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.
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