India Ratings & Research (Ind-Ra) has affirmed Gujarat State Fertilizers and Chemicals (GSFC) long-term issuer rating at 'AA+'. The outlook is stable.

The affirmation reflects GSFC's established business position in the domestic fertiliser and chemicals manufacturing industry and its comfortable credit metrics. Liquidity is strong despite a fall in profitability in FY13 and 9MFY14. This is indicated by the company’s low average fund-based working capital use (28%) over the 12 months ended February 2014.

The ratings are supported by GSFC's high operational and business synergies due to its integrated manufacturing operations, diversified product offerings and market leadership position in its industrial chemicals products such as caprolactam and melamine which contribute over 50% to its revenue from the industrial chemicals segment.

GSFC's revenue rose 18% yoy to Rs 62.5 billion in FY13, backed mainly by an increase in the traded products led by di ammonium phosphate. Operating profitability margins dipped to 12.8% in FY13. This can be attributed to fertiliser segment's margins dipping to 12% (FY12: 18%) and industrial products' to 17% (31%). The fertiliser segment's low capacity utilisation and high trading led to lower profitability in FY13 while the industrial products business suffered due to a fall in caprolactam (end product) prices on low demand and increase in benzene (raw material) prices.

For 9MFY14, EBITDA margins further dropped to 8.5% due to inventory losses on build-up of channel inventory of non-urea fertilisers in 1HFY14, unfavourable benzene-caprolactam spread and an increase in power costs.

Rating constraints continue to emanate from GSFC's high dependence on import of raw materials-ammonia and phosphoric acid - from countries in Middle East and Africa where political unrest had impacted the supply to an extent affecting GSFC's production and profitability. This constraint, however, is mitigated partially with the commencement of production at GSFC's phosphoric acid JV in Tunisia from 1QFY14 after a delay of over a year due to political unrest.

GSFC's working capital requirements have been increasing since FY10 due to a rise in receivable days on account of subsidy receivable pile up at year end. Subsidy dues stood at Rs 17 billion as at FYE13. The subsidy receivables stood at Rs 10 billion as at December 2013. The ratings also remain constrained by the fertiliser industry's susceptibility to unfavourable changes to subsidy policy. However, Ind-Ra takes comfort from the government of India's demonstration of providing significant budgetary allocations for fertiliser subsidy.

Even though the company's credit profile weakened in 9MFY14 and FY13 due to a decline in profitability and increase in debt, it remained comfortable. Leverage (adjusted net debt/op. EBITDA) increased to 2x in FY13 and gross interest coverage to 22.0x. After netting off the subsidy dues, the leverage continued to be comfortably low in FY13 (negative) and is likely to remain low in FY14. Total adjusted debt increased to Rs 17.9 billion in FY13.  The increase in the short-term debt was due to a rise in working capital requirements while debt-led strategic acquisition of 19.98% stake in Canada based Karnalyte Inc led to an increase in the long-term debt.

GSFC has capex plans of around Rs 70 billion-Rs 100 billion towards setting up a chemicals and fertilisers complex in Dahej in the next three to four years. The capex is to be funded in phases by a mix of debt and internal accruals. However, leverage should remain at levels consistent with the current ratings.

Shares of the company declined Rs 0.7, or 1.26%, to settle at Rs 54.75. The total volume of shares traded was 24,198 at the BSE (Thursday).