ICRA has downgraded the long term rating assigned to the Rs 365.5 million term loans and the Rs 350 million fund-based bank facilities of Andhra Petrochemicals (APL) from BBB+ to BBB-; the outlook on the long term rating continues to be Negative. ICRA has also downgraded the short term rating assigned to the Rs 20 million non-fund based bank facilities of APL from A2 to A3.
The revision in ratings is on account of steep deterioration in the revenue and profitability of the company during 2013-14 and expected weakness in performance during Q4 2013-14, owing to disruption in supply of its key raw material, propylene. APL sources its propylene requirement almost entirely from Hindustan Petroleum Corporation's (HPCL) Vishakhapatnam refinery; the dependence on a sole supplier enhances the force majeure event risks for APL as any disruption of supplies from HPCL will impact APL's production also.
The outlook on the long term rating continues to be negative due to the uncertainties related to timeline for production stabilization and quantum of insurance claims to be received. ICRA will be monitoring the development on these fronts, which are key rating sensitivities.
ICRA also draws comfort from the benefits accruing to APL as part of the Andhra Sugars group, which has an established track record over the past six decades. The ratings are, however, constrained by the lack of integration benefits, being a standalone petrochemical producer; dependence of margins on spreads between the oxo-alcohols and the feedstock, import duty differentials and foreign exchange rates, leading to volatility and cyclicality of profitability; and, the threat of cheaper imports from countries like Saudi Arabia, the US, Russia and Europe, where producers enjoy the benefit of lower cost of feedstock either due to backward integration or due to usage of natural gas. The ability of the company to continue to maintain its profitability in the face of volatile feedstock prices and weak global demand environment will also be a key rating sensitivity.
