Detailed Rationale

Crisil Ratings has reaffirmed its ‘Crisil AA/Stable’ rating on the long-term bank facilities of Trafigura India Pvt Ltd (TIPL; part of the Trafigura group) and reassigned its ‘Crisil A1+' rating to the short term bank facility.

 

The rating factors in the strong operational, managerial and financial support from its ultimate parent, Trafigura Group Pte Ltd (Trafigura). TIPL is strategically important to the group as it helps the latter in establishing its presence in India. Furthermore, Trafigura has extended a corporate guarantee for the bank facilities availed by TIPL.

 

TIPL is a commodities trader, dealing in nickel and coking coal, with an established market position in India. - Revenue stood at Rs 3,460 crore in fiscal 2024 and had declined from Rs 4,408 crore in fiscal 2023.  TIPL reported earnings before interest, tax, depreciation and amortisation (Ebitda) losses (negative 1.75% in fiscal 2024 due to inventory loss) against 4% in fiscal 2023. Revenue has declined owing to lower volumes traded in the standalone entity (TIPL) and shifting of some of the trades to the parent entity. The revenue and profitability are expected to remain steady over the medium term given the nature of business and the company’s prudent risk management policies.

 

The financial risk profile remains modest as the business has thin operating margin. The company does not have any long-term debt and uses short-term debt for meeting working capital requirement. Fund-based limit was Rs 1,626 crore as on September 30, 2024, and the bank limit was utilised 35% on average over the 12 months through September 2024. Overall liquidity is further supported by need-based support from the parent.

 

The rating continues to reflect the strong support from Trafigura, the established market position of the company and its prudent risk management policies. These strengths are partially offset by modest financial risk profile and susceptibility to regulatory changes.

Analytical Approach

Crisil Ratings has notched up the standalone rating of TIPL to factor in the support from Trafigura. TIPL is strategically importance to Trafigura, wherein the latter has extended a corporate guarantee for the bank facilities availed by the company.

Key Rating Drivers & Detailed Description

Strengths:

• Strong support from the ultimate parent, Trafigura: TIPL benefits from the strong operational, financial and managerial linkages with its ultimate parent, Trafigura, which indirectly owns 100% stake in the company. India is a key geography, wherein TIPL extends value-added services to customers, namely providing just-in-time inventory and working capital efficient deal structures. This differentiates TIPL from other players in this business.

 

Operations are closely linked as TIPL sources its requirement from the Trafigura group. Its risk management policies are also in line with the group’s policies.

 

Trafigura has extended need-based financial support to the company, with ~Rs 450 crore of equity infusion in fiscal 2020. Further, it has extended a corporate guarantee for the bank facilities availed by TIPL. Healthy linkages and need-based financial support will likely continue over the medium term.

 

• Established market position: Trafigura commands more than 20% market share in the nickel trading business and has a leading position in trading of coking coal in India. TIPL offers value-added services, such as just-in-time inventory and working capital efficient deal structures, which differentiate it from other players. Overall, TIPL leverages the strong goodwill of its parent.

 

• Prudent risk management policies: TIPL follows the prudent risk management policies designed by Trafigura, wherein the group does not enter speculative transactions. The company fully hedges its commodity price risk via derivative positions for nickel, where pricing is benchmarked against the relevantindex; while for coal, back-to-back index-linked contracts are structured or are fixed-priced. Similarly, the company hedges its forex fluctuation risk via derivatives. Inventory obsolescence risk is minimised by the company pre-selling a major portion of its imported cargo. Furthermore, trading exposure is monitored at the group level, wherein pre-defined value at risk limits is set. These risk management policies should enable the group to sustain any headwinds in the commodity trading business.

 

Weaknesses:

• Modest financial risk profile: The financial risk profile is constrained by working capital debt of Rs 361 crore as on September 30, 2024 (Rs 590 crore as on March 31, 2024). Resources are tied up to fund inventory, but since a significant portion is pre-sold, the recovery risk is low. The company is not expected to avail long-term debt given its asset-light balance sheet. Debt protection metrics will likely remain subdued, given the thin-margin business.

 

• Susceptibility to changes in government regulations: While the price and forex risks are hedged, the cash flows remain susceptible to various risks inherent in the commodity trading space. In fiscal 2024, the company booked losses due to selling its nickel pig iron (NPI) inventory at a price lower than the benchmark at which it was purchased. This was driven by the shift in the trading benchmark for NPI in the domestic market, changing from London Metal Exchange (LME) to Shanghai Metal Market (SMM) While the company monitors timely recovery from its customers, any significant non-recovery could materially impact the cash flow of the company. Government regulations also play a significant role as any change in duty structures or regulations on trade of any commodity may impact the operating performance.

Liquidity: Strong

Cash and equivalent stood at Rs 98 crore as on September 30, 2024. Working capital lines were utilised 35% on average over the 12 months through September 2024. The company does not have any long-term debt or any major capex plans. Annual cash accrual and unutilised bank lines will adequately cover working capital requirement over the medium term. Overall liquidity is further backed by need-based support from the parent.

Outlook: Stable

TIPL will continue to benefit from its established market position, prudent risk management policies and linkages with Trafigura.

Rating sensitivity factors

Upward factors

• Sustained improvement in the business risk profile resulting in better profitability, with return on capital employed (RoCE) above 12%
• Significant improvement in the financial risk profile with sustenance of working capital cycle and liquidity position

 

Downward factors

• Reduction in shareholding of, or diminution in support from, the parent
• Weakening in the credit risk profile of the parent
• Significant decline in operating performance, with RoCE sustaining below 5%

About the Company

Incorporated in 2009, TIPL is a wholly owned subsidiary of Trafigura. It is the only operating trading entity in India of the Trafigura group, dealing in nickel in refined form and concentrates, and coking coal and coke. While the group trades in various commodities in India, refined metals (copper, aluminium, lead, zinc and nickel), concentrates, oil and coal, the stock and sale trading of nickel, coking coal and coke is undertaken through TIPL; the remaining trades are directly handled by the parent.

 

Set up in 1993, Trafigura is one of the world’s leading independent commodity trading and logistics company. It is a global commodities trader, with an industry-leading position in oils and metals trading. With 88 offices in 48 countries, the group has established global reach and scale. While energy, metals and mining and trading businesses continue to contribute a major share, the group has been building its presence in the fast-evolving power and renewables sector through strategic, targeted engagements.

Key Financial Indicators*

As on/for the period ended March 31	Unit	2024	2023
Operating income	Rs.Crore	3460	4408
Profit after tax (PAT)	Rs.Crore	-88	10
PAT margin	%	-2.55	0.23
Adjusted debt/adjusted networth	Times	1.77	3.1
Adjusted interest coverage	Times	-0.60	2.04

*As per analytical adjustments made by Crisil Ratings

Any other information: Not Applicable