Rating Rationale
January 22, 2019 | Mumbai
Chambal Fertilisers and Chemicals Limited
Long-term and FD ratings upgraded to 'CRISIL AA/FAA+/Stable'; short-term rating reaffirmed
 
Rating Action
Total Bank Loan Facilities Rated Rs.10323.56 Crore
Long Term Rating CRISIL AA/Stable (Upgraded from 'CRISIL AA-/Positive')
Short Term Rating CRISIL A1+ (Reaffirmed)
 
Fixed Deposits Programme FAA+/Stable (Upgraded from 'FAA/Positive')
Rs.3000 Crore Commercial Paper CRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has upgraded its ratings on the long-term bank facilities and fixed deposit programme of Chambal Fertilisers and Chemicals Limited (Chambal) to 'CRISIL AA/FAA+/Stable'; while ratings on short term facilities and commercial paper have been reaffirmed at 'CRISIL A1+'.

The upgrade reflects timely commissioning of the company's urea capacity expansion at Gadepan III, Rajasthan on January 1, 2019, in line with expectations. Gadepan III plant has had steady operations since commissioning, operating at average healthy utilisation of above 90%. This coupled with management's extensive experience in efficiently running Gadepan I and Gadepan II lends adequate comfort that Gadepan III will continue to have stable operations going forward. Further, the government has already allowed supply of urea from this unit, thus mitigating offtake risks. This will significantly improve Chambal's market position and cash flows. Consequently capital structure should improve from fiscal 2020 as project debt gets gradually amortised. Debt to earnings before interest, tax, depreciation and amortisation (EBITDA) is expected to moderate to 4-5 times by fiscal 2020, from 7.4 times as on March 31, 2018.

The ratings continues to reflect its established market position, sustained healthy operating performance, and high financial flexibility. These strengths are partially offset by leveraged capital structure, and exposure to the regulated nature of the fertiliser industry.

Analytical Approach

For arriving at its ratings, CRISIL has combined the business and financial risk profiles of Chambal and its subsidiaries. This is because of strong financial linkages among the entities.

Please refer Annexure - details of consolidation, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description
Strengths
* Established market position in urea and Di-ammonium phosphate (DAP) especially in North India
Chambal is the largest private player in the Indian urea sector by production capacity, with an 8.5% share in the total domestic urea production in fiscal 2018. Moreover, the company sold 0.4 million tonne (mn ton) of DAP for six months ending September 30, 2018 (0.5 mn ton was sold for six months ending September 30, 2017). It has a significant share in the North India market, supported by its strong Uttam Veer brand and a robust distribution network. Favourable location of plants (near end-user markets and feedstock source), large capacity, and low energy consumption add to the advantage. The company's urea plants are located near the head of the Hazira-Bijapur-Jagdishpur gas pipeline, thereby ensuring gas availability. Since, urea expansion project at Gadepan III is now commissioned, it will replace the imports currently taking place in the northern region and thus, its market position is expected to improve further to 13-14% of total domestic urea production.

* Superior operating efficiency of fertiliser plants
Chambal maintains high operating efficiencies at both the plants and continues to operate well below the pre-specified energy consumption norms. With energy norms now revised for both the units to 5.5 Gcal/ton, its plants are operating at energy consumption of around 5.4 Gcal/ton. Further, timely commissioning of brownfield urea plant at Gadepan III and CRISIL's expectations of management running this plant also efficiently at energy consumption of about 5 Gcal/ton, will add to the overall profitability of the company.

The new urea policy (fixed incentive beyond reassessed capacity subject to maximum of import parity price of urea plus incidental charges), along with gas pooling, has aided production above reassessed capacity and, subsequently, lent more stability to overall profitability. Reimbursement for new unit under the policy, is by way of a complete energy cost pass through, which will ensure healthy profitability from the newly commissioned unit, subject to pre-approved floor and ceiling linked to gas prices, governed by import parity pricing.

Operating performance in fiscal 2018 continues to be supported by healthy sales volume and operating efficiencies. EBITDA margin and interest coverage ratio, were 10.9% and 5.3 times (after netting off-project related interest cost which was capitalised during the year), respectively, as on March 31, 2018; against 10.9% and 3.2 times, respectively, in the corresponding period of the previous fiscal. We expect an improvement in operating performance from fiscal 2020 onwards, when full year EBITDA comes in from Gadepan-III unit.

* High financial flexibility and stable cash accrual from the fertiliser business
Chambal has a high degree of financial flexibility with strong ability to contract debt at competitive rates. Since, large part of project related debt is in foreign currency, and it utilises commercial paper for meeting its working capital requirements, its borrowings cost is very competitive. Also, it has large unutilised bank lines and healthy cash accruals, which adds to the overall financial flexibility. Cash accrual from the urea business continues to be stable because of the pass-through nature of feedstock costs and superior operating efficiencies.

Weaknesses
* Leveraged capital structure because of large working capital requirements further accentuated by project related debt
Chambal has a leveraged capital structure and moderate debt protection metrics. The company's capital structure, is constrained by large working capital borrowings following delay in subsidy disbursement by the government. Gearing is expected to remain high in the near term, with Debt/EBITDA estimated at 7-8 times for fiscal 2019, due to commissioning of Gadepan III plant in the last quarter. Nonetheless, higher cash accruals from Gadepan-III unit from fiscal 2020 (being first full year of commissioning), capital structure is expected to improve gradually over the medium term.

* Exposure to risks related to regulated nature of the fertiliser industry
Given the government's thrust on self-sufficiency in food grain production, the fertiliser industry is strategic but highly controlled. Of late, government has focused on reducing subsidy without increasing prices by urging companies to adopt more efficient methods of urea production. In line with these measures, government tightens energy consumption norms periodically, impacting profits of urea players unless they improve energy efficiencies. Additionally, any delay in disbursement of subsidy under the direct benefit transfer scheme may lead to higher reliance on short-term working capital borrowing, leading to high interest costs, and this remains a key rating sensitivity factor.
Liquidity

Liquidity is comfortable with large unutilised bank lines and healthy cash accruals and no major debt funded capex over the medium term. Bank limits of Rs 6000 crore was utilised at about 20% over the 12 months through December 2018. Liquidity is supported by healthy cash accruals of Rs 486 crore, against nil repayment of term loans during fiscal 2018. Cash accruals are expected to be at similar levels in fiscal 2019. However, during fiscal 2020, we expect cash accruals to improve to about Rs 900-1000 crore with a repayment of about Rs. 380 crore. Further, the reimbursements to Chambal in new urea unit at Gadepan III will be dollar denominated and the project related interest and debt payments are also dollar denominated, which provides a natural hedge. 

Outlook: Stable

CRISIL believes that with timely commissioning of Gadepan III unit, Chambal's market position and operating efficiency will improve further. It continues to benefit from strong operating efficiencies and healthy cash accrual from its fertiliser business. Offtake risk of urea is mitigated by the need to reduce import dependence of urea in the country.

Upside scenario
* Significant and sustained reduction in working capital debt improving financial risk profile

Downside scenario
* Any plant stabilisation or operational issues in Gadepan-III, which may significantly impact the profitability and cash accruals
* Higher-than-expected debt levels due to further stretch in working capital.

About the Company

Incorporated in 1985 in Kota (Rajasthan), Chambal has the largest installed urea capacity of 3.07 mn ton (1.34 mn ton of urea unit at Gadepan-III recently commissioned in January 2019) in the private sector in India. Company is also into trading of complex fertilisers and pesticides. The company had significant investments in the shipping and software businesses. In fiscal 2016, Chambal had transferred its textile division to Sutlej Textiles and Industries Ltd on slump sale basis. During September 2017, Chambal sold off its all four remaining ships, thus exiting the shipping business also.

For half year ended September 30, 2018, company reported net profit of Rs. 300 crore on total income of Rs 4676 crore, as against, Rs. 282 crore and Rs. 4079 crore, respectively, for the corresponding period of the previous fiscal.

Key Financial Indicators (Consolidated)*
Particulars Unit 2018 2017
Revenue Rs crore 7,557 7,563
Profit After Tax (PAT) Rs crore 495 359
PAT Margin % 6.56 4.75
Adjusted debt/adjusted networth Times 2.61 2.40
Interest coverage Times 5.30# 3.22
*as per CRISIL adjusted numbers
#after netting off-project related interest cost which was capitalised during the year

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments.
Annexure - Details of Instrument(s)
ISIN Name of Instrument Date of Allotment Coupon Rate (%) Maturity Date Issue Size (Rs.Cr) Rating Assigned with Outlook
NA Cash Credit NA NA NA 1000 CRISIL AA/Stable
NA Letter of Credit & Bank Guarantee@ NA NA NA 1000 CRISIL A1+
NA Bank Guarantee NA NA NA 300 CRISIL A1+
NA Fund-Based Facilities NA NA NA 300 CRISIL AA/Stable
NA Rupee Term Loan NA NA 30-Sep-2027 641.17 CRISIL AA/Stable
NA Non-Fund Based Limit NA NA NA 2875 CRISIL A1+
NA External Commercial Borrowing^ NA NA 30-Sep-2027 4207.39 CRISIL AA/Stable
NA Commercial Paper NA NA 7-365 days 3000 CRISIL A1+
NA Fixed Deposits NA NA NA 0 FAA+/Stable
^Equivalent to USD550 million @ 65.74 USD/INR rate
@Letter of credit and bank guarantee limits are interchangeable
 
Annexure - Details of Consolidation
Indian Steamship Ltd
Chambal Infrastructure Ventures Limited
ISG Novasoft Technologies Limited
Inuva Info Management Private Limited
India Steamship Pte. Limited
India Steamship International FZE
CFCL Ventures Limited
ISGN Corporation
Indo Maroc Phosphore S.A, Morocco
Annexure - Rating History for last 3 Years
  Current 2019 (History) 2018  2017  2016  Start of 2016
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Commercial Paper  ST  3000.00  CRISIL A1+      11-06-18  CRISIL A1+  29-11-17  CRISIL A1+    --  -- 
            02-05-18  CRISIL A1+           
            15-03-18  CRISIL A1+           
Fixed Deposits  FD  0.00  FAA+/Stable      11-06-18  FAA/Positive  29-11-17  FAA/Stable  09-05-16  FAA/Stable  FAA/Stable 
            02-05-18  FAA/Positive  29-09-17  FAA/Stable       
            15-03-18  FAA/Positive  31-05-17  FAA/Stable       
Short Term Debt (Including Commercial Paper)  ST              29-09-17  CRISIL A1+  09-05-16  CRISIL A1+  CRISIL A1+ 
                31-05-17  CRISIL A1+       
Fund-based Bank Facilities  LT/ST  6148.56  CRISIL AA/Stable      11-06-18  CRISIL AA-/Positive  29-11-17  CRISIL AA-/Stable  09-05-16  CRISIL AA-/Stable  CRISIL AA-/Stable 
            02-05-18  CRISIL AA-/Positive  29-09-17  CRISIL AA-/Stable       
            15-03-18  CRISIL AA-/Positive  31-05-17  CRISIL AA-/Stable       
Non Fund-based Bank Facilities  LT/ST  4175.00  CRISIL A1+      11-06-18  CRISIL A1+  29-11-17  CRISIL A1+  09-05-16  CRISIL A1+  CRISIL A1+ 
            02-05-18  CRISIL A1+  29-09-17  CRISIL A1+       
            15-03-18  CRISIL A1+  31-05-17  CRISIL A1+       
All amounts are in Rs.Cr.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Bank Guarantee 300 CRISIL A1+ Bank Guarantee 300 CRISIL A1+
Cash Credit 1000 CRISIL AA/Stable Cash Credit 1000 CRISIL AA-/Positive
External Commercial Borrowings^ 4207.39 CRISIL AA/Stable External Commercial Borrowings^ 4207.39 CRISIL AA-/Positive
Fund-Based Facilities 300 CRISIL AA/Stable Fund-Based Facilities 300 CRISIL AA-/Positive
Letter of credit & Bank Guarantee@ 1000 CRISIL A1+ Letter of credit & Bank Guarantee@ 1000 CRISIL A1+
Non-Fund Based Limit 2875 CRISIL A1+ Non-Fund Based Limit 2875 CRISIL A1+
Rupee Term Loan 641.17 CRISIL AA/Stable Rupee Term Loan 641.17 CRISIL AA-/Positive
Total 10323.56 -- Total 10323.56 --
^Equivalent to USD550 million @ 65.74 USD/INR rate
@Letter of credit and bank guarantee limits are interchangeable
Links to related criteria
CRISILs Approach to Financial Ratios
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating criteria for manufaturing and service sector companies
Rating Criteria for Fertiliser Industry
CRISILs Approach to Recognising Default
CRISILs Bank Loan Ratings
CRISILs Criteria for Consolidation
CRISILs Criteria for rating short term debt

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