Rationale

The re-affirmation of ratings takes into account the stable financial performance expected in FY2020 of Deepak Fertilisers & Petrochemicals Corporation Limited (DFPCL) on a consolidated basis owing to improvement in demand and margins of isopropyl alcohol (IPA) and Ammonium Nitro Phosphate(ANP) and healthy demand of Technical Ammonium Nitrate (TAN). The sales volumes and margins of IPA had dipped during 9M FY2020 owing to a water cut by MIDC leading to plant shutdown and dumping by China. However, with the outbreak of COVID-19 the demand and margins of IPA have surged because of its use in the manufacture of sanitizers. Similarly, the contribution levels of ANP have also increased to Rs 5396/MT in 9M FY2020 as against Rs 3521/MT in FY2019 besides which the sales of Smartek brand of NPK fertilisers have more than doubled in FY2020 vis-à-vis FY2019. The company has stopped the manufacture of plain vanilla NPK fertilisers and is focussing on the Smartek brand of NPK fertilisers which commands a healthy premium over the former. Additionally, sales volumes of TAN which had declined in 9M FY2020 owing to extended monsoons have recovered even as contribution margins though lower than FY2019 levels remain healthy. The company commissioned additional capacities of Nitric acid at its Dahej plant in April 2019 but utilisation remained low in 9M FY2020 owing to technical issues with the plant and a shutdown order by Gujarat Pollution Control board (GPCB) however capacity utilisation levels have improved from Q4 onwards after resolution of issues with GPCB and stabilisation of plant. Going forward, the increase in sales volumes of nitric acid (post stabilisation of enhanced capacities), Smartchem fertilisers (due to healthy traction in the market) and IPA (due to the surge in demand for sanitisers) are expected to add to the revenues and profits of the company. Further DFPCL has decided to put on hold its Propylene based IPA expansion project and implement its TAN project only post equity funding is tied up. As of now the company is implementing only its ammonia plant under Performance Chemiserve Limited (a subsidiary of Smartchem Technologies Limited) for which the funding tie up are in progress. As a part of fund raising plans the company has divested one of its unused plots of industrial land in Dahej for a total transaction value of ~Rs 100 crore and sold its 75% holding in Desai Fruits and Vegetables for Rs 28.2 crore. Additionally, warrants of Rs. 200 crore were issued to the promoters at a price of Rs. 308.79/share, out of which Rs. 50 crore were infused in October 2018, Rs. 25 crore in October 2019, and balance Rs. 125 crore would be infused in April 2020. Following infusion by promoters, IFC in October 2019, has subscribed to $15 million as Foreign Currency Convertible Bonds in DFPCL and $15 million as compulsory convertible debentures in Smartchem Technologies Limited (STL) and is expected to subscribe to the second tranche of an equal amount in April 2020 post the Rs 125 crore infusion by the promoters. Despite infusion of funds and scaling down of capex, the credit metrics are expected to weaken as the company implements its Ammonia project besides which the exposure to project execution risk remains owing to the initial stage of the project. The ratings are also constrained by the regulatory risk in the fertilisers business and the vulnerability of the chemicals division's profitability to inherent price cyclicality. Furthermore, the company's profitability remains sensitive to any large fluctuation in spot/term R-LNG prices. The ratings continue to take into account the moderate debt coverage metrics and return indicators of the company. For its ammonia project, the company's ability to tie-up its gas requirements and achieve the design parameters, post-commissioning, would be important. The ratings, however, continue to take into account the company's diversified business product portfolio comprising of fertilisers and industrial chemicals and the strong market position held in the industrial chemicals business with leadership in ammonium nitrate (TAN), nitric acid and IPA. The ratings also factor in the company's high financial flexibility as evident from the competitive cost of debt and healthy refinancing ability demonstrated in the past. The company has reduced its short-term borrowings in the current fiscal by reducing its trading business in chemicals which was working capital intensive. The stable outlook takes into account established position in both the chemicals and fertilisers segments and the stable demand outlook for both the sectors in the long term.