Total bank loan facilities rated    Rs. 21000 crore, enhanced from Rs.16000 crore

CRISIL Ratings has reaffirmed its 'CRISIL A1+' rating on the short-term bank facilities of Rashtriya Chemicals and Fertilizers Limited (RCF).

The rating continues to reflect RCF’s established market position and its strong operating efficiency in the urea production business. Plants are operating at healthy utilisation levels, within the prescribed energy norms. Complete execution of energy saving products should further improve profitability of urea manufacturing units.

Any rise in feedstock (natural gas) prices does not impact the margin of the urea division as it is compensated through subsidy receipts from the government. However, currently, the global shortage faced of complex fertilizers globally has led to a spike in its prices, which could affect its profitability over the medium term. While the margins from the industrial chemicals segment has improved since fiscal 2021, its sustenance remains a monitorable as the business is highly commoditized and cyclical.

Additional subsidies announced by the government over the past two fiscals, has improved the financial risk profile of the company. In addition to Rs 1.05 lakh crore approved in the Union Budget for this fiscal, an additional subsidy of Rs 1.10 lakh crore was announced in May 2022 to provide for the surging feedstock and product prices. While this seemed sufficient to meet this fiscal’s requirements, as per CRISIL Ratings’ estimates, the continued surge in the gas prices could necessitate a further increase in the subsidy requirement by around Rs. 40,000 crores for the urea players. The government has been extending the required financial support to this sector, wherein a timely announcement and disbursement of this increased requirement would be a key monitorable.

RCF is the third-largest player in the domestic urea industry, in terms of production capacity, accounting for 10% of the total production. The company has a strong position in Maharashtra, Karnataka and Andhra Pradesh. Diversity in revenue streams across the urea, complex fertilisers and industrial chemical products segments, also shields the overall margin from any unfavourable conditions in any particular segment and lends stability to the cash flow position.

Healthy operating efficiency of the urea production division

Strong operating efficiency is driven by the urea manufacturing plants, operating at healthy utilisation rates, with energy consumed below the prescribed norms and the additional Rs 350 per tonne provided by the government. As pre-specified norms form the basis for reimbursement of feedstock cost to fertiliser companies, lower energy consumption results in better profitability. The Thal and Trombay plants operated at energy levels of 5.85 and 6.51 giga calorie (Gcal)/tonne (against energy norms of 6.20 and 6.50 Gcal/tonne), respectively, in fiscal 2022. Similarly, energy consumption levels have remained comfortable at 5.74 Gcal/tonne and 6.55 Gcal/tonne for the Thal and Trombay plants respectively, during the first six months of fiscal 2023. The energy efficiency capex for the Trombay plant was completed in the third quarter of this fiscal and accordingly reduction in energy consumption is expected from the fourth quarter onwards.

Comfortable financial risk profile

Additional subsidies announced by the government over the past two fiscals, has improved the financial risk profile of the company. Adjusted debt to adjusted networth increased to 0.86 times as on March 31, 2022 as compared to 0.63 times as on March 31, 2021, though a significant improvement from 1.53 times as on March 31, 2020. Improvement in operating performance has improved the interest coverage ratio to 8.05 times in fiscal 2022 as compared to 4.22 times in fiscal 2021.

However, the continued surge in gas prices has necessitated a requirement of additional subsidies to be announced for this fiscal. Given the requirement of working capital borrowings mainly depend on the subsidy receivable position with the Government, a substantial lag in announcing and disbursing these additional subsidy requirements could alter the credit metrics for the company. The government has been extending the required financial support to this sector, wherein a timely announcement and disbursement of this increased requirement would be a key monitorable. Also, with RCF being appointed as a canalising agency to facilitate urea imports on behalf of the Government, its requirement for funding limits has increased, considering the rise in imported urea prices.

While the company would continue to undertake capital expenditure (capex) for periodic efficiency along with its committed investment towards its joint venture, any major debt-funded capex or investment that constrains the capital structure, would be a key rating sensitivity factor.