Fitch Ratings has today downgraded Indian Farmers Fertiliser Cooperative Ltd's (IFFCO) National Long Term Issuer Rating to 'AA(ind)' from 'AA+(ind)' and revised its Outlook to Negative from Stable. Simultaneously the agency has assigned a National rating of 'AA(ind)' to IFFCO's outstanding long term bank loans amounting to INR14.92bn, and National Long Term ratings of 'AA(ind)' and National Short term ratings of 'F1+(ind)' to its INR126.89bn fund based sanctioned bank facilities, INR32.51bn non-fund based sanctioned bank facilities and proposed working bank facilities amounting to INR10.6bn; and has also affirmed its INR1bn commercial paper program's National short-term rating at 'F1+(ind)'.
The downgrade reflects higher than anticipated borrowings that have increased the financial and operating leverage and stressed the credit profile. The rise in debt level is largely attributable to IFFCO's higher working capital requirements towards costlier raw materials, funding of subsidy recoverable from Government of India (GoI) and increased trading activities. The company's historical financial risk profile characterised by low debt, healthy cash balances and strong coverage ratios, started changing after its debt funded INR22bn acquisition of a di-ammonium phosphate (DAP) facility at Paradeep in Oct 2005. Increased prices as well as the availability of key raw materials including gas, sulphuric acid and phosphoric rock also remain a key rating concern. Fitch notes that IFFCO's attempts to secure key raw material supplies at reasonable prices by forming joint-ventures with companies in other countries, are either under execution or still in the developmental phase.
IFFCO's ratings continue to be supported by its established business position in the Indian fertiliser industry as the single largest producer of urea and DAP. The company's large base of farmers, through its 39,500 member co-operatives who act as distributors and end consumers of fertilisers, remains intact and continues to support its market position. The ratings are also supported by its track record of high operational efficiencies in urea manufacture and healthy cash inflows from the Oman India Fertiliser Company SAOC, its urea joint-venture in Oman. In view of the industry leadership and systemic importance of IFFCO in the production and distribution of fertilisers across the country, the ratings factor in probability of structural support from GoI, if needed.
The Negative Outlook reflects growing concerns on the adequacy of GoI's funding of fertiliser subsidies. As most raw material prices are a pass-through to the GoI under the fertiliser subsidy policy, the increase in prices of key inputs, combined with the high prices of imported urea and DAP, has resulted in a shortfall in GoI's FY2008-09 annual budgetary allocations for fertiliser subsidies. Timely and adequate receipt of fertiliser subsidies (constituting 51% of FY08 revenues of IFFCO) is a crucial factor in determining the financial risk profile of IFFCO and Fitch will monitor the developments on this. The continuation of a large gap in the subsidy funding could hinder the expected improvement in IFFCO's credit metrics in terms of net debt/operating EBITDA and interest coverage, will lead to a ratings downgrade. Any significant increase in budgetary allocations by GoI resulting in release of subsidies on a timely basis, leading to the expected reduction in debt levels on a sustained basis, would result in the Outlook being revised back to Stable. Meanwhile, IFFCO has stated its interest in undertaking an INR50bn brownfield urea project at its Kalol facility. However, this is at a very preliminary stage and has presently not been factored into the ratings. In the event of IFFCO actually taking up this project with substantial debt based funding, this could potentially act as a negative rating trigger.
IFFCO is India's largest fertiliser manufacturer, having 18% of urea and 30 % of DAP installed capacity in the country; these are two largest used fertilisers in India. The company is a multi-state cooperative society and recorded sales of INR121bn, with operating EBDIT of INR8.2bn and net income of INR2.6bn in FY08.
Note to editors: Fitch's National ratings provide a relative measure of creditworthiness for rated entities in countries with relatively low international sovereign ratings and where there is demand for such ratings. The best risk within a country is rated 'AAA' and other credits are rated only relative to this risk. National ratings are designed for use mainly by local investors in local markets and are signified by the addition of an identifier for the country concerned, such as 'AAA(ind)' for National ratings in India. Specific letter grades are not therefore internationally comparable.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.