Rating Rationale

Key Rating Drivers & Detailed Description

Strengths

Healthy tank terminal business in Sharjah, UAE

VIL has set up a tank terminal complex at Hamriyah Free Zone, Sharjah, UAE, comprising 30 storage tanks of various sizes with total capacity of 170,000 CBM. It can handle a full spectrum of petroleum products and is the only terminal in the Middle East which can handle multiple categories of specialty products under one roof with one of the shortest main jetty lines. It also addresses the supply gap for petrochemical storage facilities in the UAE, wherein most of the terminals operate in the oil and gas space with limited capabilities to store all grades of chemicals, besides providing a fully integrated terminal with complete end-to-end solution for liquid cargo handling. The unique services offered by the tank complex led to its healthy utilisation and quick ramp-up since fiscal 2019. The tank terminal provides additional services of distillation, which has aided additional revenue generation.

Diversification benefits from steady trading business

VIL is also engaged in the trading business, which was set up by the erstwhile promoters who had experience of over two decades. The business is characterised by sound distribution network, strong relationships with key suppliers and customers, established processes and prudent risk mitigating practices, which has led to steady Ebitda margin over the years.

Extensive experience of the promoter

The current promoter, SEL, has extensive experience in managing multiple and diverse businesses, including textile and real estate, and strong track record in setting up large infrastructure projects in the energy space. VIL has demonstrated high proficiency in managing the commodity trading and distribution business, as reflected in the significant scaling up of operations as well as setting up the tank terminal complex at Sharjah. The company has a team of highly qualified professionals which support the diverse businesses abroad.

Weaknesses

Average financial risk profile, constrained by the VPPL project

While credit metrics are expected to remain healthy in fiscal 2024, progress on VPPL’s project will lead to increased leverage, constraining the financial risk profile before accruals from the project begin to provide support. Adjusted networth stood at Rs 2,304 crore with debt of Rs 131 crore as on March 31, 2023, leading to healthy gearing of 0.06 time. Debt protection metrics were comfortable, as indicated by interest coverage and net cash accrual to adjusted debt ratios of 8.5 times and 3.95 times, respectively, in fiscal 2023.

Debt comprised tank terminal debt of Rs 131 crore as of March 2023, which is expected to be repaid in fiscal 2024 through accruals as well as the debt service reserve account. However, with material progress on the VPPL project in the next two fiscals, the entity is expected to reach its peak debt by fiscal 2026 when the project is expected to be completed, with debt mainly comprising VPPL’s term debt. Any delay in financial closure or project implementation resulting in substantial time and cost overruns could adversely impact the cash flow and debt protection metrics of VIL, and hence, will remain a key monitorable.

Exposure to risks related to timely project implementation and funding tie-up at VPPL

VPPL is implementing a debt-funded project at cost of Rs 2,050 crore for setting up a manufacturing facility in phases at the Dighi port. The project will be funded through debt and promoter funds in the ratio of 2:1. The project has received UMPP approval from the Maharashtra government and is eligible for various benefits, including industrial promotion subsidy, and tax and duty concessions. The group has roped in a marquee player, Technip India Ltd, as its engineering, procurement and construction management (EPCM) contractor. The latter was involved in dismantling the plant at Malaysia and its shipment to Dighi port in fiscal 2018.

The project has been delayed by around five years because of various factors such as insolvency proceedings under the bankruptcy law at the debt-laden Dighi port, the Covid-19 pandemic and change in ownership of VIL. The final NCLT order in favour of APSEZ was received in July 2020 and environment clearance in March 2021.

APSEZ has taken charge of the port, and Groupe Veritas has commenced pre-commissioning surveys. The project faces implementation risk, given its scale and scope, uncertainty regarding technical output and efficiency, and its idle status for five years. Funding risk continues as the group is yet to achieve financial closure. Any significant cost or time overrun may affect cash flow and debt protection metrics, and therefore, remains a key rating sensitivity factor.

Susceptibility to volatility in tank terminal rental rates and prices of crude and petrochemicals as well as forex rates

The tank terminal business is exposed to volatility in tank terminal rental rates as well as utilisation, which could impact cash generation. As witnessed in fiscal 2023, moderation in rental rates which reached its trough during the first half of fiscal 2023 has impacted cash generation. VIL also trades in chemicals and polymer products, through its Middle East subsidiary, whose prices are directly linked to crude prices (highly volatile). While the company has adequate risk mitigating strategies, operating performance remains susceptible to volatility in commodity prices as well as forex rates and will be a key monitorable.