar group is expected to be forthcoming in case required, liquidity remains stretched due to weak operating cash flows, thereby increasing dependence on advances from customers and extension of credit period from SSL

Rating sensitivity factors

Upward factors:

• Improvement in operating performance, while maintaining healthy double-digit operating margin, leading to annual cash accrual of over ~$30-40 million
• Improvement in financial risk profile and debt metrics, supported by significant debt reduction including through equity infusion.
• Raising of additional working capital lines to provide liquidity buffer. 

Downward factors:

• Significant moderation in business performance with operating margin remaining below 7% on sustained basis, thereby impacting cash generation
• Continuing high debt level due to cash losses, capex or elongation in working capital cycle impacting debt metrics; interest coverage ratio sustaining below 1 time
• Change in stance of support from the Sanmar group, mainly the holding company

About the Company

The Sanmar group had acquired Trust Chemical Industries, an Egyptian limited liability company, in March 2007. The company was operating the largest chlor alkali plant in Egypt with capacity of 200,000 tonne per annum of caustic soda. This was converted into a joint stock company in June 2010. The plant is located at Port Said, at the mouth of the Suez Canal.

 

Since then, the company has gradually expanded its capacity and product profile, and is now the largest PVC (capacity of 400,000 tonne per annum) and chlor alkali (capacity of 275,000 tonne per annum) manufacturer in Egypt.

Key Financial Indicators*

As on/for the period ended March 31		2024	2023
Revenue	Rs Crore	3760	4933
Profit after tax	Rs Crore	-1184^	-74#
PAT margin	%	-ve	-Ve
Adjusted debt/adjusted networth	Times	NM**	NM**
Interest coverage	Times	0.72	2.59

#Fiscal 2023 – PAT excludes net unrealized gain on extinguishment of loan converted to NCD/bond $ 63.07 mn (Rs. 511 cr)

*Exchange rate used for FY23– Rs.81/$;FY24 – Rs 83.5/$

**Not meaningful

^PAT losses are higher in FY24 compared to FY23 due to $66.3 million (Rs 554 crores) primarily due to deferred tax liability arising out of revaluation of assets

Any other information: Not Applicable