Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL BBB-/Stable/CRISIL A3’ ratings on the bank facilities and non-convertible debentures (NCDs) of TCI Sanmar Chemicals S.A.E (TCI).

 

Revenue has declined by 28% year-on-year (y-o-y) to Rs.2689 crore ($332 million) in the first nine months of fiscal 2024 compared to corresponding period last year, driven by moderation in realisations of polyvinyl chloride (PVC) and caustic soda, which dropped by 24% and 55% y-o-y compared to corresponding period last year, respectively, and offset the benefit of higher volume. PVC and caustic soda sales volume increased by 20% and 7% y-o-y, respectively, during the first nine months of fiscal 2024 compared to corresponding period last year, yet revenue has declined due to a fall in realisations. PVC prices dropped during first nine months of current fiscal 2024 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%, which were earlier provided on exports of PVC, caustic soda and calcium chloride were revised to 9-10% w.e.f July’22, leading to lower operating margin in the first nine months of 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 export markets, though domestic sales fetch higher realisations than exports. The move is aimed at improving the availability of the US dollar to cover operational expenses and debt servicing. Export incentives for nine months of fiscal 2024 stood at Rs.97 crore ($12 million). In fiscal 2023, the company has accounted for export incentives to the extent of Rs 516 crore (USD 64 million) for the period from July 2021 to March 2023 .

 

The operating margin of the company for the first nine months of fiscal 2024 is almost at same level as corresponding period last year. During the quarter ended June 2022 of last year, due to the steep fall in PVC prices, the company has written down the carrying value of inventory to net realizable value amounting to USD 55 mn. Also, during the first nine months of fiscal 2023, expense for write down of inventory to net realizable value no longer required amounting to USD 45 mn was reversed with net impact of USD 10 mn on the profit for the first nine months of fiscal 2023.

 

PVC operating margin is mainly dependent on prices of key raw material i.e., ethylene dichloride (EDC) and the end-product. The PVC operating margin has improved during the first nine months of fiscal 2024 compared to corresponding period last year driven by improvement in PVC-EDC spreads. However, Caustic soda operating margin has decreased during first nine months of fiscal 2024 on account of lower Caustic realization as compared to corresponding period last year.

 

Caustic prices have recovered in January 2024 from September 2023 levels; Recovery in PVC prices could be gradual while demand remains steady. Revenue is expected to improve in fiscal 2025, with better realisations and steady volume. With expected improvement in margins due to improvement in realisations and as well as continuing export incentives, lower power cost will help TCI to sustain its operating margin at 15-17% over the medium term) .

 

Interest cost has gone up significantly from USD 41 mn during first nine months of fiscal 2023 to USD 58 mn in the corresponding period this fiscal mainly on account of steep increase in the benchmark rate – The London Interbank Offered Rate/Secured Overnight Financing Rate(LIBOR/SOFR). The steep increase in interest costs is expected to impact the net profitability in fiscal 2024.

 

The company, nevertheless, continues to benefit from support for procurement of EDC via group entity, Sanmar Shipping Ltd (SSL; rated CRISIL A+/Stable/A1), with an extended credit period in view of the dollar shortage in Egypt. This helps ensure steady supply of EDC, enabling TCI to operate its PVC plant at over 90% utilisation. The company also plans to tie up additional working capital limit of Rs 330 – 365 crore ($40-45 million) by March 2024.

 

Due to the Covid-19 pandemic and its consequent impact on the business, the company had to opt for loan restructuring under RBI 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 regular.

 

As part of restructuring, TCI’s holding company, Sanmar Holdings Ltd (SHL) infused Rs 127.5 crore ($ 17 million). 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, which will ease pressure on liquidity. However, higher interest cost following significant increase in LIBOR/SOFR rates, will also impact  cash accrual in the near term.

 

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-polyvinyl chloride (PVC) and caustic soda in Egypt, the 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 lends to variability in the operating margin, and the sub-par financial risk profile of the company, with earnings impacted presently by forex 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.

 

CRISIL Ratings has also not considered the extraordinary income 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: TCI has a diversified product profile with offerings of PVC, caustic soda and calcium chloride. They are 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, 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 market. Caustic soda production is power intensive in nature. Owing to sharp increase in power cost in Europe, caustic soda production had become unviable there, resulting in a demand supply mismatch in fiscal 2023, consequently leading to higher realisations; this situation, however, has normalised over the first nine months of fiscal 2024, resulting in moderation of caustic soda realisations, though demand remains strong. Drop in power cost due to depreciation of the Egyptian pound against the US dollar, has increased competitiveness of caustic soda produced by TCI.

 

Revenue visibility will be driven by steady demand for suspension PVC over the medium term. While PVC realisations have been moderating post historic highs of fiscal 2022, TCI 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, even though 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 cost competitiveness. Due to long vintage and longstanding 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. The 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.

 

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. PVC imports attract a 9% duty while duties on import of key raw materials is negligible. Any adverse change in the duty structure could impact the operating margin. Operating profit and margin are also impacted by lower realisations from exports as compared to the domestic market. TCI needs to export 70-75% of PVC and around 90% of caustic soda, given the shortage of US dollars in Egypt. The company requires US dollars for payment to raw material suppliers and for debt servicing.

 

• 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 from promoters and better performance in fiscal 2022, the networth witnessed an improvement. For fiscal 2023, the company has reported PAT of Rs 437 crore ($ 53.9 million), which includes the unrealised gain on conversion of debt. Excluding these gains,  there has been a loss at the PAT level in fiscal 2023. Considering lower operational profitability and high interest costs, the interest cover is expected to be below 1 time in fiscal 2024, yet likely to improve over the medium term, in line with better expected operating profit. This is a key monitorable.

 

Any material improvement in networth will depend on sustenance of profitability over the medium to long term. Any potential equity raise will also further improve the capital structure and the total outside liabilities to tangible networth (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 is continuing into fiscal 2024. TCI has a large requirement of US dollars, as it imports a sizeable portion of its raw materials and needs to service dollar denominated debt. Therefore, to ensure sufficient availability of US dollars, the company  has increased exports of PVC , even though prices of PVC is lower in export markets than in the domestic market. Further tightness in US Dollar availability in Eqypt would be a key monitorable.

Liquidity: Adequate

Overall liquidity of TCI benefits from likely access to funding support from its holding company, as has been demonstrated in the past. However, standalone liquidity of the company remains stretched, as its working capital limit has been reduced to Rs 834 crore ($ 103 million) since March 2023, from Rs 1,012 crore ($ 125 million) in June 2022 . This is part of the resolution plan, agreed upon with lenders. Consequently, fund-based utilisation was high, with almost full utilisation in the last 4-6 months.

 

The company continues to derive support from SSL for procurement of EDC, on extended credit terms, given the forex challenges in Egypt. Besides, TCI has mobilized advances from customers  Rs 240-330 crore ($30-40 million) pending tie up of additional working capital from banks.

 

TCI  is in the process of seeking additional working capital limit of Rs 330 – 365 crore ($40-45 million) by March 2024. This will partially reduce dependance on SSL and advances from customers for working capital needs. Timely sanction of this facility will be crucial to ease liquidity pressures and will remain monitorable.

 

Interest payments are bi-annual for TCI ‘s term debt and the interest payment of Rs 227 crore ($ 28 million) was made on time in September 2023. The next term debt interest payment of around Rs 243 crore ($ 30 million) is due in March 2024. TCI would continue to manage liquidity through extended credit period from SSL for raw material purchases and customer advances to meet its debt servicing obligations. Tying up of additional working capital would improve the liquidity position of TCI, albeit any material improvement will depend on the improvement in operational profits.

 

Additional working capital lines of Rs 330 – 365 crore ($ 40-45 million) is likely to be tied up by March 2024. In case of delay in tie up of working capital facility, TCI will continue to manage the liquidity position with the extended credit period from SSL and also resort to advances from customers. Besides, around Rs 130 crore ($16 million) of export incentives expected to be received shortly. TCI also maintains a debt service reserve account (DSRA) of Rs 120-130 crore ($15-16 million), which will also aid liquidity.

 

Post repayment of $75 mn (Rs 608 crore) of term debt in March 2022 and September 2022, the company has minimal principal repayment obligations until fiscal 2025. Debt servicing shall increase gradually post fiscal 2025.

 

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

Outlook: Stable

CRISIL Ratings believes that TCIS is expected to maintain its established  market position in the PVC segment in Egypt and in Europe and enhance its operating efficiency across businesses, supported by cost reduction initiatives. The financial risk profile is expected to be sub-par in the near term and improve gradually over the medium term, driven by better margins. Timely support from the holding company of Sanmar group, if required, is also expected to be forthcoming.

Rating Sensitivity factors

Upward factors

• Better operating performance, along with healthy double-digit operating margin, leading to annual cash accrual of around $ 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 declining to below 10-12% on a sustained basis, impacting cash generation.
• High debt level due to capex, elongation of working capital cycle, impacting debt metrics further; interest cover remaining just over one time.
• Change in stance of support from the Sanmar group, and the main holding company.

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		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