| Tata Chemicals Limited | ||
| Rating reaffirmed at 'CRISIL A1+' | ||
| Rating Action | ||
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| Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings. | ||
| 1 crore = 10 million | ||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has reaffirmed its ‘CRISIL A1+’ rating on the commercial paper programme of Tata Chemicals Limited (TCL).
During fiscal 2023, TCL’s consolidated revenue grew 33% supported by higher realisations across geographies, while volumes remained flat. Earnings before interest, tax, depreciation and amortisation (Ebitda) margin expanded by 420 basis points (bps) as the increase in realisation was higher than rise in cost of production owing to favourable demand-supply scenario. Realisation is expected to decline in fiscal 2024 owing to moderation in input prices, while volumes are expected to increase on the back of favourable demand outlook, especially from the glass sector. At the same time, global supply situation remains tight with no significant capacity addition expected in the near term.
Among international businesses, the operations in the US and UK reported revenue growth of 43% and 35%, respectively, in fiscal 2023 due to sharp increase in realisations, while Ebitda margin improved by more than 270 bps and 1,700 bps, respectively. Margin is expected to improve further in the US business with newer annual contracts starting to take effect for calendar year 2023, as seen in the fourth quarter of fiscal 2023. Similarly, in the UK operations, the benefit of moving to fixed-margin contract is expected to accrue from fiscal 2024 onwards. The Kenya operations also continued to improve with 64% growth in operating income and improvement in Ebitda margin by 2,470 bps, enabling it to become debt-free in fiscal 2023.
The standalone business of TCL remains debt free, while majority of the debt resides in the international businesses. Overall, gross debt (including lease liabilities) stood at Rs 6,296 crore as on March 31, 2023, against Rs 7,024 crore as on March 31, 2022. The company prepaid debt in 2023 as cash accrual improved and is expected to continue the same with incremental accruals to be utilized towards repayment of debt in UK and US businesses.
Financial flexibility remains strong by virtue of a being part of the Tata group. Liquidity is also cushioned by cash and equivalent of Rs 1,935 crore as on March 31, 2023, and quoted equity investment in other Tata group companies valued at around Rs 4,400 crore as on May 23, 2023.
The rating continues to reflect the strong business risk profile of TCL, driven by its established market presence in diversified markets, and healthy financial risk profile because of strong liquidity and financial flexibility. These strengths are partially offset by susceptibility to price volatility in the soda ash business. |
Analytical Approach For arriving at its rating, CRISIL Ratings has combined the business and financial risk profiles of TCL, Tata Chemicals Europe, Tata Chemicals North America, Tata Chemicals Magadi, and Rallis India Ltd (Rallis; ‘CRISIL AA+/Stable/CRISIL A1+’). For calculation of financial ratios, CRISIL Ratings has amortised goodwill (both arising from acquisitions as well as self-generated) over 20 years starting fiscal 2009. A significant portion of this goodwill relates to the acquisition of General Chemical Industrial Products (GCIP), which gave TCL access to long-term trona reserves for manufacturing natural soda ash.
Please refer Annexure - List of entities consolidated, which highlights entities considered and their analytical treatment of consolidation. |
Key Rating Drivers & Detailed Description Strengths: Strong business risk profile driven by established market presence Business remains diversified, with operations spread across basic chemistry products, including soda ash, sodium bi-carb and salt manufacturing (together contributing around 81% of revenue in fiscal 2023) and specialty products, including agricultural solutions (around 19%).
The inorganic chemicals business is geographically diversified across North America, Europe, Africa and India. TCL is the third-largest producer of soda ash in the world, with capacity of 4.2 million tonne per annum (mtpa) and natural soda ash forming nearly two-third of its capacity. Its subsidiary, Rallis, too has a strong market position in the agricultural products industry. The consumer products business, which was demerged to Tata Consumer Products Ltd, has resulted in increasing contribution from the soda ash business.
Healthy operating efficiency in the natural soda ash business Operating efficiency is expected to remain healthy, backed by availability of low-cost natural soda ash from North America, and improving capacity utilisation catering to strong demand across all applications. The company’s soda ash plant in Mithapur, Gujarat, is one of the lowest-cost producers of synthetic soda ash, aided by proximity to saltworks and limestone quarries and economies of scale. It also has an integrated cement plant, which utilises by-products from soda ash manufacturing.
Strong financial risk profile, underpinned by strong liquidity, high financial flexibility and healthy capital structure Liquidity remains strong, aided by cash and cash equivalent of Rs 1,935 crore as on March 31, 2023. Easy access to low-cost financing from banks and financial markets, being part of the Tata group, and low utilisation of working capital lines, also support liquidity. Capital structure should remain healthy, with gearing expected well below 1 time.
The company has also announced next phase of capex of Rs 2,000 crore to be spent over next four years to increase its soda ash and sodium bicarbonate capacity. The capex is expected to be funded from internal accruals and thus shall not impact the financial risk profile of the company.
Weakness: Susceptibility to price volatility in the soda ash business The domestic soda ash business remains susceptible to volatility in international prices, driven by capacity addition, currency fluctuations and competition from imports. While improved operating efficiency from large scale of operations and increased integration across geographies partially offsets impact of any price fluctuation on TCL, its soda ash business will remain exposed to price volatility. |
Liquidity: Strong Liquidity is supported by cash and cash equivalent of Rs 1,935 crore as on March 31, 2023. Easy access to low-cost financing from banks and financial markets, being part of the Tata group, and minimal utilisation of working capital lines also support liquidity. Cash accrual of over Rs 2,300 crore in fiscal 2024 are expected to be adequate to cover the debt obligation of around Rs 600 crore and capital expenditure over the medium term. |
Rating Sensitivity factors Downward factors
ESG profile The environment, social, and governance (ESG) profile of TCL supports its already strong credit risk profile. Chemical manufacturing can have a significant impact on the environment owing to high water consumption, waste generation and greenhouse gas (GHG) emissions. The sector’s social impact is characterised by health hazards, leading to higher focus on employee safety and well-being; and the impact on local community given the nature of its operations. The company has continuously focused on mitigating its environmental and social risks.
Key ESG highlights:
There is growing importance of ESG among investors and lenders. TCL’s commitment to ESG will play a key role in enhancing stakeholder confidence, given high access to domestic capital markets |
About the Company Incorporated in 1939, TCL manufactures soda ash and related chemicals, including sodium bicarbonate, caustic soda and bromides. The company commenced operations in 1944 with a 30,000 tonne per annum (TPA) plant in Mithapur. Over the years, it has expanded its soda ash installed capacity to 917,000 TPA. It entered the iodised vacuum salt business in 1986. TCL also has a 440,000-TPA cement plant in Mithapur, which was set up to effectively utilise the solid waste generated during soda ash production.
Its subsidiary, Rallis, is one of the leading players in the domestic crop protection sector, and manufactures pesticides, herbicides and fungicides at its factories in four locations. In March 2006, TCL completed acquisition of the Brunner Mond group for GBP 104 million, gaining access to the soda ash business in Europe and Kenya. It acquired GCIP in North America for USD 1.01 billion in March 2008. In December 2010, it acquired British Salt Ltd, the leading manufacturer of pure-dried vacuum salt products with around 50% market share in the UK, for GBP 93 million. The company also has brine wells with a long tenure of residual life. TCL was also in the urea and phosphatic fertiliser and trading businesses, which it sold in 2018 as part of its strategy to exit highly regulated businesses. In fiscal 2020, TCL demerged its consumer product business to another Tata group entity, and also acquired the remaining 25% stake in Tata Chemicals (Soda Ash) Partners (TCSAP) for USD 195 million, thereby increasing its stake to 100%. |
Key Financial Indicators
# CRISIL Ratings-adjusted numbers ^based on abridged financials |
Any other information: Not applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
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Annexure – List of entities consolidated
^Dissolved/liquidated during fiscal 2022 *Dissolved in March 2023 |
| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||
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Criteria Details
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