Detailed Rationale

CRISIL Ratings has upgraded its ratings on the bank facilities of Agarwal Coal Corporation Private Limited (ACCPL) to ‘CRISIL A/Stable/CRISIL A1’ from ‘CRISIL A-/Positive/CRISIL A2+’.

 

The ratings upgrade factors in the strong operating performance of the imported coal trading business, driven by volume gains and healthy demand for imported coal on the back of strong economic growth. Going forward, CRISIL Ratings believes that the group will continue to maintain its operating margin, traded volumes, healthy liquidity and adequately hedge its foreign exchange (forex) exposure in line with the existing policy. This will remain a key rating monitorable going forward.

 

The operating performance of the Agarwal group remained healthy during fiscal 2023 on the back of higher volumes and healthy operating margins. The company continues to benefit from its long-term relationships with suppliers despite global macro headwinds. The group reported earnings before interest, tax, depreciation and amortisation (Ebitda) per tonne of Rs 587 for fiscal 2023 against Rs 777 last fiscal. While imported coal prices moderated during the second half of fiscal 2023 and first half of the current fiscal, it continues to remain higher than historical averages. Ebitda per tonne is expected to normalise with easing of the international demand-supply situation. Volumes will likely remain stable this fiscal supported by continuation of the government mandate on minimum blending of imported coal by power generation companies in India and moderation in imported coal prices.

 

Moreover, the financial risk profile remains healthy supported by adequate debt protection metrics. The liquidity remains strong driven by unencumbered cash and cash equivalent of around Rs 1,000 crore as on October 5, 2023.

 

Furthermore, the ratings reflect the Agarwal group's established market position in the imported thermal coal trading business and healthy financial risk profile. These strengths are partially offset by the susceptibility of debt protection metrics to adverse movements in forex rates and exposure to risks related to stretched working capital cycle and bad debt.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of ACCPL and its associate companies – Agarwal Fuel Corporation Pvt Ltd (AFCPL), Agarwal Coal Corporation (Singapore) Pte Ltd (ACCSPL) and Agarmin Coal Washery Pvt Ltd (ACWPL) as the companies have common promoters and strong operational and financial linkages. These companies are collectively referred to as the Agarwal group.

 

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:

Established market position

The Agarwal group is a leading player in the imported non-coking coal trading business in India and continues to maintain their market share of 6-7% since fiscal 2018. The customer base (mainly in Gujarat, Karnataka, West Bengal, Maharashtra, Chhattisgarh, Odisha and Tamil Nadu) comprises of small and medium companies in diverse segments, such as textiles, steel, captive power generation and ceramics. The group also provides stevedoring and inland transportation services to large customers.

 

The stable market position and diversified clientele will mitigate the impact of a decline, if any, in demand from any one sector. While the coal trading volume will be supported by continued demand from the power sector and government guidelines to blend imported coal by power plants, sustenance of the coal trading volume will remain a key monitorable.

 

Healthy financial risk profile

The financial risk profile is supported by healthy debt protection metrics and capital structure. Being in the trading business, the Agarwal group avails mostly working capital limits, including letter of credit facilities (LC). As of March 2023, it had outstanding working capital limits including LCs of around 25% of the operating income of fiscal 2023. Out of this, around 70% was secured against margin money fixed deposits. The capital structure also remained healthy with net gearing (adjusted net debt[1] to adjusted networth) of 0.20 time as on March 31, 2023 (0.1 time as on March 31, 2022). Furthermore, the group hedges 70-75% of its forex exposure as per their hedging policy which contributes to higher interest and finance costs. However, interest coverage ratio is likely to remain range-bound at 2-3 times and net gearing is expected to remain below 0.1 time over the medium term.

 

The group has invested around Rs 140 crore during fiscal 2023 (Rs 20 crore during previous fiscal) in the real estate business through its promoter-owned entity, Agarwal Real Infra LLP, and plans to invest ~Rs 500 crore over the next 3-5 years. CRISIL Ratings understands that, going forward, an unencumbered cash balance of at least Rs 500 crore will always be maintained by the group for its coal trading business. Any material deviation in cash accrual or interest coverage ratio, more-than-anticipated investment in group entities or diversification into unrelated businesses will be key rating sensitivity factors.

 

Weaknesses:

Exposure to fluctuations in forex rates

The entire thermal coal requirement is imported against LCs at sight and through buyer’s credit (generally of 180 days) to finance the LCs, and therefore, the group’s liability is denominated in US dollars. As on March 31, 2023, the group had foreign currency-denominated liabilities of ~Rs 2,400 crore (~Rs 2,800 crore as on March 31, 2022). While the group’s policy is to hedge 70-75% of its forex exposure through options and forward contracts, the extent of hedging differs each year (67-89% over the three fiscals through 2023) and profitability remains susceptible to the unhedged forex portion as well. The company incurred a forex loss (including hedging cost) of Rs 176 crore during fiscal 2023 (Rs 66 crore in fiscal 2022) and will remain susceptible to forex fluctuations which may lead to higher expenses over the medium term. More-than-expected variation in forex-related costs (including hedging costs) will remain a key rating sensitivity factor.

 

Exposure to risks of stretched working capital cycle and bad debt  

The group sells to diversified, mid-sized companies on high-sea basis, and to small players through the stock-and-sale model. There have been delays in the past in payments from some customers in the cement and steel industries, which had resulted in receivables of over 120 days. However, the group has since implemented a strict debtor collection policy and capped its exposure to individual customers, thus improving its working capital position. Thus, receivables position has improved during current fiscal. That said, the group continues to remain exposed to risks related to moderation in credit profile of counterparties it deals with.

 

The group relies on short-term debt to fund its working capital requirement, which helps maintain healthy debt protection metrics. Receivables are expected to remain around the same level over the medium term. Higher traded volume and delays in payment may stretch the working capital cycle, which will remain a key monitorable.

[1]Net debt = adjusted debt – cash and cash equivalents

Liquidity: Adequate

Liquidity is backed by unencumbered cash and equivalent of ~Rs 1,000 crore as on October 05, 2023, average bank limit utilisation of ~32% during the 12 months through July 2023 (sanctioned limit of Rs 190 crore for ACCPL and AFCPL combined) and expected cash accrual of Rs 340-370 crore this fiscal. The group largely relies on short-term debt, which is mostly backed by 100% cash margin. However, it is likely to maintain cash balance of at least Rs 500 crore going forward. However, liquidity remains susceptible to fluctuations in forex rates, which will remain a key rating sensitivity factor.

Outlook: Stable

CRISIL Ratings believes the Agarwal group will continue to benefit, over the medium term, from its established market position and healthy operating performance.

Rating Sensitivity Factors

Upward Factors

• Sustenance of strong operating performance with net cash accrual of over Rs 400 crore and interest coverage ratio of 5.5 times over the medium term
• Significant increase in traded volume, along with sustenance of profitability and efficient working capital management leading to improvement in the liquidity position

 

Downward Factors

• Adverse forex rate movements or lower profitability, leading to net cash accrual of less than Rs 150 crore on sustained basis
• More-than-expected investments in group entities/unrelated businesses, adversely impacting the financial risk profile and liquidity
• Delays in realisation of receivables or adverse risk management policies

About the Group

Set up as a proprietorship concern in 1966, ACCPL was reconstituted as a private limited company in 2000. The group is currently led by Mr Vinod Kumar Agarwal and is one of the leading coal importers in India. ACCPL, together with AFCPL, trades in imported and domestic coal. AFCPL also provides stevedoring and inland transportation services exclusively to customers of group companies. ACCSPL was formed to cater to customers dealing with foreign suppliers.

 

During the first quarter of fiscal 2024, the group reported operating income of Rs 2,364 crore and profit after tax (PAT) of Rs 45 crore.

Key Financial Indicators (Consolidated)*

As on/for the period ended March 31	Unit	2023	2022
Operating income	Rs crore	13,153	10,060
Profit after tax (PAT)	Rs crore	506	629
PAT margin	%	3.9	6.3
Adjusted debt (gross)/adjusted networth	Times	1.32	1.52
Adjusted interest coverage	Times	2.86	8.08

   *As per analytical adjustment by CRISIL Ratings

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	Cash credit$	NA	NA	NA	92	NA	CRISIL A/Stable
NA	Cash credit	NA	NA	NA	8	NA	CRISIL A/Stable
NA	Overdraft facility&	NA	NA	NA	35	NA	CRISIL A/Stable
NA	Overdraft facility	NA	NA	NA	10	NA	CRISIL A/Stable
NA	Letter of credit%	NA	NA	NA	372	NA	CRISIL A1
NA	Letter of credit@@	NA	NA	NA	41	NA	CRISIL A1
NA	Letter of credit##	NA	NA	NA	115	NA	CRISIL A1
NA	Letter of credit^^	NA	NA	NA	117	NA	CRISIL A1
NA	Letter of credit++	NA	NA	NA	205	NA	CRISIL A1
NA	Letter of credit**	NA	NA	NA	95	NA	CRISIL A1
NA	Letter of credit	NA	NA	NA	150	NA	CRISIL A1

&One way interchangeability from overdraft facility to letter of credit limit

$One way interchangeability from cash credit facility to letter of credit limit

%Includes sub-limits for bank guarantee of Rs 20 crore for coal business, bank guarantee of Rs 50 crore for institutional coal business and standby letter of credit of 372 crore

@@Includes sub-limits for bank guarantee of Rs 10 crore for institutional coal business and standby letter of credit of Rs 41 crore  

##Includes sub-limits for bank guarantee of Rs 40 crore for institutional coal business and standby letter of credit of Rs 115 crore

**Includes sub-limit for bank guarantee of Rs 30 crore for institutional coal business

^^Includes sub-limit for standby letter of credit of Rs 117 crore

++Includes sub-limits for bank guarantee of Rs 40 crore for institutional coal business and standby letter of credit of Rs 205 crore.