Rationale

 ICRA had earlier placed the ratings of Paradeep Phosphates limited (PPL) under watch with negative implications after the company announced its plans to acquire the urea and phosphatic fertiliser assets of Zuari Agro Chemicals Limited (ZACL) as the acquisition could lead to a moderation in the company's return and credit metrics. The removal of the rating watch factors in the completion of the said acquisition. The acquisition was partly funded from the proceeds of PPL's initial public offering (IPO), partly by internal accruals and the balance from debt. The acquisition, along with the ongoing capex amid elevated raw material prices, is likely to keep the debt levels high in the near to medium term. However, PPL would benefit from the significantly larger scale of operations and enhanced backward integration (post stabilisation of the operations of the projects) which would aid in maintaining healthy contribution levels. The ratings factor in expectations of healthy cash generation from operations amid steady receivable levels with timely receipt of subsidy from the GoI and operational improvements with the commissioning of backward integration projects which will improve cost efficiencies. PPL's revenues and volumes are likely to increase with the completion of the debottlenecking of its facilities which will take its manufacturing capacity to 1.8 MMTPA from 1.3 MMTPA earlier, along with the addition of 1.2- MMTPA capacity from ZACL's assets. While the contribution margins on the sale of phosphatic fertilisers are expected to moderate in FY2023 because of the steep rise in raw material prices, the cash flow is expected to remain stable with the expected rise in sales volume. PPL's revenue witnessed a healthy growth of 52% YoY in FY2022, driven by a sharp increase in product realisation and volumes. With the sharp increase in the prices of raw material as well as finished fertiliser in international markets, the subsidy for phosphatic fertilisers has also increased sharply under the NBS scheme. As a result, the overall realisation of phosphatic fertilisers witnessed a sharp jump in FY2022. The company's OPBDITA increased to Rs. 727.9 crore in FY2022 from Rs. 549.1 crore in FY2021 as the company benefitted from low priced inventory at FY2021-end.