CRISIL’s ratings on the bank facilities and debt programmes of Rashtriya Chemicals & Fertilizers Ltd (RCF) continue to reflect the company’s established position in the fertiliser industry and its diversified revenue profile. The ratings are also supported by RCF’s integrated operations and comfortable financial risk profile, marked by a large net worth, and comfortable gearing and debt protection metrics. These rating strengths are partially offset by the cyclicality in RCF’s industrial products business, and the regulated nature of the fertiliser industry.

RCF is the third-largest player in the domestic urea industry by production capacity. The company had a share of around 10 per cent in the domestic urea production in 2010-11 (refers to financial year from April 1 to March 31) and has strong presence in its primary markets in Maharashtra, Karnataka, and Andhra Pradesh. RCF’s Trombay (Maharashtra) urea plant restarted operations in 2009-10 with commencement of supply of gas from Krishna-Godavari basin and produced 3.3 million tonnes of urea in 2010-11. This has further strengthened RCF’s market position in the domestic urea segment. While RCF has lower urea profitability than some of the other players, including Chambal Fertilisers and Chemicals Ltd (rated ‘CRISIL AA-/FAA/ Stable/CRISIL A1+’) and Indian Farmers Fertiliser Cooperative Ltd (rated ‘CRISIL AA-/Stable/CRISIL A1+’), the company is currently implementing de-bottlenecking project at Thal (Maharashtra), which will improve its profitability from 2012-13 onwards if the company secures gas supply at favourable rates.

RCF has a diverse revenue profile with presence in urea, complex fertilisers, and industrial chemical products. This diversity protects the company’s profitability from unfavourable conditions in any particular segment and adds stability to its cash flows. For instance, in 2010-11, while the cash flows from industrial products declined, this was more than offset by higher cash flows from the complex fertiliser segment. In 2010-11, the complex fertiliser segment benefited from a favourable nutrient based subsidy (NBS) regime and the restart of production in the ammonium nitrate phosphate (ANP) unit in Trombay, which was shut since 2006-07. The production at ANP unit stabilised in the second half of 2010-11 and the unit operated at 58 per cent utilisation for the full year. CRISIL believes that while RCF’s profitability from complex fertiliser operations will remain healthy over the medium term, it will moderate down from the peak witnessed in 2010-11 because of significant increase in international prices of raw materials.

The company’s financial risk profile is comfortable. The company’s gearing improved to 0.24 times as on March 31, 2011, from 0.72 times as on March 31, 2010. The improvement in gearing was a result of liquidation of fertiliser bonds of Rs.3.27 billion in 2010-11 following the Government of India’s (GoI’s) buy-back announcement and reduction in working capital borrowings. RCF is taking up a de-bottlenecking and energy efficiency project at its Thal plant at a cost of about Rs.3.3 billion, which will increase the urea capacity at the plant to 2 million tonnes per annum (tpa) from the present 1.7 million tpa. The project, partly debt-funded, was expected to be completed in 2011-12 but will now be commissioned in 2012-13. CRISIL believes that RCF’s net gearing will increase over the medium term due to debt contracted for its Thal de-bottlenecking project, along with increase in working capital borrowings due to expectation of delays in subsidy reimbursements from the GoI. RCF is considering a brownfield expansion at Thal, a coal based fertiliser plant at Talcher in a joint venture with Coal India Limited (rated CRISIL AAA/Stable/CRISIL A1+) and GAIL (India) Ltd (rated CRISIL AAA/Stable) and various international opportunities, but CRISIL has not factored these plans into its rating since the company is currently conducting a detailed feasibility analysis of the projects. RCF had healthy cash accruals of Rs.2.87 billion for 2010-11. The company also has an adequate interest coverage ratio (8.1 times in 2010-11). RCF’s strong liquidity is supported by cash balances of Rs.4.2 billion as on March 31, 2011.

However, the inherent cyclicality of RCF’s industrial chemicals business makes it vulnerable to international price movements. CRISIL believes that the profitability of this division will remain vulnerable to intense competition from imports. Other risk factors include the regulated nature of the fertiliser industry, and large working capital borrowings to fund subsidy receivables from the GoI. The New Pricing Scheme – III, subsidy framework for urea came to an end on March 31, 2010, and the new framework is yet to be announced by GoI. The impact of the new framework on RCF will remain a key rating sensitivity factor. CRISIL believes that the industry will remain exposed to developments on the regulatory and government front over the medium term.

CRISIL believes that RCF’s profitability and cash accruals will remain healthy over the medium term on the back of its diversified business risk profile and expected benefits from its recently completed projects. The debt-funded capital expenditure (capex) notwithstanding, RCF’s financial risk profile is expected to remain healthy, marked by a large net worth, and comfortable gearing and debt protection metrics. The ratings may be upgraded if profitability in the urea segment improves with timely completion of the de-bottlenecking project. The ratings may also be upgraded in case of favourable changes in the new urea concession policy that is yet to be announced. Conversely, the outlook may be revised to ‘Stable’ if RCF’s ongoing Thal de-bottlenecking projects faces time and cost overruns or if the company undertakes larger-than-expected debt-funded capex programme, thereby weakening its debt protection metrics. The outlook may also be revised to ‘Stable’ if there is any adverse change in the urea concession policy or if the fixed subsidy under NBS for complex is inadequate to cover any sharp increase in raw material prices.