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 Sanmar)

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TCI’s revenues marginally declined by 3% y-o-y to Rs. 4933 crores(USD 609 million)  in fiscal 2023 driven by moderation in realisation of Poly-Vinyl Chloride (PVC) which witnessed a decline of 35-40% YoY in fiscal 2023 post record high prices in fiscal 2022. Marginal drop in overall revenue in fiscal 2023 was partly mitigated by an increase in realisation of caustic soda  during fiscal 2023  by 56% y-o-y due to demand supply mismatch on account of increased production costs among competitors in Europe with high energy costs leading to unviability of caustic production there. Besides, TCI also received export incentives from the Egyptian government which supported overall operating income in fiscal 2023. The Egyptian government has announced incentives of 14-15% on exports of PVC, caustic soda, and calcium chloride from June 2021 onwards, and the company accounted for export incentive to the extent of Rs.516 crores (USD 64 million) in fiscal 2023 for almost two years.

 

During the first quarter of fiscal 2024, the PVC prices have marginally improved over the last quarter of fiscal 2023 with pick up in demand from end user markets. During the same period i.e., first quarter of fiscal 2024, realization of caustic soda has decreased by ~20-30% compared to the last quarter of fiscal 2023 due to normalization in prices post record highs in fiscal 2023. While this is expected to result in moderation in revenues in the near term as well, albeit continuing export incentives will partly cushion the fall in overall operating income.

 

Despite the decline in PVC spreads in fiscal 2023 as compared to fiscal 2022, TCI’s operating margins increased by 400 bps in fiscal 2023 as compared to fiscal 2022 driven by improvement in contribution from caustic soda, as well as export incentives coupled with improvement in capacity utilization. These incentives are given to companies in Egypt to boost exports. Due to forex challenges in Egypt which has resulted in scarcity of US dollar since Feb’22, the company has pivoted its product sales predominantly to export markets though domestic sales realisation is better than export price; in order to augment US Dollar availability for meeting operational payments and debt servicing..

 

Operating margins are mainly dependent on prices of key raw material i.e. Ethylene Dichloride (EDC) and end product price. The PVC-EDC spreads moderated in fiscal 2023 from fiscal 2022 levels on account of steep fall in PVC price with spike in export of PVC from China due to slowdown in their domestic demand  . Due to the steep fall in PVC prices during the first quarter of fiscal 2023, the company has written down the carrying value of inventory to net realizable value amounting to USD 55 mn. During the first quarter of fiscal 2024, the PVC – EDC spreads have marginally reduced compared to last quarter of fiscal 2023 due to increase in EDC prices. However, continuing export incentives, higher capacity utilization and reduction in power costs due to depreciation of Egyptian Pounds (EGP) will enable TCI’s operating profitability to range between 15-17% in the near term.

 

Due to COVID 19 and its consequent impact on the business, the company had to opt for loan restructuring under RBI circular dt. 7th June 2019. The restructuring was approved by the consortium of lenders and implemented on June 30, 2021.  As per the restructuring proposal, the total outstanding term loan of Rs. 6186 crores(USD 825 million) were converted into sustainable debt of Rs. 4419 crores(USD 589 million) and the balance being unsustainable debt of USD 236 million (INR 1770 crores). Out of the unsustainable debt, USD 118 million (Rs. 885 crores) was converted in form of 0.01% NCDs and the remaining USD 118 million (Rs. 885 crores) 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 Limited infused Rs.127.5 crores (USD 17 million) which along with healthy accruals were used for prepayment of term loans to the extent of Rs.608 crores (USD 75 million) before September 30, 2022, which resulted in upgradation of the account to standard. Post the pre-payment, the company does not have any significant repayment obligations till end of fiscal 2025 which will obviate liquidity pressures, despite higher interest costs following significant increase in LIBOR/SOFR rates, which will also impact  cash accruals in the near term.

 

The company, nevertheless, continues to benefit from support for procurement of EDC via group entity, Sanmar Shipping Ltd (SSL) with extended credit period in view of the dollar shortage in Egypt. This helps ensure steady supplies of EDC, enabling TCI to operate its PVC plant at utilization levels of over 90%. The company is also proposing to tie up additional working capital limits

 

The ratings reflect TCI’s diversified product profile with market leadership position in Suspension-Poly vinyl chloride (PVC) and caustic soda in Egypt, diversified revenue stream catering to multiple end user industries, long standing relationship with customers and healthy demand prospects for its products. Besides, the company also benefits from support provided by SSL, its group company. The rating also factors in the long vintage and vast experience of the promoters in the Petro chemicals sector for more than five decades coupled with strong leadership team, and the strong parentage and significant financial flexibility of Sanmar Holdings Ltd. (SHL). SHL through its overseas subsidiary holds 86.1% stake in TCI. These strengths are however  offset by presence in the commoditized nature of products, which lends variability to TCI’s operating margins, and its sub-par financial risk profile with the company’s earnings impacted presently due to forex challenges in Egypt.

Analytical Approach

For arriving at the ratings of TCI, CRISIL Ratings has taken a standalone view of the company.

 

The company has availed of unsecured loan of 1636 crore (USD 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.

 

CRSIL Ratings has also not considered the extraordinary income due to unrealized gain on extinguishment of unsustainable loan to NCD as part of the PAT or Networth for arriving 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 construction industry and urbanization while supply is lower due to large barriers of entry. Further, the Egyptian Government has also levied anti-dumping duty of 9% on PVC resins for imports from USA which supports the domestic market. Caustic soda production is power intensive in nature. Owing to sharp increase in power costs in Europe, caustic soda production had become unviable there, resulting in a demand supply mismatch in fiscal 2023 leading to increase in caustic realization; this situation, however, has normalized in Q1 2024, resulting in moderation of caustic soda realization price, though demand remains strong. Power costs of TCI declined due to depreciation of EGP against the US Dollar, which has increased the competitiveness of caustic soda produced by TCI. Further the power price  has been frozen by the Egyptian government till fiscal 2025.

 

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

 

Support from SSL

TCI is highly dependent on imports of EDC being the key raw materials for PVC production even though part of EDC requirement can be manufactured captively through 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 established long standing relationship with suppliers, company largely resorts to import of EDC.

 

Due to 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 their support for procurement and supplying of EDC to TCI with extended credit period, pending tie up of additional working capital by the company with banks. As regard receivables, the company’s sales are on cash and carry basis. Besides, the company is also managing working capital through collection of advance from the customers. The average inventory period is also low at 30-40 days.

 

Experience of Sanmar Group in the Petro chemicals business

The Sanmar Group has been engaged in the manufacturing of Petro chemicals for over five decades. The Group also has presence in shipping, metals, and engineering products. The promoters have scaled up the Indian chemicals business to over Rs. 5900 crores and is an established player in the Indian markets for its products. The Group’s PVC/chemicals business on a consolidated basis has revenues of over Rs. 10,000 crores lending significant scale to the Group. This has also enabled the Group to attract investments from marque investors like Fairfax Group and same was also evident in the initial public offering (IPO) of Chemplast Sanmar Ltd wherein it raised Rs 3850 crore.

 

Weakness:

Vulnerability of profitability to fluctuations in PVC prices

Profitability of PVC manufacturing companies depends on the prevailing PVC prices and EDC prices. Cyclical downturns have resulted in variations in operating profitability in the past for these players. Import of PVC currently attracts an import duty of 9% while duties on import of key raw materials is negligible. Any adverse change in duty structure will impact operating margins. Also, operating profits and margins are impacted because of lower export realisation as compared to domestic price, with TCI needing to export at least 70-75% of PVC and ~90% of caustic soda, due to shortage of US Dollar in Egypt. The company requires US Dollars for payment of raw materials and debt servicing.

 

Sub-par financial risk profile

Financial risk profile has remained sub-par over the years largely due to erosion of networth due to continued losses in earlier years. With infusion of Rs. 127.5 crores(USD 17 million) equity from promoters and better performance in fiscal 2022, net worth witnessed an improvement. For fiscal 2023, the company has reported PAT of USD 53.9 million which includes the unrealized gain on conversion of debt to NCD, excluding the same there has been loss at PAT level in fiscal 2023; Considering lower profitability and high interest costs, the interest cover is expected to be 1.1-1.4x in fiscal 2024; the same is expected to improve over the medium term in line with better operating profits and  will remain a monitorable aspect.

 

Any material improvement in net worth will depend on sustenance of profitability over the medium term to long term. In addition, any potential equity raise will also result in further improvement in the capital structure and improvement in total outside liabilities to tangible networth (TOL/TNW). The company is expected to undertake capex of USD 20-25 million per annum over the medium term, for routine maintenance and replacement of components at plants to enhance efficiency. The same is expected to be funded through a mix of debt and accruals.

 

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

 

Increase in risk related to forex availability

Following the impact on the economy from pandemic related issues, and the Russia-Ukraine war, which further exacerbated inflationary pressures and affected tourism, the Central Bank of Egypt limited 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 also for servicing USD denominated debt. Therefore, to ensure sufficient availability of US Dollars, TCIS has increased exports mainly of PVC and Caustic Soda to ensure sufficient US Dollars to meet its raw material and debt repayments, even though the export price of these products is lower than in the domestic markets in Egypt. Further tightness in US Dollar availability in Eqyptian market would be a key monitorable

Liquidity: Adequate

TCI’s overall liquidity position benefits from likely access to funding support from its holding company, as has been demonstrated in the past. However, TCI’s standalone liquidity position is stretched, as its working capital limits have been reduced to Rs.834 crores (USD 103 million) since March 2023 from Rs.1012 crores (USD 125 million) in June 2022, as part of resolution plan, agreed upon with lenders. Consequently, fund based utilisation has been high with almost full utilization in the last 4-6 months.

 

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

 

TCI  is in the process of obtaining additional working capital lines by a further Rs.450-500 (USD 55 - 60 million) crores by November 2023. This will partially bring down the dependance on SSL and advance from customers for working capital needs. Timely sanction of working capital lines will be crucial to obviate liquidity pressures, and will remain a monitorable.

 

TCI has bi-annual interest payments on its term debt. The interest payment of Rs.227 crores (USD 28 mn) due on September 28, 2023 had been serviced on time and the next   interest payment of ~USD 28-30 mn is due on March 31, 2024. Post the repayment of US$75 mn (Rs. 608 crore) of term loans in September 2022, the company has minimal principal repayment obligations until fiscal 2025. Debt servicing obligations 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 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 term and improve gradually over the medium term driven by improved margins. Timely support from holding company of Sanmar group, if required, is also expected to be forthcoming.

Rating Sensitivity factors

Upward factors

• Improvement in operating performance, while maintaining healthy double-digit operating margins, leading to annual cash accruals 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 margins deteriorating to below 10-12% on sustained basis impacting cash generation
• High debt levels due to capex, elongation of working capital cycle , impacting debt metrics further;  interest cover remaining at just over 1 time
• Change in stance of support from Sanmar group, mainly holding company

About the Company

Sanmar Group had acquired Trust Chemical Industries (“TCI”), an Egyptian Limited Liability Company, operating as the largest Chlor–Alkali plant in Egypt, in March 2007 with a capacity of 200,000 TPA of Caustic Soda and this was converted into Joint stock company in June 2010. The plant is situated at Port Said, at the mouth of the Suez Canal. Since then, the company has gradually expanded their capacity and product profile over the years 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 Margins	%	-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 USD 67.29 mn (Rs. 505 cr)

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

*Exchange rate used for FY22 – Rs.75/USD; FY23 – Rs.81/USD

**Not meaningful

Any other information: Not applicable