India Ratings & Research (Ind-Ra) has downgraded India Glycols (IGL) long-term issuer rating to 'BBB+' from 'A-'. The outlook is negative.
The downgrade reflects IGL's tightened liquidity in FY13 (year end March) due to its investments of Rs 1,530 million in National Stock Exchange. The company through its 100% subsidiary IGL Finance invested short-term funds in a commodity financing product offered by the exchange, which defaulted in payments at the time of settlement. IGL's total exposure in IGL Finance was Rs 1,434 million as on Mar. 14, 2014 including amount received of Rs 96 million from the exchange. The negative outlook reflects uncertainties about improvements in IGL's liquidity position in FY16.
Also, IGL's financial performance deteriorated in 9MFY14, with revenue dipping 13.5% yoy to Rs 21.95 billion led by reduced sales from the industrial chemicals business. EBITDA margin also fell to 4.5% in 9MFY14 from 11% in 9MFY13. This was mainly due to a fall in guar gum prices leading to a 57% yoy decline in guar gum sales. Guar gum prices fell because of an increase in acreage for guar and capacity additions for guar gum processing. The company had to write down guar gum inventory of Rs 170 million. Furthermore, ethanol prices increased and the company incurred some trade related forex losses during 9MFY14.
The ratings remain constrained by IGL's high working capital intensity. Also, the possibility of introduction of guar gum substitutes in the market and/or alternative exploration techniques could impact the business profile of the company. IGL plans to introduce value-added guar gum derivatives in FY15.
The ratings are, however, supported by IGL's established position in the Indian market as a producer of monoethylene glycol and ethylene oxide derivatives. Moreover, the company has the flexibility to switch between molasses and ethyl alcohol as raw material, depending on cost viability.
In 2013, severe flash floods in Uttarakhand resulted in large-scale destruction. Consequently, the Ministry of Finance announced a one-year principal and interest moratorium for loans outstanding for all industries in the state. IGL opted to avail the package to ease its tight liquidity. Ind-Ra has not treated this moratorium under its Distressed Debt Exchange criteria, given IGL's ability to refinance its debt obligation had this package been not available.
After the period of moratorium is over, repayments will be bunched up in FY16 (Rs 3.96 billion), which could lead to refinancing risk. However, given its established relationships within the banking system, IGL expects to refinance debt successfully, if need be.
Shares of the company declined Rs 1.25, or 1.19%, to settle at Rs 103.50. The total volume of shares traded was 38,163 at the BSE (Tuesday).
