Detailed Rationale

CRISIL Ratings has revised its outlook on the long-term bank facilities of Assam Bio Refinery Private Limited (ABRPL) to ‘Negative’ from ‘Stable’ while reaffirming the rating at ‘CRISIL A+’.

 

The revision in outlook factors that the company’s credit risk profile may weaken over the medium term if there is no commensurate increase in cash-flows or equity support from sponsors to largely offset the time or cost overruns in implementing the ongoing project. The total project cost and commissioning timelines has now been revised to Rs 3,250 crore and April 2023 from earlier estimates of Rs. 1,750 crore and April 2022, respectively. Any further escalations in the project cost or implementation timelines would also be a key monitorable.

 

Amongst the Rs 1,500 crore of cost increase, Rs 1,102 crore is due to changes required in project scope while the balance is due to time and cost overruns incurred. Since the current increase in cost escalations have mainly been due to changes in project scope which would yield incremental profits, no major impact on the debt servicing ability of the company is expected. Requirement of these changes in project scope coupled with the execution delays faced due to the Covid-19 pandemic has delayed the plant’s expected commissioning date to April 2023, from April 2022 expected previously.

 

The incremental project cost of Rs 1,500 crore is expected to be funded by raising additional debt of Rs 945 crore, while the balance through quasi-equity of Rs 405 crore and viability gap funding of Rs 150 crore. Funding for this incremental project cost is yet to be tied up and accordingly its timeliness would be a key rating monitorable.

 

The rating continues to reflect the strategic importance this project holds to, and the expectations of continuous support it receives from Numaligarh Refinery Limited (NRL; rated ‘CRISIL AAA/Stable/CRISIL A1+’). NRL continues to hold 50% shareholding in this company with a 75% economic interest and is expected to continue with a similar shareholding structure. It has also provided land for the project on a lease basis to ABRPL. Additionally, NRL would be guaranteeing 100% offtake of the entire bioethanol produced, which would then be blended with the motor spirit it produces; and accordingly the offtake risk would be low. Further, NRL would also be assisting ABRPL in guaranteeing the offtake/take up the responsibility of marketing the entire furfuryl alcohol produced. The rating also continues to take comfort from the vast experience of the promoters in successfully implementing projects in the oil and gas and energy sector.

 

These rating strengths are, however, partially offset by the initial construction phase of the project. ABRPL would be the first second-generation (2G) bio-refinery to be set up in India and accordingly successful implementation of the project within the desired timelines would be a key monitorable. While the technology, to be licensed by Chempolis, has been tested on a pilot plant basis, its deployment on a commercial scale is still to be seen. The key feedstock i.e. bamboo is abundantly available in the north-eastern regions wherein ABRPL would be setting up its refinery. However, considering the unorganized nature of the segment, seamless execution of the bamboo sourcing agreements with the local level entrepreneurs (LLEs) guaranteeing bamboo availability at reasonable price would be a key rating monitorable.

Analytical Approach

CRISIL Ratings has applied its parent notch-up framework to factor in the extent of support the company is expected to receive from NRL. While NRL is expected to hold 50% shareholding under the joint venture (JV) structure, at present it holds a 75% economic interest in the project through the additional funding committed through shareholder loans which is unsecured and sub-ordinated to bank loans. Also, considering the strategic importance the project holds for NRL, the company is expected to continue receiving the required operational, financial and managerial support; in a timely manner.

Key Rating Drivers & Detailed Description

Strengths:

• Strategic importance to JV sponsors i.e. NRL and Fortum 3 BV:

ABRPL’s bio-ethanol plant would be of strategic importance to NRL’s existing operations. NRL would be blending the bio-ethanol purchased from ABRPL with the motor spirit it produces, to adhere with the Government’s guidelines of achieving a 20% ethanol blending target by 2025. Successful commissioning of the plant would enable Fortum to expand its market reach in the bio-based solutions.

 

The project is expected to receive the required managerial, financial and operational support from its promoters, on a timely basis. There are six directors on the board, out of which three directors are from NRL, two directors are from Fortum and one director is from Chempolis; while the Chairman of the board will be alternated between NRL and Fortum’s management, every 5 years.

 

NRL has also been closely providing the required operational support on grounds such as manpower resources and utilities, to ensure seamless execution of the project. The bio-refinery would be set up adjacent to NRL’s existing refinery, on the land leased out by NRL.

 

• Comfortable DSCR position expected owing to assured offtake

NRL would be guaranteeing the entire offtake of the bioethanol produced by ABRPL. It would also be ensuring the offtake of furfuryl alcohol produced, in case ABRPL is unable to market the same. Sale of bioethanol and furfuryl alcohol is expected to contribute to approximately 85% of revenues. The offtake agreement will be executed with NRL prior to the plant achieving its COD and accordingly its timely execution would be a key rating monitorable.

 

Despite the estimated project cost increase by Rs 1,500 crore, the DSCR position is expected to remain comfortable with an average DSCR of around 1.40 times, expected over the tenure of the loan. Since the current increase in cost escalations have mainly been due to changes in project scope which would yield incremental profits, no major impact on the debt servicing ability of the company is expected.

 

Weaknesses:

• Susceptibility to time and cost overruns, thereby impacting economic viability of the project

Construction of the bio-refinery begun in early 2019, wherein the plant was expected to commission by April 2022. However, requirement to undertake certain changes in the project scope coupled with the execution delays that were faced due to the Covid-19 pandemic has delayed the plant’s expected commissioning date to April 2023.

 

A comfort is taken of the vast experience of the promoters who have depicted a suitable track record in successfully implementing projects in the oil and gas and energy sector. However, this being the first 2G bio-refinery to be set up in India, its steady execution as per the planned timelines as well as its successful commissioning would continue to be a key rating monitorable.

 

• Operating margins could be exposed to volatility in feedstock prices

Bio-ethanol prices are regulated by the Government, wherein currently the minimum support price is being estimated basis the cost of production of ethanol as a co-product in sugar mills. The current mechanism therefore considers the sugarcane prices while arriving at the minimum support price (MSP) for bio-ethanol. On the other hand, ABRPL would be processing bamboo to produce ethanol and therefore, the product prices would be delinked to feedstock prices. Accordingly, post the plant commissioning its operations, the ability of the company to maintain its operating margins amidst the fluctuations that could arise in the feedstock prices, would be a key rating monitorable.

Liquidity: Adequate

The project is currently being funded through a mix of equity and debt, as per the funding terms agreed upon. Funding for the incremental project cost of Rs 1,500 crore is in the process of being tied up. Repayments for the funded debt is expected to begin post the plant commissions operations. The project is expected to continue receiving the required funding, on a timely basis, owing to strong balance sheets of the two JV sponsors namely, NRL and Fortum.

Outlook: Negative

CRISIL Rating believes that ABRPL’s credit risk profile could be impacted in case the project incurs any further time or cost overruns. Additionally, a timely tie up of the funding required for the incremental project cost of Rs 1,500 crore would be a key monitorable.

Rating Sensitivity factors

Upward factors:

• Timely and successful commissioning of the plant, within the revised budgeted project cost
• Execution of the required bamboo sourcing and offtake agreements, wherein a comfortable DSCR of 1.40 times could be expected over the loan tenure

 

Downward factors:

• Considerable delay in project execution, resulting in significant time and cost overruns, resulting in DSCR weakening to below 1.30 times
• Sharp uptick in bamboo prices or unfavorable realization of bioethanol produced, resulting in DSCR weakening to below 1.30 times
• Downward revision in credit rating of NRL by at least one notch
• Reduction in shareholding or moderation in support philosophy of NRL towards ABRPL

About the Company

Incorporated in June 2018, ABRPL is a joint venture set up by NRL, Fortum 3 BV and Chempolis Oy, wherein NRL would hold a 50% equity stake while Fortum 3 BV and Chempolis together would hold the remaining 50%. The company has been set up with an aim to produce eco-friendly bio-ethanol from bamboo biomass, along with the other co-products namely furfuryl alcohol, acetic acid and liquid CO2.

 

Construction of the bio-refinery begun in early 2019, wherein the plant was expected to commission by April 2022. However, requirement to undertake certain changes in the project scope coupled with the execution delays that were faced due to the Covid-19 pandemic has delayed the plant’s expected commissioning date to April 2023.

 

Through processing 300,000 TPA of dry bamboo (500,000 TPA of green bamboo), ABRPL would be able to produce 50,120 TPA of bio-ethanol (48,900 TPA expected initially), 11,100 TPA of acetic acid and 18,600 TPA of furfural annually. Also, a total of 31,680 MT of liquid CO2 will be extracted from off-gas streams annually, as identified as per the changes in project scope recently undertaken.

 

The project cost which initially was estimated at Rs 1750 crore, has been revised to Rs 3250 crore. The total project cost is estimated to be funded in the debt: equity ratio of 67:33. The Rs 150 crore of viability gap funding that the company is entitled to receive is considered as a quasi-equity for computing the funding mix.

Key Financial Indicators*

As on / for the period ended March 31		2021	2020
Operating income	Rs crore	NA	NA
Reported profit after tax (PAT)	Rs crore	NA	NA
PAT margin	%	NA	NA
Adjusted debt/adjusted networth	Times	NA	NA
Interest coverage	Times	NA	NA

*Company is in project stage

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon Rate (%)	Maturity date	Issue Size (Rs Cr)	Complexity level	Rating assigned with outlook
NA	Rupee Term Loan	NA	MCLR + 0.5%	30-Sep-33	1225	NA	CRISIL A+/Negative