Key Rating Drivers & Detailed Description

Strengths:

Established market position in urea and diammonium phosphate (DAP), especially in north India

Chambal is the largest private player in the urea industry in India in terms of production capacity. Its share in the total domestic urea production has increased to 13.4%, driven by ramp-up of its Gadepan-III plant. The company has maintained its share in the non-urea fertilisers segment. It sold 0.93 million tonne of DAP/muriate of potash/nitrogen phosphorus potassium during the first nine months of fiscal 2022, down from 1.60 million tonne in the corresponding period of the previous fiscal because of global shortage of the fertilisers amidst the Russia-Ukraine war. It has a significant market share in north India, supported by strong brand (Uttam Vir) and robust distribution network. Favourable location of plants (near end-user markets and feedstock source), large capacity and low energy consumption are added advantages. The urea plants are near the Hazira-Bijapur-Jagdishpur gas pipeline, which ensures sufficient gas availability.

Superior operating efficiency

High operating efficiency is driven by plants functioning at more than 100% of capacity, energy consumption below the prescribed norms and additional fixed cost of Rs 350 per tonne provided by the government for urea players. Excluding the months where the plants were shut for maintenance, the Gadepan-I and -II plants operated below the energy norm of 5.500 gigacalorie per tonne during the first nine months of fiscal 2022. The Gadepan-III unit consumed less than 5.00 gigacalorie per tonne during the period, improving the operating efficiency of the urea manufacturing business.

Chambal sold 2.62 million tonne of urea and 0.93 million tonne of DAP/muriate of potash/nitrogen phosphorus potassium during the first nine months of fiscal 2022 (2.73 million tonne and 1.60 million tonne, respectively, in the corresponding period of the previous fiscal). While uneven distribution of rainfall caused a marginal decline in urea sales, the global shortage of complex fertilisers impacted sales volume in the domestic market.

The recent rise in feedstock (natural gas) prices will not impact the operating profitability of the urea production division as it is passed through entirely, to be compensated through subsidy receipts from the government. For Profitability against production above reassessed capacity, wherein incentive is capped at import parity price of urea plus incidental charges, to also not be majorly impacted on considering that the imported urea prices are also high. However, the global shortage of complex fertilisers, which has led to a spike in prices, may have a mid-term impact on overall profitability.

Production of the Gadepan-III unit has been restricted at 100% as there has been no defined policy for production above 100% for plants commissioned under the new urea investment policy. Amidst the rise witnessed in imported fertilizer prices, government has permitted Chambal to increase its output from this unit to beyond the installed capacity for this fiscal which will support its operating efficiency.

Comfortable financial risk profile

The company used the additional subsidy announced under the Aatmanirbhar Bharat Package 3.0 mainly to repay working capital borrowings, thereby improving its capital structure and debt protection metric substantially. Adjusted debt to adjusted networth improved to 0.75 times as on March 31, 2021 (2.94 times as on March 31, 2020). Adjusted interest coverage and net debt to OPBDIT ratios improved to 8.63 times in fiscal 2021 (4.28 times in fiscal 2020) and 1.19 times as on March 31, 2021 (4.94 times a year earlier), respectively.

While there has been an unprecedented rise in raw material prices (especially pooled gas prices) and imported fertiliser rates, the additional subsidies (Rs 60,593 crore added to the initial budget of Rs 79,530 crore) announced by the government should restrict increase in subsidy arrears for this fiscal. A similar addition in subsidy budget is expected for fiscal 2023, to compensate for the rise in raw material and imported fertiliser prices. Timely announcement and disbursement of the additional subsidies remain key rating sensitivity factors.

Chambal has no large cash outflow towards capex or investments over the near term. Overall, net debt to OPBDIT ratio is expected to remain below 1.5 times over the medium term.

Weakness

Exposure to regulatory risks

Given the government’s thrust on self-sufficiency in food grain production, the fertiliser industry is strategic but highly controlled. Hence, players are susceptible to regulatory changes. The government has been focusing on reducing subsidy without increasing prices by urging companies to adopt efficient methods for urea production. In line with these measures, the government has tightened energy consumption norms, thereby impacting profits of urea players unless they improve energy efficiency. The impact of this norm is mitigated by the agreed additional fixed cost of Rs 350 per tonne allowed for all urea manufacturers.

Fertiliser companies are also susceptible to delays in subsidy payments from the government, leading to high reliance on working capital loans. Any deferment in the disbursement of subsidy on account of under-budgeting and any change in the regulatory scenario remain key rating sensitivity factors.

Annexure – List of Entities Consolidated

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