Fitch Ratings has today assigned India's Gujarat State Fertilisers & Chemicals Limited (GSFC) a National Long-term rating of 'AA(ind)' with a Stable Outlook. The agency has also assigned ratings of 'AA(ind)/F1+(ind)' to GSFC's INR7.4bn sanctioned fund based working capital bank facilities and INR3.5bn sanctioned non-fund based facilities. Simultaneously, Fitch has assigned 'F1+(ind)' ratings to GSFC's INR2.1bn short-term debt program and INR2bn commercial paper program.
GSFC's ratings reflect GSFC's integrated operations and low off-take risks in both the fertilisers and chemicals segments, on account of a favourable demand supply scenario and tariff protections available to the domestic industry. The ratings are supported by its established business position as a fertiliser and industrial chemical producer, its strong profitability and comfortable financial profile. Nonetheless, the ratings are moderated by the inherent cyclicality in industrial products like caprolactam and melamine, which are undergoing a weak business cycle internationally.
Like other di-ammonium phosphate (DAP) manufacturers in India, GSFC is exposed to the availability and price of phosphoric acid, which is largely imported. GSFC mitigates this global supply constraint through long-term supply agreements with leading international suppliers. Fitch notes that GSFC's joint venture in Tunisia to secure phosphoric acid at reasonable prices is under execution, and is likely to reduce the key input risk once operational in FY11.
Fitch notes that GSFC went through a financial restructuring in FY03 resulting from a significant drop in its profitability and a high financial leverage. Post restructuring, the company has deleveraged substantially with the long term domestic debts being repaid in FY06. This was possible as the company regained its profitability in FY04 after stabilising production in incremental capacities in ammonia and DAP. GSFC's present financial risk profile is characterised by low debt, sufficient cash and equivalents, as well as strong debt coverage ratios. During FY09, GSFC enjoyed sufficient liquidity in the form of unutilised bank limits, despite higher working capital requirements towards costlier inputs and funding of subsidies recoverable from the Government of India (GoI).
The fertiliser business remains exposed to GoI's regulatory policies in terms of subsidy policy changes, which may impact fertiliser manufacturers' profitability and liquidity. As a whole, the industry is also dependent on the adequacy and timeliness of GoI's budgetary allocation to meet the subsidy obligations. Traditionally, these obligations have been under funded and carried over to the next financial year and/or paid by way of special bonds instead of cash. However, given the strategic importance of fertilisers in the country's food chain, GoI is likely to continue funding its fertiliser obligations and any regulatory changes would keep the long-term viability of the domestic fertiliser industry intact.
A reduction in GSFC's exposure to regulatory risk - including a dependence on GoI subsidies - would constitute a positive rating trigger. Negative rating triggers include, unfavourable changes in subsidy policies, an inadequate budget allocation for fertiliser subsidies, higher than normal delays in receipt of subsidies , deterioration in performance of industrial products division and a large debt funded capex program.
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GSFC is a nitrogen and phosphate-based fertiliser and industrial chemicals manufacturer promoted by the Government of Gujarat, which is the key shareholder with management control; all four plants are located in the state of Gujarat. During FY09, the company had net revenues of INR58.8bn and operating EBITDA margin of 14.46%.
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