Detailed Rationale

CRISIL Ratings has reassigned its ‘CRISIL AA/Stable' rating to the Rs.300 core long-term bank facilities of Trafigura India Pvt Ltd (TIPL; part of Trafigura group). CRISIL Ratings has also withdrawn its rating on Rs 300 crore proposed working capital facilities on client’s request. This is in line with CRISIL Ratings’ withdrawal policy.

 

The ratings derive support from the strong operational, managerial, and financial support provided by the ultimate parent, Trafigura Group Pte Ltd (Trafigura). TIPL is of strategic importance to the group in establishing its presence in India. The strong financial support is reiterated by Trafigura extending a corporate guarantee for the bank facilities availed by TIPL.

 

TIPL is a commodities trader, dealing primarily in nickel and coking coal, with an established market position in India. Revenues stood at Rs 4408 crore and earnings before interest, tax, depreciation, and amortisation (EBITDA) margin over 4% in fiscal 2023 compared to Rs 7403 crore and ~1%, respectively, in fiscal 2022. Revenues declined on-year due to lower volumes traded in ferro nickel as a strategy to mitigate counterparty risk, while margins were boosted by arbitrage opportunities amid high volatility in the underlying commodity prices.

 

However, TIPL is expected to report a net operating loss in fiscal 2024 because of losses on sale of nickel pig iron (NPI) inventory due to decline in prices. This inventory was bought during fiscal 2022 at LME linked prices. However, due to various market events and conditions TIPL had to sell the inventory after holding it for some time at Shanghai Metals Market (SMM) index linked prices or fixed prices based on the SMM index. The SMM index has been trading at significant discount to London Metal exchange (LME). With no major upward revision in prices, company sold around 60% of the inventory in the domestic market during the first half of fiscal 2024 resulting in the net loss. However, part of the inventory was sold to the parent at levels slightly above the purchase price cushioning the loss at TIPL. With no such inventory left, TIPL does not anticipate any further losses in the near term. Net margins are expected to sustain at 1-2% on a steady state basis given the nature of business and the company’s prudent risk management policies. Sustenance of operating profitability would be a key rating monitorable.

 

CRISIL Ratings estimates a moderation in the financial risk profile in fiscal 2024 with impact on networth due to losses expected to be incurred in the fiscal. Financial risk profile is moderate, with external debt availed of Rs 1,446 crore as on March 31, 2023, to fund its working capital requirements. Networth was strong at Rs 468 crore at the end of fiscal 2023. Overall liquidity position is further comforted by the need-based support extended by the parent.

 

The ratings factor in the strong support from Trafigura, the company’s established market position and prudent risk management policies. These strengths are partially offset by the modest financial risk profile and exposure to inherent business risk, including vulnerability to government regulations.

Analytical Approach

CRISIL Ratings has notched up the standalone rating for the parental support expected from Trafigura. TIPL is of strategic 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 is strategically important in terms of extending varied value-added services to its customers, namely, providing just in time inventory and offering favourable deal structures. This differentiates TIPL from the other players present in this business space.

 

Operations are closely linked as TIPL sources its entire requirement from the Trafigura group entities. The risk management policies followed 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, the strong financial support is reiterated by Trafigura extending a corporate guarantee for the bank facilities availed by TIPL. CRISIL Ratings expects the healthy linkages and need based financial support to continue.

 

• Strong market position: Trafigura commands more than 20% market share in the nickel trading business and holds a leading position with regards to trading of coking coal in India. The value-added services the company offers, namely, just in time inventory and favourable deal structures differentiates TIPL from the other players present in this space. Overall, TIPL leverages the strong goodwill created by its parent over the years.

 

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

 

Weaknesses:

• Modest financial risk profile: Financial risk profile is modest, with working capital debt of Rs 1,446 crore as on March 31, 2023. The resources tied up is mainly to fund its inventory, however since a significant portion is pre-sold, the recovery risk is low. The company is not expected to avail any long-term debt given the asset light balance sheet maintained. Debt protection metrics are expected to remain modest, given the thin margin nature of business.

 

• Exposed to inherent business risk, including vulnerability to 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 2023, the company took a write-off of around Rs 100 crore against potential loss from fraudulent supply by a counterparty. In fiscal 2024, the underlying benchmark for pricing NPI inventory shifted from LME to SMM due to external factors resulting in significant losses in the sale of inventory. While the company monitors timely recovery from its customers, given the thin margin nature of business, any significant non-recovery could materially impact the cash flows of the company. Further, Government regulations also play a significant role, as any change in duty structures or regulations on trade of any commodity could impact the industry’s operating performance.

Liquidity: Strong

TIPL maintained a cash and equivalent balance of Rs 9 crore as on March 31, 2023, wherein liquidity is supported by sufficient cushion in bank limits. Working capital lines were utilised 66%, on average, over the 12 months through September 2023. Given the asset light balance sheet maintained, the company does not have any long-term debt. Overall liquidity position is further backed by the need-based support extended by the parent.

Outlook: Stable

The credit risk profile of TIPL will continue to be aided by its established market position, prudent risk management policies and linkages with Trafigura.

Rating Sensitivity factors

Upward factors:

• Enhancement in the profitability of TIPL, with return on capital employed (RoCE) sustaining above 12%
• Significant and sustained improvement in the credit risk profile of the parent

 

Downward factors:

• Diminution in support from the parent, Trafigura
• Significant and sustained weakening of the credit risk profile of the parent
• Decline in operating margin of TIPL, with RoCE sustaining below 5%

About the Company

Incorporated in 2009, TIPL is a wholly owned subsidiary of the Trafigura group. It is the only operating trading entity in India for the group, dealing primarily in nickel in refined form and concentrates, and coking coal and coke. While the group trades in various commodities in India namely, refined metals (copper, aluminium, lead, zinc, 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.

 

Founded in 1993, Trafigura is one of the world’s leading independent commodity trading and logistics houses. 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 its global reach and scale. While energy and metals and mining trading businesses continue to contribute to a major share of the business, the group has also been building its presence and position in the fast-evolving power and renewables sector through a series of strategic, targeted engagements.

Any other information: Not applicable