Detailed Rationale

CRISIL Ratings has reaffirmed its 'CRISIL A1+' rating on the short-term bank facilities of Rashtriya Chemicals and Fertilizers Limited (RCF).

 

The rating continues to reflect the established market position and strong operating efficiency of RCF in the urea production business. Business risk profile is further strengthened via diversification into manufacturing of urea and complex fertilisers (comprising about 63% of sales for the first nine months of fiscal 2024), trading of complex fertilisers (around 27%) and manufacturing of industrial chemicals (nearly 10%). The plants are operating at healthy utilisation levels, with manufactured fertilisers at 28.20 lakh tonne for fiscal 2023 compared to 27.95 lakh tonne for fiscal 2022. Complete execution of energy-saving products should further improve profitability of the urea manufacturing units. However, any further tightening of energy efficiency norms may impact the profitability of the urea division and remains a key monitorable.

 

Revenue stood at Rs 13,101 crore with Ebitda (earnings before interest, taxes, depreciation, and amortisation) of Rs 320 crore for the nine months through December 2023, against Rs 16,767 and Rs 1,277 crore, respectively, in the corresponding period of the previous fiscal. Operating performance weakened significantly due to the fertiliser manufacturing segment, which reported Ebit of Rs 17 crore compared to annual Ebit of about Rs 300-400 crore witnessed in the past. This was due to lower gas prices and plant shutdowns in the urea segment. Further, a sharp downward revision in NBS (nutrient-based subsidy) rates by the government for the second half of fiscal 2024 impacted profitability of all players in the complex fertiliser segment, leading to inventory loss and lower realisations. The industrial chemicals segment witnessed supernormal profitability in fiscal 2023, which has moderated but should remain healthy at 13-15% Ebitda margin and will support overall profitability going forward. However, recovery in operating profitability is expected in fiscal 2025, with energy efficiency schemes being implemented in the urea plants and upward revision in NBS rates for the complex fertilisers along with expectation of steady raw material prices. NBS rate for phosphorous has been revised upwards for the first half of fiscal 2025 and will remain monitorable.

 

Debt stood at Rs 2,292 crore as of November 2023 compared to Rs 1,863 crore as on March 31, 2023. CRISIL Ratings notes that there have been cost overruns in the Talcher joint venture with the company’s financial commitment increasing by about Rs 1,000 crore. Majority of this will be debt funded and lead to increase in debt in the near term. However, financial risk profile should remain comfortable, with gearing sustaining below 0.65 time over the medium term. Further, net leverage (net adjusted debt/Ebitda) is likely to spike during fiscal 2024 end given the sharp decline in profitability. However, it shall decline thereafter due to expected recovery in operating profitability though debt is also likely to increase on account of planned capital expenditure (capex) and funding the cost overrun in its Talcher joint venture. Being 75% owned by the Government of India also supports financial flexibility.

 

The government has also demonstrated its financial support to the fertiliser sector via additional subsidies in the recent past since it is crucial for food security. The announced subsidy of Rs 1.64 lakh crore for fiscal 2025 should be sufficient to meet the requirement. Since timely disbursement of the entitled subsidy is crucial for the company to maintain its robust financial risk profile, any change in policy support or sustained delays in payouts would remain monitorable.

 

The above-mentioned strengths are partially offset by susceptibility of the overall operating performance to cyclicality in the industrial products business segment and any change in regulations for the fertiliser industry.

Analytical Approach

CRISIL Ratings has considered the standalone operating and financial risk profiles of RCF.

Key Rating Drivers & Detailed Description

Strengths:

Healthy business risk profile

RCF is the fourth-largest player in the domestic urea industry, in terms of production capacity, accounting for 10% of the total production. Manufacturing volumes were healthy with fertiliser sales of 33.14 lakh tonne in fiscal 2023, compared to 30.8 lakh tonne in the previous fiscal. The company has a strong position in Maharashtra, Karnataka and Andhra Pradesh. Diversity in revenue streams across the urea, complex fertilisers and industrial chemical products segments, also shields the overall margin from any unfavourable condition in a particular segment and lends stability to the cash flow position.

 

Healthy operating efficiency of the urea production division

The urea manufacturing plants operate at healthy utilisation rates, with energy consumed below the prescribed norms. As pre-specified norms form the basis for reimbursement of feedstock cost to fertiliser companies, lower energy consumption results in better profitability. The Thal (Raigad in Maharashtra) and Trombay (Mumbai) plants are expected to operate at energy levels of about 5.7 and 6.5 gigacalorie (Gcal)/tonne (against energy norms of 6.20 and 6.50 Gcal/tonne), respectively, in fiscal 2024 compared to 5.7 and 6.5 Gcal/tonne respectively in fiscal 2023. More energy efficiency schemes planned for both plants should reduce energy consumption and aid operating profitability going forward.

 

Comfortable financial risk profile

Adequate subsidies announced by the government over the past 2-3 fiscals aided the financial risk profile of the company. Adjusted gearing improved to 0.41 time as on March 31, 2023, from 0.90 time as on March 31, 2022, and as high as 1.53 times as on March 31, 2020. There have been cost overruns in the Talcher joint venture leading to increase in RCF’s investment by nearly Rs 1,000 crore, which will be majority funded via debt in the near term. This would lead to higher debt in the near term; however, adjusted gearing should remain below 0.65 time over the medium term.

 

Subdued profitability in the current fiscal will lead to adjusted interest coverage ratio of approximately 4 times, against over 6 times in fiscal 2023. The ratio is expected to sustain at above 5 times over the medium term, with recovery in operating profitability and no significant subsidy buildup.

 

Given the requirement of working capital borrowing mainly depends on the subsidy receivable position with the government, a substantial lag in announcing and disbursing these additional subsidy requirements could alter the credit metrics for the company. The government has been extending the required financial support to this sector, wherein a timely announcement and disbursement of this increased requirement would be monitorable.

 

Weaknesses:

Cyclicality in the industrial products and complex fertiliser business

The industrial chemicals business is highly commoditised and cyclical. Thus, players are exposed to fluctuation in international prices and the import duty structure for the key products.

 

Profitability in the complex fertiliser business remains susceptible to availability and prices of key raw materials in the international market along with the NBS rates declared by the government. There was a significant downward revision in NBS rates during the second half of fiscal 2024, impacting profitability for players.

 

Profitability in the industrial chemicals and complex fertiliser businesses will remain constrained by intense competition from cheaper imports and availability of raw material in the international market, respectively.

 

Exposure to regulatory risks in the fertiliser industry

Given the strong thrust of the government on self-sufficiency in food grain production, the fertiliser industry is strategic but highly controlled. Hence, players are susceptible to regulatory changes. The government is focused on reducing subsidy without increasing prices, by urging companies to adopt more efficient methods for urea production. Accordingly, the government may tighten energy consumption norms, thereby impacting profit of urea players, unless they improve energy efficiency. This has happened in the past, with revised energy norms for the Thal and Trombay plants of RCF being applicable from April 1, 2018, and October 1, 2020, respectively.

 

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 are key rating sensitivity factors.

Liquidity: Strong

RCF enjoys strong financial flexibility, driven by access to a large unutilised bank limit to support any funding requirement, given the regulated nature of the industry. RCF has access to sanctioned working capital limit of Rs 19,369 crore (interchangeable between fund-based and non-fund-based), wherein utilisation has averaged around 25% for the 12 months through December 2023. Further, non-convertible debentures worth Rs 800 crore will be due in fiscal 2025 and cash accrual may not fully suffice to cover the debt obligation. However, RCF should comfortably refinance the debt obligation if needed, given its healthy financial flexibility. Furthermore, easy access to low-cost financing from banks/financial markets aid liquidity.

 

ESG profile

The environmental, social and governance (ESG) profile of the company supports its already strong credit risk profile.

 

The chemical sector has a significant impact on the environment, due to the high greenhouse gas emissions and hazardous waste generated from its core operations. In line with this, RCF has been continuously focusing on mitigating its environmental and social risks to ensure minimal impact.

 

Key ESG highlights

• RCF has been implementing various energy conservation projects. One of the projects is the revamp of the Thal ammonia plant for reducing 55,000 tonne per annum (TPA) of carbon dioxide emissions.
• Effluent treatment plant upgradation is being taken up at Thal, for recycling of 75% of effluent generated into direct usable water, which will save around 5,000 cubic meters of fresh water.
• The company has commissioned solar rooftop facilities at Thal, Trombay and soil testing labs with an aggregate capacity of 2.17-megawatt peak to increase clean energy consumption.
• To ensure corporate social responsibility programmes, it has focused on community development and has invested in projects related to rural development, promoting health care, nutrition and education.
• Its governance structure is characterised by the board comprising three independent directors of the total eight directors, strong investor grievance redressal and extensive disclosure

 

There is growing importance of ESG among investors and lenders. RCF’s commitment to ESG principles will play a key role in enhancing stakeholder confidence, given its high share of market borrowing in its overall debt and access to capital markets.

Rating Sensitivity Factors

Downward Factors

• Significant and sustained weakening of operating performance, leading to lower-than-expected cash accrual
• Sizeable rise in subsidy receivables beyond 200 days
• Larger-than-expected debt-funded capex or investments
• Substantial adverse impact of any regulatory/policy change

About the Company

RCF was incorporated in 1978, following the reorganisation of the erstwhile Fertiliser Corporation of India Ltd. It has plants in Trombay and Thal. The Thal unit manufactures urea apart from some industrial products and has capacity of 20 lakh TPA. The Trombay unit manufactures various industrial products and has capacity of 3.3 lakh TPA for urea and 6.9 lakh TPA for complex fertilisers. The industrial chemicals portfolio includes more than 15 products, such as methanol, methylamines, di-methyl formamide, ammonium nitrate melt, nitric acid and ammonia. The company has expanded its revenue streams and product portfolio through traded sales of imported di-ammonium phosphate and muriate of potash. The Government of India holds 75% of RCF’s equity, while financial institutions and the public own the remaining.

Over the nine months ended December 31, 2023, profit after tax (PAT) was Rs 130 crore on total income of Rs 13,238 crore against Rs 796 crore and Rs 16,888 crore, respectively, for the corresponding period of the previous fiscal.

Any other information: Not Applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs.Crore)	Complexity level	Rating assigned with outlook
NA	Working capital demand loan@	NA	NA	NA	18,795	NA	CRISIL A1+
NA	Proposed working capital facility@	NA	NA	NA	2205	NA	CRISIL A1+

@Interchangeable with buyers’ credit, short term loan, letter of credit, bank guarantee