ICRA has reaffirmed the 'AA-' rating to Rs 15 billion cash credit limits and Rs 36 billion term loans of Rashtriya Chemicals & Fertilizers (RCF). The outlook on the long term rating is 'stable'.
The rating continues to factor in the established position of RCF as one of the largest urea manufacturers in India; vertically integrated operations in fertilizers and chemicals; healthy operating efficiency in urea operations; improvement in profitability of complex fertilizers post introduction of NBS policy, moderate financial risk profile and large sovereign ownership.
ICRA notes that the profitability of the company has remained weak during 9m FY 14 due to high forex losses, though the same is likely to improve during Q4 FY 14 as the company crosses the cutoff level of urea production for the revamped capacity at Thal, which is eligible for IPP-based pricing, and becomes entitled for additional subsidy. While profitability remains under pressure, particularly in view of the increase in gas price which may lead to deterioration in the profitability of the chemicals division with some of the chemicals becoming unviable, the likely increase in fixed cost compensation for urea is likely to offset the decline in profitability in case gas price increase is to be effected during FY15.
The rating also factors in the vulnerability of profitability in the fertilizer business to regulatory risks and agro-climatic risks; vulnerability of the profitability of the chemical division to commodity price cycles, exchange fluctuations and potential reduction of import duty and high working capital intensive nature of fertilizer operations.
ICRA notes that the company proposes to undertake ~Rs 45 billion brownfield expansion at Thal which would lead to deterioration in the capital structure. With recent amendments in the new urea investment policy, the GoI has removed the 'guaranteed buyback' clause which effectively removes the downside protection for such projects and increases the off-take risk for RCF. ICRA has not factored in these investments while assigning its ratings and would review the ratings as and when clarity on RCF's financial commitment on the above projects emerges.
ICRA also notes the complex fertilizer manufacturers producing ammonia using domestic gas have received an Office Memorandum (OM) from Department of Fertilizers (DoF) which states that, pending finalization of the guidelines on recovery, it has been decided to recover undue benefit to the company on account of usage of cheap domestic gas in the production of P&K fertilisers from the date of the OM (Jan 6, 2014), subject to reconciliation after final decision by Empowered Group of Ministers (EGoM).
Shares of the company gained Rs 0.65, or 1.85%, to trade at Rs 35.80. The total volume of shares traded was 72,880 at the BSE (2.37 p.m., Thursday).
