By: ICN Bureau
Last updated : August 30, 2021 10:12 am
The ratings continue to reflect the strong managerial and financial support received by the company from its parent, Krishak Bharati Cooperative Ltd (KRIBHCO).
CRISIL Ratings on the bank facilities and non-convertible debentures of KRIBHCO Fertilizers Limited (KFL) continues to reflect the likelihood that the operating performance of the company will improve with stabilisation of the recently completed energy saving projects and expected completion of the freight reduction project by the end of the ongoing fiscal along with sustenance of the recently reduced working capital intensity. This will lower the operating cost as well as improve the cash flow of the company.
The energy saving project was completed in May 2021, and the plants have been operating around 5.2 gigacalorie (Gcal)/tonne post that, which is well below the normative requirement of 5.5 Gcal/tonne. The company is in the process of setting up railway sidings at the plant; this will lead to significant reduction in freight cost, which is not reimbursed by the government. While there have been delays in implementation on account of the Covid-19 pandemic, the project is expected to be completed by December 2021. These factors are expected to support the operating profit over the medium term. However, any further delays in execution of the project will remain a key rating sensitivity factor.
The ratings also factor in improvement in the financial risk profile, driven by reduction in working capital borrowing, mainly on account of additional subsidy (over and above the budgeted subsidy for fiscal 2021) provided the central government under the Aatma Nirbhar Bharat Package 3.0 in fiscal 2021. Subsequently, receivables fell to 70 days as of March 2021 compared with 235 days as of March 2020. While the government has adequately allocated the subsidy for fiscal 2022, sustenance of the reduced receivables will remain a key monitorable.
The ratings continue to reflect the strong managerial and financial support received by the company from its parent, Krishak Bharati Cooperative Ltd (KRIBHCO), and its well-established market position in the urea industry. These strengths are partially offset by the average financial risk profile of the company and exposure to regulatory risks in the fertiliser industry.
Key Rating Drivers & Detailed Description
Strengths:
Strong managerial and financial support of the parent, KRIBHCO
The premise of the management and financial support from the parent, KRIBHCO, is central to the assessment of CRISIL Ratings regarding the credit risk profile of KFL. Being a 100% shareholder in KFL, KRIBHCO has provided corporate guarantees for the latter’s bank facilities and non-convertible debentures. KFL has a marketing agreement with KRIBHCO for selling its total production of urea and surplus ammonia. The urea produced is sold under the KRIBHCO urea brand, which has been present for the past 25 years. KFL also enjoys strong management support in the form of common directors with KRIBHCO.
Established market position in the urea industry
KFL, along with its parent, KRIBHCO, is the second largest player in the urea sector in India, with a prominent presence in the high urea-consuming states of northern India. Both these entities together had around a 13.8% share in the total domestic urea production in fiscal 2021. KFL also benefits from the large distribution network of KRIBHCO, comprising 9,475 cooperative societies, 2,300 direct dealers and 4,000 retailers across the country. Additionally, the favourable location of the plant of KFL, close to its markets, lends it a significant competitive edge.
Weaknesses:
Average financial risk profile
The average financial risk profile is indicated by a leveraged capital structure and modest debt protection metrics. Gearing stood at 2.2 times as on March 31, 2021 (5.2 times a year earlier). Adjusted interest coverage was 1.9 times in fiscal 2021 (1.7 times in the previous fiscal). While the leverage and metrics have improved from the previous fiscal because of additional subsidy from the government, they remain at modest levels. On account of the ongoing capital expenditure (capex), gearing is expected to remain above 2 times in fiscal 2022. KFL will likely refinance its debt obligation in a timely manner considering the moderate cash accrual over the medium term.
Exposure to regulatory risks in the fertiliser industry
Given the government’s thrust on self-sufficiency in food grain production, the fertiliser industry is strategic but highly controlled. Hence, the players are exposed to any regulatory changes made by the government. Of late, the government has focused on reducing subsidy without increasing prices by urging companies to adopt efficient methods of urea production. In line with these measures, the government has tightened energy consumption norms in the past, thereby impacting profits of urea players unless they improve energy efficiency. The impact of this norm is partially offset by the agreed additional fixed cost of Rs 350 per tonne by the government for all urea manufacturers. Fertiliser companies are also susceptible to delays in subsidy payments from the government, leading to higher reliance on working capital loans. Any delay in the disbursement of subsidy on account of under-budgeting and any changes in the regulatory scenario will remain key rating sensitivity factors.
Liquidity: Strong
Liquidity remains strong, driven by unutilised bank lines of around Rs 2,500 crore as of May 2021 (fund-based bank limit of Rs 2,995 crore as of May 2021). Annual cash accrual and unutilised bank lines should be adequate for meeting the debt obligation, capex and any incremental working capital requirement in fiscal 2022. Moreover, healthy financial flexibility is backed by the strong promoter support received from KRIBHCO. The entire outstanding debt of KFL is backed by a corporate guarantee extended by KRIBHCO. This enables KFL to refinance its debt obligation at competitive rates, dependence on which is expected to continue over the medium term.
Outlook: Positive
The credit risk profile of KFL should improve over the medium term after completion of the ongoing capex, while the company maintains its healthy market position in the urea industry.