Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AA+/Stable/CRISIL A1+’ ratings on the bank facilities and commercial paper of Indian Farmers Fertiliser Cooperative Limited (IFFCO).

 

The ratings continue to reflect the strong market leadership of IFFCO, the superior operating efficiency of its fertiliser plants, and its healthy financial risk profile. The strengths are partially offset by exposure to regulatory risks and volatility in raw material prices.

 

Operating performance remains comfortable, with plants operating at over 100% utilization and within the prescribed energy norms. Profitability of the urea division (contributed to around 30% of margins during the first nine months of fiscal 2023) has continued to remain immune to the rise in feedstock (natural gas) prices as this is compensated through subsidy receipts from the government. In fact, margins have improved for this segment as higher energy savings benefits the operating profitability, amidst rise in gas prices.

 

Profitability of the non-urea business segment (contributed to around 70% of margins during the first nine months of fiscal 2023) has also remained comfortable. While final product prices largely remained unchanged, the volatility in input prices was compensated in the form of increase in nutrient based subsidy (NBS) rates. Going forward, operating profitability is expected to remain comfortable, with easing gas/input costs. Further, the healthy dividends earned from its profitable ventures overseas, which are into urea production as well as raw material production of complex fertilisers; has further supported the cash flows of the company.

 

With regard to subsidy receivables, a payout of Rs 105,222 crore was initially budgeted for fiscal 2023, which was revised to Rs 225,222 crore through additional payouts. CRISIL Ratings estimates the revised budget may still fall short by Rs 30,000-35,000 crore, factoring no change in the NBS rates announced, leading to a subsidy buildup for IFFCO. However, a comfort continues to be taken from the continued financial support extended by the government, wherein the subsidy budgeted of Rs 175,103 crore for the current fiscal has been the highest initial subsidy announced, as compared over the past 5-6 years. That said, since timely disbursement of the entitled subsidy is crucial for the company to maintain its financial risk profile, any change in policy support or sustained delays in payouts would continue to remain a key rating monitorable. 

 

IFFCO plans no major debt-funded capital expenditure (capex) other than in the nano-fertiliser segment and a 2000 tonne per day (TPD) sulphuric acid plant being set up. Adjusted debt to adjusted networth ratio and net debt to operating profit before depreciation, interest and taxes (OPBDIT) ratio are expected to remain below 0.5 time and 1.5 times, respectively, over the medium term.

Analytical Approach

CRISIL Ratings has considered the standalone business and financial risk profile of the company for analysis.

 

It has also used the capital allocation method to factor in the capital required by its financial entities viz. IFFCO Tokio General Insurance Company Ltd. (ITGIC-subsidiary) and IFFCO Kisan Finance Ltd. (IKFL-associate). This is on factoring the strategic importance these entities hold to IFFCO and the implicit support that has been factored while assessing the credit risk profile of both these entities.

Key Rating Drivers & Detailed Description

Strengths:

Market leadership in the fertiliser industry and diverse income streams

IFFCO dominates the domestic urea and phosphatic fertiliser segments, with market share of over 25% and 15%, respectively. Over the past five decades, IFFCO has established a wide customer base and strong brand equity. Its vast distribution network comprises 35,000-member cooperative societies, which aid penetration into remote areas. The business risk profile is also supported by diverse income streams with presence across urea, phosphatic fertilisers, trading activities and investments in profitable ventures. This diversity has helped IFFCO sustain its profitability.

 

Healthy 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 reimbursement provided by the government for urea players. IFFCO receives Rs 350 per tonne for urea manufactured till the reassessed capacity and an additional Rs 150 per tonne for its Phulpur I, Aonla I and Kalol units, which aids profitability.

 

In the phosphatic fertilisers segment, the society commands optimum pricing in its raw material procurement because of economies of scale and strong raw material linkages. IFFCO’s Subsidiaries/joint ventures — Oman India Fertiliser Company SAOC, Industries Chimiques du Senegal and Jordan India Fertilizer Company — help avail benefits of backward integration by ensuring consistent and timely raw material supply and diversity into related businesses.

 

The society sold 7.63 million tonne and 4.72 million tonne of urea (including imported) and non-urea fertilisers, respectively, in fiscal 2022. Sales volume remained comfortable, at 5.80 million and 3.57 million tonne of urea (including imported) and non-urea fertilisers, respectively, in the first nine months of fiscal 2023 (5.61 million tonne and 3.79 million tonne, respectively, in the corresponding period of the previous fiscal).

 

Profitability of the urea division (contributed to around 30% of margins during the first nine months of fiscal 2023) has continued to remain immune to the rise in feedstock (natural gas) prices as this is compensated through subsidy receipts from the government. In fact, margins have improved for this segment as higher energy savings benefits the operating profitability, amidst rise in gas prices. Profitability of the non-urea business segment (contributed to around 70% of margins during the first nine months of fiscal 2023) has also remained comfortable. While final product prices largely remained unchanged, the volatility in input prices was compensated in the form of increase in nutrient based subsidy (NBS) rates. Going forward, operating profitability is expected to remain comfortable, with easing gas/input costs.

 

Comfortable financial risk profile

The society 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 metrics substantially. Adjusted debt to adjusted networth ratio improved to 0.63 time as on March 31, 2021 (1.35 times as on March 31, 2020). Adjusted interest coverage improved to 4.98 times in fiscal 2021 (2.64 times in fiscal 2020) and net debt to OPBDIT ratio to 0.46 time as on March 31, 2021 (5.12 times a year earlier).

 

Since then, the unprecedented rise in raw material prices (especially pooled gas prices) and imported fertiliser rates has caused a gradual buildup in subsidy receivables position in fiscal 2022 and fiscal 2023. Nevertheless, financial risk profile of the company is expected to remain comfortable, backed by the strong operating efficiencies as well as healthy dividend earned from overseas investments. Adjusted debt to adjusted networth has remained comfortable at 0.64 times as on March 31, 2022 and is expected to improve to below 0.50 times as on March 31, 2023. While net debt to OPBDIT ratios increased to 2.62 times as on March 31, 2022, it is expected to improve to below 1.05 times as on March 31, 2023.

 

The society has no major debt-funded capex plans other than in the nano-fertiliser segment and a 2000 MTPD sulphuric acid plant being set up. Overall, adjusted debt to adjusted networth ratio and net debt to operating profit before depreciation, interest and taxes (OPBDIT) ratio are expected to remain below 0.5 time and 1.5 times, respectively, over the medium term.

 

Weaknesses:

Exposure to regulated nature of the fertilizer industry and volatility in raw material prices

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.

 

The phosphatic-fertilizer industry was brought under the NBS regime from April 1, 2010. Under this scheme, the Government of India fixes the subsidy payable on nutrients for the entire fiscal (with an option to review this every six months), while retail prices are market driven. Manufacturers of phosphatic fertilizers are dependent on imports for their key raw materials such as rock phosphate and phosphoric acid. Cost of raw materials accounts for about 75% of the operating income. The regulated nature of the industry and susceptibility of complex fertilizer players (including Coromandel) to raw material price volatility under the NBS regime continues to be key rating sensitivity factors.

 

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.

Liquidity: Strong

Against the outstanding debt of Rs 9,700 crore, cash and equivalents stood at Rs 4,750 crore as on March 31, 2023 (on a provisional basis). Average fund-based bank limit utilisation (including commercial papers and short-term loans) was around 40% during December 2022. Existing cash and liquid investments, unutilised bank lines and healthy annual cash accruals of more than Rs 2,000 crore should be adequate for meeting the debt obligation and capex plans of the company over the medium term. Investments in highly profitable ventures such as IFFCO Tokio General Insurance Co Ltd, dividend income from Oman India Fertiliser Company SAOC, minimal long-term debt and ability to raise short-term working capital debt at competitive rates enhances IFFCO’s financial flexibility.

Outlook: Stable

CRISIL Ratings believes IFFCO’s business and financial risk profile will sustain over the medium term, supported by its market leadership in both urea and phosphatic fertilisers, healthy operating efficiency and expectation of adequate subsidy budget allocation by the Government

Rating Sensitivity factors

Upward factors

• Significant debt reduction or monetisation of stake in joint ventures or subsidiaries, leading to a net cash* positive position on a sustained basis
• Sustained reduction in receivables (including subsidy receivables) to below 40 days
• Substantial positive impact of any regulatory or policy changes by the government

 

* Net cash = Cash and cash equivalents - Total debt

 

Downward factors

• Larger-than-expected, debt-funded capex or acquisition or increase in debt due to stretch in the working capital position, leading to net debt to OPBDIT ratio exceeding 2 times on a sustained basis
• Substantial adverse impact of any regulatory or policy change by the government

About the society

IFFCO was established as a cooperative society in 1967. It is India’s largest fertiliser manufacturer. It was set up to facilitate easy access to fertilisers for cooperative societies at government-prescribed rates.

 

In 2021, IFFCO retained its first position in the Fertilisers and Agro-Chemicals segment in Fortune 500 companies in India, and was ranked as the number one cooperative by International Cooperative Alliance. Further in 2022, IFFCO retained its number one rank amongst top 300 cooperatives.

 

During the first nine months of fiscal 2023, the society achieved profit after tax (PAT) of Rs 1,691 crore on a total income of Rs 48,877 crore, against Rs 1,195 crore and Rs 30,200 crore, respectively, during the corresponding period of the previous fiscal.

Any other information: Not applicable

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs crore)	Complexity  levels	Rating assigned with outlook
NA	Cash Credit	NA	NA	NA	5070	NA	CRISIL AA+/Stable
NA	Commercial paper	NA	NA	7-365 days	156	Simple	CRISIL A1+
NA	Letter of credit & Bank Guarantee	NA	NA	NA	6865	NA	CRISIL A1+
NA	Long Term Loan	NA	NA	25-Mar-25	1000	NA	CRISIL AA+/Stable
NA	Overdraft Facility	NA	NA	NA	3750	NA	CRISIL A1+
NA	Proposed Long Term Bank Loan Facility	NA	NA	NA	1600	NA	CRISIL AA+/Stable
NA	Short Term Loan	NA	NA	NA	9715	NA	CRISIL A1+