Detailed Rationale

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

 

The downgrade reflects the likely weakening of credit risk profile of the company due to further escalation in the project cost and delay in its commissioning. The total project cost has been revised to Rs 4,200 crore as compared to the previous estimate of Rs 3,250 crore (vs initial estimates of Rs 1,750 crore). The project commissioning timeline is also extended by one year to April 2024. The same was expected to commission in April 2022 initially. While the management does not anticipate any further escalations in the project cost or implementation timelines, considering ABRPL would be the first second-generation (2G) bio-refinery to be set up in India; successful implementation of this project within the revised timelines and costs would remain a key monitorable.

 

The rating, however, 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 ABRPL with an ~85% economic interest as of Sep 30, 2023 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 sales/offtake of the entire furfuryl alcohol and acetic acid produced by assuring buyers on the quality and supply of products.

 

The rating continues to take comfort from the vast experience of the promoters in successfully implementing projects in the oil & gas and energy sector. These strengths are, however, partially offset by the construction progress of the project. ABRPL would be the first 2G bio-refinery to be set up in India. While the technology, to be licensed by Chempolis Oy (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 unorganised nature of the segment, seamless execution of bamboo sourcing agreements with the local level entrepreneurs (LLEs) guaranteeing its availability at reasonable price would be a key rating monitorable during the operational phase of the project.

Analytical Approach

CRISIL Ratings has applied its parent notch-up framework to factor in the extent of support the company receives from NRL. While NRL is expected to continue to hold 50% shareholding under the joint venture (JV) structure, as of Sep 30, 2023 it holds an ~85% economic interest in the project through the additional funding committed by way of shareholder loans and optionally convertible debentures (OCDs) which are 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 (Fortum):

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 to the government’s guidelines of achieving a 20% ethanol blending target by 2025. Similarly, successful commissioning of the plant would enable Fortum to establish its technology commercially and 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, especially from NRL, on a timely basis. There are six directors on the board, out of which three are from NRL, two from Fortum and one from Chempolis. The Chairman of the board is currently from NRL and 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 is being set up adjacent to NRL’s existing refinery, on the land leased by NRL.

 

Guaranteed offtake by NRL

NRL is guaranteeing the entire offtake of the bioethanol produced by ABRPL. It is also ensuring the offtake of furfuryl alcohol produced, in case ABRPL is unable to market the same. The sale of bioethanol and furfuryl alcohol is expected to contribute to 70-80% of revenues. NRL will also assist in sales of acetic acid, if needed, by assuring buyers of the quality and supply of products. The offtake agreement will be executed with NRL prior to the plant achieving its commercial operation date (COD). Therefore, the demand risk for the project would be low.

 

Moderate though adequate DSCR position

Owing to further increase in the project cost by Rs 950 crore, the DSCR position has moderated to ~1.3 times as against ~1.5 times projected previously over the tenure of the loan. DSCR is still adequate since the assets would have significant remaining life beyond the tenor of the debt which shall reduce refinancing risk. The increase in the project cost is likely to be funded by additional debt having similar repayment tenor/structure and other terms as existing debt.

 

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 initially expected to commission by April 2022. However, the requirement to undertake certain changes in the project scope coupled with the execution delays that were faced due to the Covid-19 pandemic had resulted in plant’s expected commissioning date getting revised to April 2023. Now, owing to further changes in engineering design and supply side issues, the commissioning date stands revised to April 2024 resulting in total delay of 2 years so far.

 

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 execution as per the planned timelines as well as its successful commissioning & stabilisation 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. External funding required has been tied up via term debt, balance to be funded via quasi equity and viability gap funding of Rs. 150 crore. Repayments for the funded debt is expected to begin one year after the commissioning of plant operations. The project is expected to continue receiving the required funding, on a timely basis, owing to the strong balance sheets of the two JV sponsors namely, NRL and Fortum.

Outlook: Stable

A stable outlook reflects CRISIL Ratings’ expectation that ABRPL will be able to implement the project within the revised cost and timeline thereby supporting its credit risk profile. However, ABRPL being the first 2G bio-refinery plant proposed to be set up in India, its successful commissioning and stabilisation would be monitored closely.

Rating Sensitivity factors

Upward factors:

• Successful commissioning and stabilization of the plant within the revised 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:

• Further delay in project execution, resulting in significant time and cost overruns.
• Sharp uptick in bamboo prices or unfavorable realization of bioethanol produced, resulting in significant weakening of DSCR.
• Downward revision in credit rating of NRL by 1 notch or more
• 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. The plant is expected to be commissioned in April 2024.

 

Through processing 300,000 tonne per annum (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 furfuryl alcohol annually. Also, a total of 31,680 metric tonne 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, was previously revised to Rs. 3250 crores owing to changes in project scope and has now been further revised to Rs 4200 crore owing to increased cost of key raw materials such as steel and titanium arising due to the global supply chain situation. The total project cost is estimated to be funded in the debt: equity ratio of 75:25. The Rs 150 crore of viability gap funding that the company is entitled to receive is netted off the project cost for computing the funding mix.

Key Financial Indicators*

As on/for the period ended March 31	Unit	2023	2022
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