Rating Rationale

Strengths
* Dominant market position in the fertiliser industry, and diverse income streams
IFFCO dominates the domestic urea and phosphatic fertilisers industry, with market shares of over 19% and 30%, respectively, in fiscal 2018. With presence of five decades, the society has established a wide customer base and strong brand equity. Its robust distribution network comprises 35,000 member cooperative societies, which help in penetrating the remote areas. 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 in case of decline in profits in any one particular segment in the past. Diversity in its income streams will continue to enhance stability in overall profitability.

* Healthy operating efficiencies of the plants
Historically, high capacity utilisation, low energy consumption, and strong focus on modernisation and improving energy efficiency have helped maintain strong operating efficiencies.

During fiscal 2018, operating profit was lower than expectation due to various factors, such as, lower profits from complex fertiliser segment, higher employee cost due to wage revision, one-time write-offs and other one-time expenditures. Additionally, IFFCO's plants were shutdown for implementation of energy saving capex in fiscal 2018. This resulted in lower urea production of 4.11 mtpa during fiscal 2018 as against 4.33 mtpa during fiscal 2017, further impacting profits.

IFFCO's urea plants have been operating below the government's notified energy norms. As the pre-specified norms form the basis for reimbursement of feedstock costs to fertiliser companies, lower energy consumption would result in better profitability. Effective April 1, 2018, government further tightened energy norms for 11 urea plants, including all 5 plants of IFFCO. Given the capex undertaken in fiscal 2018, IFFCO's energy consumption will remain below these revised norms. However with tightening of energy norms, the gap between notified energy norms and IFFCO's actual energy consumption is expected to narrow down going forward, thus impacting profitability.

In phosphatic fertilisers segment, society commands optimum pricing in its raw material procurement (phosphoric acid and Muriate of Potash) because of economies of scale and strong raw material linkages with capability to manufacture half of its phosphoric acid requirements in-house and 1/4^th requirement being met through contracted phosphoric acid capacity from one of its JV, JIFCO.

* Robust financial flexibility
Financial flexibility remains comfortable, backed by investments in highly profitable ventures such as IFFCO Tokio General Insurance Company Ltd, stable dividend income from OMIFCO and minimal long-term debt. IFFCO received total dividend income of Rs. 96 crore in fiscal 2018 from its investments in JVs, subsidiaries and associates. As of March 31, 2018, IFFCO had cash and cash equivalents of Rs. 2,277 crore primarily on account of cash inflows from stake sale in IFFCO-Tokio. Expectations of generating healthy cash accruals of over Rs. 1,000 cr. annually and ability to raise short-term working capital debt at competitive rates also underscores its high financial flexibility.

Weaknesses
* Moderate debt protection metrics due to working capital-intensive operations
Working capital requirement is large because of delays in subsidy reimbursements by the government. Large working capital debt results in high interest costs. Increased interest costs leads to moderate debt protection metrics. Net cash accrual to total debt and interest coverage ratios were 0.12 time and 1.08 times, respectively, for fiscal 2018. Government receivables continues to remain high, though during fiscal 2018, it was lower due to one-time write off of Rs. 411 crore on account of derecognizing proposed reimbursement of additional fixed cost to urea units (for fiscal 2015 to fiscal 2017) and Rs. 765 crore on account of alleged undue benefits on usage of imported ammonia (for April 2010 to May 2013). Working capital intensive operations are likely to keep the debt protection metrics moderate. Impact of recently implemented direct benefit transfer (DBT) scheme on overall working capital cycle will remain a key monitorable.

* 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, delay in disbursement of subsidy results in higher reliance on short-term working capital borrowing, leading to high interest costs and remains a key rating sensitivity factor.