Detailed Rationale

CRISIL Ratings has assigned its ‘CRISIL AA+/Stable’ rating to the non-convertible debentures (NCDs) of Tata Chemicals Limited (TCL) while reaffirming its ‘CRISIL A1+’ rating on the commercial paper programme of TCL.

 

The ratings reflect the strong business risk profile of TCL, driven by its established market presence in diversified markets, and healthy financial risk profile on the back of healthy liquidity and strong financial flexibility emanating from being part of the Tata group. These strengths are partially offset by susceptibility to price volatility in the soda ash business.

 

During fiscal 2024, TCL’s consolidated revenue saw a year-on-year decline of around 8%, mainly on account of lower realizations and reduced volumes, owing to muted demand and pricing pressure faced across the industry. Earnings before interest, tax, depreciation, and amortization (EBITDA)) margin also moderated to 18.5% during fiscal 2024 as against 22.7% during fiscal 2023. Realizations for the domestic segment are expected to remain subdued on account of higher expected supply levels owing to commissioning of domestic capacities while volumes are expected to increase on the back of favorable near-term demand outlook, especially from the glass sector.

 

Among international businesses, the operations in the US improved marginally due to improved realizations despite reduced volumes owing to disruptions on account of plant maintenance and rail car shortage during fiscal 2024. The company’s UK operations witnessed a revenue decline of around 9% to Rs 2,404 crores during fiscal 2024 as against Rs 2,629 crores during fiscal 2023, along with 11% drop in volumes during the period, as it faced muted demand. The operations in Kenya also faced demand headwinds with overall revenue decline of 32% while volumes moderated by 15% during fiscal 2024.

 

While the standalone business of TCL remained debt (long-term) free till March 31, 2024 with majority of the debt residing in its international businesses, TCL is expected to raise fresh NCDs up to Rs 2,000 crore at standalone level mainly to repay equivalent debt in its overseas subsidiaries; overall, gross debt is not expected to increase as a result of raising these fresh NCDs. Gross debt reduced to Rs 5,064 crore as on March 31, 2024, against Rs 6,083 crore as on March 31, 2023 as the company prepaid part of its debt from cash accruals.

Analytical Approach

For arriving at its rating, CRISIL Ratings has combined the business and financial risk profiles of TCL, Tata Chemicals Europe, Tata Chemicals North America, Tata Chemicals Magadi, and Rallis India Ltd (Rallis; ‘CRISIL AA+/Stable/CRISIL A1+’). For calculation of financial ratios, CRISIL Ratings has amortized goodwill (both arising from acquisitions as well as self-generated) over 20 years starting fiscal 2009. A significant portion of this goodwill relates to the acquisition of General Chemical Industrial Products (GCIP), which gave TCL access to long-term trona reserves for manufacturing natural soda ash.

 

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:

• Strong business risk profile driven by established market presence: Business remains diversified, with operations spread across basic chemistry products, including soda ash, sodium bi-carb and salt manufacturing (together contributing around 82% of revenue in fiscal 2024) and specialty products, including agricultural solutions (around 18%).

 

The inorganic chemicals business is geographically diversified across North America, Europe, Africa and India. TCL is the third-largest producer of soda ash in the world, with capacity of 4.4 million tonne per annum (mtpa) and natural soda ash forming nearly two-third of its capacity. Its subsidiary, Rallis, too has a strong market position in the agricultural products industry. The consumer products business, which was demerged to Tata Consumer Products Ltd, has resulted in increasing contribution from the soda ash business.

 

• Healthy operating efficiency in the natural soda ash business: Operating efficiency is expected to remain healthy, backed by availability of low-cost natural soda ash from North America, and improving capacity utilisation catering to strong demand across all applications. The company’s soda ash plant in Mithapur, Gujarat, is one of the lowest-cost producers of synthetic soda ash, aided by proximity to saltworks and limestone quarries and economies of scale. It also has an integrated cement plant, which utilises by-products from soda ash manufacturing.

 

• Strong financial risk profile, underpinned by strong liquidity, high financial flexibility and healthy capital structure: Liquidity remains strong, aided by cash and cash equivalent of Rs. 645 crores and liquid investments of Rs. 615 crores as on March 31, 2024. The company also had quoted equity investment in other Tata group companies valued at around Rs. 6451 crores as on May 27, 2024. Strong financial flexibility being part of the Tata group, and low utilisation of working capital lines, also support liquidity. Capital structure remains healthy with gearing at 0.3 times as on March 31, 2024 and is expected to remain well below 1 time going forward with no major debt addition planned.

 

The company has also announced next phase of capex of Rs 2,000 crore to be spent over next four years to increase its soda ash and sodium bicarbonate capacity. The capex is expected to be funded from internal accruals and thus shall not impact the financial risk profile of the company.

 

Weakness:

• Susceptibility to price volatility in the soda ash business: The domestic soda ash business remains susceptible to volatility in international prices, driven by capacity addition, currency fluctuations and competition from imports. While improved operating efficiency from large scale of operations and increased integration across geographies partially offsets impact of any price fluctuation on TCL, its soda ash business will remain exposed to price volatility.

Liquidity: Strong

Liquidity is supported by cash and cash equivalent of Rs 645 crore as on March 31, 2024 along with outstanding liquid investments of Rs. 615 crores. Easy access to low-cost financing from banks and financial markets, being part of the Tata group, and minimal utilisation of working capital lines also support liquidity. Expected annual cash accruals of over Rs 1,400-1,500 crore over fiscals 2025 to 2027 would be adequate to cover the planned capital expenditure over the medium term, while the company would look to refinance a part of the scheduled debt repayments in some of its foreign subsidiaries.

 

ESG profile

Key ESG highlights:

• TCL is committed to reduce its carbon footprint as per the Science Based Target initiatives (SBTi) guidelines by 30 percent by 2030 from 2019 base year.
• TCL for fiscal 2024 had consumed ~100% fly ash generated in its operations.
• The company’s lost time injury frequency rate has reduced in fiscal 2024 compared to the previous fiscal (for employees LTIFR reported was 1.21x in fiscal 2024 compared to 1.83x in previous fiscal, and for workers LTIFR was 0.19x in fiscal 2024 compared to 0.4x in the previous fiscal)
• Gender diversity for employees and workers stood at ~9% and ~6%, respectively, in fiscal 2024.
• Its government structure is characterized by ~56% of its board comprising of independent directors, 22% being woman board directors, split in positions of chairperson and CEO, presence of a board level ESG committee and extensive financial disclosures.

Outlook: Stable

CRISIL Ratings believes TCL will continue to benefit from its established market presence in domestic as well as international markets and healthy financial risk profile driven by strong liquidity and financial flexibility.

Rating Sensitivity factors

Upward factors:

• Healthy revenue growth coupled with improvement in profitability leading to better-than-expected cash accruals on a sustained basis
• Significant deleveraging resulting in consolidated net debt to Ebitda ratio of below 1 time on a sustained basis

 

Downward factors:

• Increase in debt or moderation in profitability leading to consolidated net debt to Ebitda ratio of over 3 times on a sustained basis
• Lower-than-expected cash accruals on a sustained basis
• Significant depletion in cash position (including liquid investments)

About the Company

Incorporated in 1939, TCL manufactures soda ash and related chemicals, including sodium bicarbonate, caustic soda and bromides. The company commenced operations in 1944 with a 30,000 tonne per annum (TPA) plant in Mithapur. Over the years, it has expanded its soda ash installed capacity to 10,91,000 TPA. It entered the iodised vacuum salt business in 1986. TCL also has a 440,000-TPA cement plant in Mithapur, which was set up to effectively utilise the solid waste generated during soda ash production.

 

Its subsidiary, Rallis, is one of the leading players in the domestic crop protection sector, and manufactures pesticides, herbicides and fungicides at its factories in four locations. In March 2006, TCL completed acquisition of the Brunner Mond group for GBP 104 million, gaining access to the soda ash business in Europe and Kenya. It acquired GCIP in North America for USD 1.01 billion in March 2008. In December 2010, it acquired British Salt Ltd, the leading manufacturer of pure-dried vacuum salt products with around 50% market share in the UK, for GBP 93 million. The company also has brine wells with a long tenure of residual life. TCL was also in the urea and phosphatic fertiliser and trading businesses, which it sold in 2018 as part of its strategy to exit highly regulated businesses. In fiscal 2020, TCL demerged its consumer product business to another Tata group entity, and also acquired the remaining 25% stake in Tata Chemicals (Soda Ash) Partners (TCSAP) for USD 195 million, thereby increasing its stake to 100%.

Key Financial Indicators

Particulars	Unit	2024	2023
Revenue	Rs crore	15707	17045
Profit after tax (PAT)	Rs crore	435	2434
PAT margin	%	2.8	14.3
Adjusted gearing	Times	0.30	0.41
Interest coverage	Times	6.04	9.95

CRISIL Ratings-adjusted numbers

Any other information: Not Applicable

Annexure - Details of Instrument(s)

ISIN	Name of the instrument	Date of Allotment	Coupon Rate (%)	Maturity Date	Issue size (Rs. Crore)	Complexity Level	Rating assigned with outlook
NA	Commercial paper	NA	NA	7-365 days	100	Simple	CRISIL A1+
NA	Non-convertible debentures*	NA	NA	NA	2000	Simple	CRISIL AA+/Stable

*Yet to be issued