ICRA has revised the ratings assigned to the Rs. 140.92 crore term loans and the Rs. 35 crore long-term, fund based facilities (increased from Rs. 18.63 crore earlier) of The Andhra Petrochemicals Limited (APL) from LBBB+ to LA-; the outlook on the rating is stable. ICRA has also revised the ratings assigned to the Rs. 2 crore short-term non-fund based facilities (increased from Rs. 1.62 crore earlier) of APL from A2 to A2+.

The revision in ratings reflects the successful completion and stabilisation of the ?Optimisation and Modernisation? project without time or cost overruns. Further the favourable domestic demand for the various end-user sectors as well as the improved international price position have led to an improvement in the financial performance of the company in FY2011, with high margins, modest working capital intensity and free cash inflows. The ratings also factor APL?s plans to prepay ~50% of its term loans in the near term; consequently, interest costs are expected to come down further and the gearing is expected to improve, leading to an improvement in the financial risk profile of the company.

The ratings continue to factor the sole producer status of APL in the Indian oxo-alcohol market with a capacity to account for ~50% of the domestic oxo-alcohol demand; the improved domestic demand outlook for the various end-use sectors of oxo-alcohols such as plasticisers (used for Polyvinyl Chloride) after the slowdown in H2 2008-09 and 2009-10; and the strength of the group, with the promoter company The Andhra Sugars Limited (rated LA-/A1 by ICRA) having an operational history of almost five decades.

The ratings also continue to factor the dependence of margins on the spread between the oxo-alcohols and the feedstock, leading to volatility and cyclicality of margins; lack of integration benefits, being a standalone petrochemical producer; the influence of import duty differentials and Rupee-US Dollar parity levels on the margins; threat of cheaper imports from the Middle-East, Asian countries such as South Korea and Russia, the US and the European Union, where the local players enjoy the benefit of lower cost of feedstock either due to backward integration of refineries or due to the usage of natural gas; and the high concentration risks due to the dependence on a single feedstock supplier, which exposes the company to force majeure risks.