Detailed Rationale

CRISIL Ratings has revised its outlook on the long-term bank facilities and non-convertible debentures (NCDs) of TCI Sanmar Chemicals S.A.E (TCI Sanmar) to ‘Negative’ from ‘Stable’ while reaffirming the rating at ‘CRISIL BBB-’. The short-term rating has been reaffirmed at ‘CRISIL A3’.

 

The outlook revision reflects tightness in liquidity position of TCIS, due to high interest obligations and decline in operating profit, driven by moderation in prices of poly-vinyl chloride (PVC) and caustic soda (caustic) in fiscal 2024. The tightness in liquidity has been further exacerbated by delay in sanction of additional working capital lines and reduction in existing working capital limit to USD $96 million as on March 31, 2024, from USD $103 million as on March 31, 2023, as part of terms of restructuring plan agreed upon in fiscal 2022. The working capital limit will be further reduced to USD $92 million by end of April 2024, barring the sanction of new working capital lines. While group company, Sanmar Shipping Ltd (SSL, rated ‘CRISIL A1+/Stable/CRISIL A1’) has provided support by extending credit period, raising additional working capital limits will be critical to sustain operations at high utilization levels, and will be a key monitorable going forward.

 

TCIS’s revenue is estimated to have declined by 26% year-on-year (y-o-y) to ~USD 450 million in fiscal 2024. This was on account of moderation in realizations of PVC and caustic soda, by 18% and 51% y-o-y, respectively, and thus, partly offset the benefit of volume. PVC sales volume by ~16%. PVC prices during fiscal 2024 dropped due to increase in cheap imports from China, while caustic soda prices normalized from record highs in fiscal 2023. Besides, export incentives of 14-15%, provided on exports of PVC, caustic soda and calcium chloride, were revised to 9-10% with effect from July 2022, leading to lower operating revenue and margins in fiscal 2024. These incentives are given to companies in Egypt to boost exports. Amidst challenges related to foreign exchange faced in Egypt, which led to scarcity of US dollar since February 2022, the company has pivoted its PVC sales predominantly to overseas markets, though domestic sales fetch comparatively higher realizations. The move is aimed to improve availability of the US dollar to cover raw material expenses and debt servicing. Operating profit is estimated around USD 60 million for fiscal 2024, compared to USD 140 million in fiscal 2023.

 

The profitability of PVC business is mainly dependent on prices of key raw material i.e., ethylene dichloride (EDC) and the end-product. The PVC contribution margin improved during the first nine months of fiscal 2024, compared to corresponding period last year, driven by better PVC-EDC spreads. However, contribution margin of caustic soda moderated due to drop in realizations. Caustic prices have shown some improvement since  January 2024 over September 2023 levels; while PVC prices still remain moderate, though demand remains steady.

 

With recent positive developments in Egypt and foreign investments coming in including  from the International Monetary Fund, the foreign exchange position of the country is expected to improve. This will enable TCIS to pivot its PVC sales primarily in the domestic market, and thus, benefit from better realisations. With gradual recovery in PVC and caustic prices, revenue is expected to improve in fiscal 2025. Expected improvement in margin amid better realisations along with lower power cost will help TCI to sustain its operating margin at 15-18% over the medium term.

 

High interest cost of ~USD 75 million in fiscal 2024, mainly on account of steep increase in the benchmark rate – The London Interbank Offered Rate/Secured Overnight Financing Rate (LIBOR/SOFR), has impacted the net profit. Despite liquidity challenges faced, TCIS availed customer advances and extended credit from SSL for procurement of EDC and ensured that debt commitments (primarily interest commitments which are paid on bi-annual basis) for March 2024 were serviced in a timely manner. The support from SSL  ensures a steady supply of EDC, enabling TCI to operate its PVC plant at over 90% utilisation.

 

Due to the Covid-19 pandemic and its consequent impact on the business, the company had to opt for loan restructuring under the Reserve Bank of India’s circular dated June 7, 2019. The restructuring was approved by the consortium of lenders and implemented on June 30, 2021. Accordingly, the total outstanding term loan of Rs 6,186 crore ($825 million) was converted into sustainable debt of Rs 4,419 crore ($ 589 million) and the balance being unsustainable debt of $236 million (Rs 1,770 crore). Out of the unsustainable debt, $118 million (Rs 885 crore) was converted in form of 0.01% NCDs and the remaining $118 million (Rs 885 crore) was converted into equity in fiscal 2022 (lenders got 13.9% stake in the company in lieu of the same) The NCDs were issued to banks in September 2022. The first principal repayment on the restructured loan was made on September 30, 2021, and since then all payments have been made regularly.

 

As part of the restructuring, TCI’s holding company, Sanmar Holdings Ltd (SHL) infused Rs 127.5 crore ($ 17 million) in form of equity in fiscal 2022. This, along with healthy accrual, was used to prepay term debt to the extent of Rs 608 crore ($ 75 million) before September 30, 2022, which resulted in upgradation of the account to standard. Post the pre-payment, the company has no significant debt obligation till end of fiscal 2025, but for interest payments which are sizeable following the significant increase in LIBOR/SOFR rates.

 

Based on discussions with lenders, unsecured loans of Rs 1,636 crore ($202 million), extended by Sanmar Overseas Investments A.G. (immediate holding company of TCI and step-down subsidiary of SHL), is proposed to be converted to equity. The conversion to equity is subject to regulatory approvals in Egypt.

 

The ratings reflect the diversified product profile of TCI with its market leadership position in suspension PVC and caustic soda in Egypt, varied revenue streams catering to multiple end-user industries, longstanding relationships with customers, and healthy demand prospects for its products. Besides, the company also receives support from SSL, its group company.

 

The rating also factors in the long vintage and five-decade-long experience of the promoters in the petrochemicals sector, coupled with the strong leadership team and parentage, and significant financial flexibility of SHL. Through its overseas subsidiary, SHL holds 86.1% stake in TCI. These strengths are however  offset by the commoditised nature of products, which causes fluctuation in operating margin, and the sub-par financial risk profile of the company, with earnings impacted presently by foreign exchange related challenges in Egypt

Analytical Approach

To arrive at the ratings of TCI, CRISIL Ratings has taken a standalone view of the company.

 

The company has availed an unsecured loan of Rs 1,636 crore ($ 202 million) from Sanmar Overseas Investments A.G. (immediate holding company of TCI and step-down subsidiary of SHL), which has been subordinated to lenders. CRISIL Ratings has considered 75% of unsecured loans as equity and 25% as debt for arriving at the ratings. Post conversion of the entire $202 million into equity, balance 25% considered as debt will also be considered as equity.

 

CRISIL Ratings has also not considered the extraordinary income in FY 2023 due to unrealised gain on extinguishment of unsustainable loan to NCD, as part of the profit after tax or networth to arrive at the ratings.

Key Rating Drivers & Detailed Description

Strengths:

• Established market position in the PVC and caustic soda segments in Egypt, well-established presence in export markets and healthy demand prospects: TCIS has a diversified product profile with offerings of PVC, caustic soda and calcium chloride. It is the largest player in the PVC segment in the Middle East and North Africa (MENA) region. There is a significant demand-supply mismatch in PVC in TCIS’s target markets, due to rapid development of the construction industry and higher urbanisation on one hand, while supply is lower due to large entry barriers, on the other hand. Further, the Egyptian government has levied an anti-dumping duty of 9% on PVC resin imports from USA, which supports the domestic manufacturers.

 

Caustic soda production is power intensive in nature. However, sharp increase in power cost in Europe has made production unviable there. This has led to a demand-supply mismatch and hence, higher realisations in fiscal 2023, this situation, however, has normalised in fiscal 2024, resulting in moderation of caustic soda realisations. Drop in power cost due to depreciation of the Egyptian pound against the US dollar, has increased competitiveness of caustic soda produced by TCIS.

 

Revenue visibility will be driven by steady demand for suspension PVC over the medium term. While PVC realisations have been moderating from the historic highs of fiscal 2022, TCIS will continue to benefit from the large demand-supply mismatch and its market leadership position. Further, the company also has a sizeable presence in the export market. Overall operating income will also benefit from export incentives, provided by the Eqyptian government.

 

• Support from SSL: TCI is highly dependent on imports of EDC, which is the key raw material for PVC production despite a part of EDC requirement can be manufactured captively through the ethylene plant. This is due to cost competitiveness of imported EDC and the mix of captive versus imported EDC will depend on the cost competitiveness of the latter. Due to long vintage and established relationships with suppliers, the company largely resorts to imports.

 

Amid forex challenges and scarcity of US dollars in Egypt, in order to ensure seamless procurement of EDC essential for sustenance of operations, SSL has extended support to procure and supply EDC to TCI with an extended credit period, pending tie up of additional working capital facilities with banks. As regard receivables, sales are on cash and carry basis. Besides, the company is also managing working capital through collection of advances from customers. Average inventory period is also low ranging from 30 to 40 days.

 

• Longstanding presence of the Sanmar group in the petrochemicals business: The Sanmar Group has been engaged in manufacturing petrochemicals for over five decades. It is also present in other businesses such as shipping, metals, and engineering products. The promoters have scaled up the Indian chemicals business to over Rs 5,900 crore, and the group has an established position in the domestic market. The PVC/chemicals business, on a consolidated basis, generated revenue of over Rs 10,000 crore, lending significant scale to the group. This has also enabled the group to attract investments from marque investors such as the Fairfax Group. It was also evident in the initial public offering (IPO) of Chemplast Sanmar Ltd, wherein it raised Rs 3,850 crore during FY 2022.

 

Weaknesses:

• Vulnerability of profitability to fluctuations in PVC prices: Profitability of PVC manufacturing companies depends on prevailing prices of PVC and EDC. Cyclical downturns have caused the margin to fluctuate in the past which is common in the petrochemicals industry. The Sanmar Group has over five decades of experience in the petrochemicals industry and have  managed impact of cyclicality in the past. PVC imports from USA into Eqypt attract a 9% anti dumping duty, while duties on import of key raw materials is very negligible. Any adverse change in the duty structure could impact the operating margin. Operating profit and margin are also impacted by lower realisations from export of PVC, as compared to the domestic market.

 

• Sub-par financial risk profile: The financial risk profile has remained sub-par over the years, largely due to erosion of networth and continued losses in earlier years. With infusion of Rs 127.5 crore ($ 17 million) equity by the promoters and better performance in fiscal 2022, the networth witnessed a modest improvement.. For fiscal 2023, the company has reported net profits of Rs 437 crore ($ 53.9 million), which includes unrealised gain on conversion of debt. Excluding these gains, there has been a loss at the net profit level in fiscal 2023. Considering lower operating margin and high interest cost, the interest cover is estimated to be below one time in fiscal 2024. The same is likely to improve over the medium term, in line with better profitability, and will be a key monitorable.

 

Any material improvement in net worth will depend on sustenance of profitability over the medium to long term. Any potential equity raise will further improve the capital structure and total outside liabilities to tangible net worth (TOL/TNW). The company is expected to undertake capital expenditure (capex) of Rs 162 – 203 crore($ 20-25 million) per annum over the medium term, towards routine maintenance and replacement of components at plants, so as to enhance efficiency.

 

Timely support if required, is also expected to be forthcoming from the parent.  Any change in this stance, will be monitorable.

 

• Increase in risk related to forex availability: Following the economic impact caused by the pandemic, and the Russia-Ukraine war, which further exacerbated inflationary pressures and affected tourism, the Central Bank of Egypt curbed the availability of US dollars for entities operating out of Egypt in fiscal 2023, and this has continued into fiscal 2024. TCI has a large requirement of US dollars, as it imports a sizeable portion of its raw material and needs to service dollar denominated debt. Therefore, to ensure sufficient availability of US dollars, the company has increased PVC exports, even though prices of PVC are lower in export markets than in the domestic market.

 

With recent positive developments with respect to investments in Egypt from ADQ, Abu Dhabi (Abu Dhabi Developmental Holding Company and support from the International Monetary Fund, the US dollar availability situation is expected to improve in Eqypt. This will enable the company to sell higher quantum of PVC in the domestic market, which commands better realisations. This will remain a key monitorable

Liquidity: Adequate

Overall liquidity of TCI benefits from likely access to funding support from its holding company, as demonstrated in the past. However, standalone liquidity remains stretched, as the working capital limit was initially reduced to Rs 834 crore ($ 103 million) in March 2023, from Rs 1,012 crore ($ 125 million) in June 2022. This was part of the resolution plan, agreed upon with lenders. Consequently, fund-based utilisation was high, with almost full utilisation in recent months. The working capital limit has been further reduced to USD 96 million in March 2024, and is proposed to be reduced to USD 92 million by April 2024, which will keep utilization levels elevated.

 

Interest payments are bi-annual for term debt. Despite lower operating profits, TCIS mobilised customer advances and received extended credit support from SSL, which enabled it to honour the interest obligations of USD 31 million in March 2024 on time. Liquidity position has been constrained due to delay in tying up additional working capital limits, and due to lower profits, even as plant utilization levels remain high.

 

Additional working capital limit of Rs 330–365 crore ($ 40-45 million), which were expected to be tied up in the second half of fiscal 2024, is now likely to be tied up by first quarter of fiscal 2025, which will help obviate liquidity pressures, and reduce  the dependence on SSL and customer advances. Timely sanction of this facility will be crucial and will remain a monitorable.

 

Also, liquidity is expected to improve in fiscal 2025, supported by better profitability at TCIS, tie up of additional working capital and with possible receipt of export incentives from the Eqyptian government. The company also has $ 13 mn in its DSRA account, which can be used to partly meet its interest obligation. TCIS has interest obligations of USD 70-75 mn in fiscals 2025 and 2026, while long-term principal repayment obligations are negligible in fiscal 2025 and at USD 12 mn in fiscal 2026. Improvement in liquidity, and better operating profits will ensure sufficient funds are available to meet the repayment obligations.

 

Timely support if required, is also expected to be forthcoming from the parent holding company.

Outlook: Negative

CRISIL Ratings believes that TCIS is expected to maintain its established market position in the PVC segment in Eqypt and in the European markets, and enhance its operating efficiencies across businesses, supported by cost reduction initiatives. The financial risk profile is expected to remain sub-par in the near to medium term, despite improving gradually, driven by improved product-raw material spreads/margins. While timely support from the holding company of Sanmar group is expected to be forthcoming in case required, liquidity remains stretched amid delay in funding via additional working capital lines, thereby increasing dependence on advances from customers and extension of credit period from SSL.

Rating Sensitivity factors

Upward factors:

• Improvement in operating performance, while maintaining healthy double-digit operating margin, leading to annual cash accrual of around USD 40 mn
• Sustained improvement in financial risk profile and debt metrics, such as interest cover, including through equity infusion

 

Downward factors:

• Significant moderation in business performance with operating margin dropping below 10-12% on sustained basis, impacting cash generation
• High debt level due to capex or elongation in working capital cycle, impacting debt metrics further; interest cover sustaining at just over 1 time
• Change in stance of support from the Sanmar group, mainly the holding company
• Delay in tie-up of additional working capital limits

About the Company

The Sanmar Group had acquired Trust Chemical Industries, an Egyptian limited liability company, in March 2007. The company was operating the largest chlor alkali plant in Egypt, with a capacity of 200,000 tonne per annum of caustic soda. This was converted into a joint stock company in June 2010. The plant is located at Port Said, at the mouth of the Suez Canal.

 

Since then, the company has gradually expanded its capacity and product profile, and is now the largest PVC (capacity of 400,000 tonnes per annum) and chlor alkali (capacity of 275,000 tonnes per annum) manufacturer in Egypt.

Key Financial Indicators

As on/for the period ended March 31	Unit	2023	2022
Revenue	Rs Crore	4933	4692
Profit After Tax (PAT)	Rs Crore	-74#	498#
PAT Margin	%	-1.5	10.6
Adjusted debt/Adjusted networth	Times	NM**	NM**
Interest coverage	Times	4.93	2.60

#Fiscal 2022 – PAT includes net unrealized gain on extinguishment of loan converted to equity $67.29 mn (Rs. 505 cr)

#Fiscal 2023 – PAT excludes net unrealized gain on extinguishment of loan converted to NCD/bond $ 63.07 mn (Rs. 511 cr)

*Exchange rate used for FY22 – Rs.75/$; FY23 and beyond – Rs.81/$

**Not meaningful

Any other information: Not Applicable