Tata Chemicals' rating upgraded by Crisil
Tata Chemicals Limited
 |
Rs 0.6 billion non-convertible debenture
programme |
AA+ / Stable (upgraded from AA / Positive) |
|
Rs 0.13 billion non-convertible debenture
programme |
AA+ / Stable (upgraded from AA / Positive) |
|
Rs 0.68 billion non-convertible debenture
programme |
AA+ / Stable (upgraded from AA / Positive) |
|
Rs 0.5 billion non-convertible
debenture programme |
AA+ / Stable (upgraded from
AA / Positive) |
|
Rs 3 billion short-term debt programme |
P1+ (reaffirmed) |
Hind Lever Chemicals Limited
|
Rs 1 billion short-term debt programme |
P1+ (reaffirmed) |
The upgrade in Tata Chemicals Limited's (Tata Chemicals)
non convertible debenture ratings is based on benefits expected
to arise from Tata Chemicals' acquisition of Hind Lever Chemicals
Limited (HLCL) under a share swap agreement and the improvement
in Tata Chemicals' financial profile with reduction in debt
levels and interest costs.
The merger with HLCL will strengthen Tata Chemicals' business
profile by imparting greater diversity to its revenue stream.
HLCL's sodium triopolyphosphate (STPP) and complex fertiliser
businesses complement Tata Chemicals' soda ash, branded salt
and urea operations. The merged company will enjoy a strong-to-leading
position in all these businesses. In addition, it will have
superior operating efficiencies because of its large-scale
capacities and highly integrated operations. The benefits
of diverse revenue streams have been demonstrated in the current
fiscal, when the merged entity's overall profitability has
been protected in spite of the reduction in the complex fertiliser
business' profitability. The company has already received
the Mumbai High Court's approval for the merger, and the Punjab
and Haryana High Court's approval is expected within a few
months. The merger will be effective from April 1, 2002.
The rating upgrade also reflects the improvement in Tata
Chemicals' financial profile with the reduction in its debt
levels and interest costs in 2003-04. The company is expected
to have about Rs 5 billion in debt as on March 31, 2004, as
against Rs 7.9 billion as on March 31, 2003. This reduction
and the refinancing of debt at lower interest rates have helped
Tata Chemicals to reduce its interest costs. Its gross interest
outgo fell to Rs 388.9 million in the first nine months of
2003-04 from Rs 767.8 million in the corresponding period
last year. Tata Chemicals enjoys high profit margins and comfortable
interest coverages with a proft after tax (PAT) margin of
14.95 per cent and profit before depreciation, interest and
tax (PBDIT) cover of 10.8x in the first nine months of 2003-04.
Post-merger, Tata Chemicals's comfortable financial profile
will continue to be supported by its large networth of over
Rs 20 billion and low gearing of 0.38x (estimates for the
merged entity as on March 31, 2004). The merged entity also
enjoys high financial flexibility with a strong liquidity
position (estimated mutual fund investments of Rs 3.5 billion
as on March 31, 2004) and its association with the Tata Group.
Although the merged entity's operating profit margins will
decline because of HLCL's relatively less-profitable complex
fertiliser business (which will account for around one-third
of its total sales), its net margins will still be high at
around 8 per cent.
Tata Chemicals is an established player in the urea segment
in Uttar Pradesh, Punjab and Haryana, while HLCL enjoys more
than a 60 per cent share of the complex fertiliser market
in West Bengal and Bihar. The two have among the best efficiency
norms for urea and complex fertiliser plants in the industry.
Crisil believes that the merged company's presence in urea
and complex fertilisers, its highly efficient plants, and
established brands and distribution network will hold it in
good stead in the decontrolled scenario.
In the chemicals business, Tata Chemicals is the largest
domestic producer of soda ash (current market share of 34
per cent) apart from being the largest player in the branded
salt segment (with a 39 per cent share). Since soda ash is
used in the detergent and glass industries, this business
will be complemented by HLCL's STPP one (STPP is a major ingredient
in detergents). HLCL enjoys a dominant position in this segment
because of its status as the sole supplier to Hindustan Lever
Limited (HLL). HLL has assured the company that it will procure
90 per cent of its STPP requirements from the company for
the next three years.
These rating strengths are, however, tempered by the fact
that the company's fertiliser business continues to be dependent
on government policies while its chemicals business remains
susceptible to imports and international price fluctuations.
The current ratings do not factor in any large capital expenditure
or investments apart from those included in the current business
plan. Tata Chemicals has expressed an interest in acquiring
a part of the government's stake in fertiliser companies that
are being divested, and in brownfield expansions to enhance
its capacities. Crisil will factor in the impact of any future
acquisitions or expansions on the ratings as and when they
take place, depending on the size of the investments required
and the funding mix for the same.
Outlook
Given the synergies between their businesses, Crisil expects
the merger with HLCL to bring cost benefits to Tata Chemicals.
Crisil also expects Tata Chemicals to sustain the improvement
in its financial profile with its reduced debt levels and
interest charges.
About the company
Tata Chemicals, which is a part of the Tata Group, manufactures
urea, soda ash and other inorganic chemicals and cement. It
reported a PAT of Rs 1.88 billion on net sales of Rs 12.58
billion in the first 9 months of 2003-04 as against a PAT
of Rs 1.37 billion and net sales of Rs 11.81 billion in the
first nine months of 2002-03. The company reported a PAT of
Rs 1.97 billion on an operating income of Rs 15.35 billion
in 2002-03.
HLCL manufactures complex fertilisers and speciality chemicals
(detergent builders). Its complex fertiliser range includes
di-ammonium phosphate (DAP), NPK (10:26:26, 12:23:16 and 28:28:0),
single super phosphate (SSP) and muriate of potash (MoP).
It enjoys a dominant position in the STPP segment. For the
nine months ended December 2003, HLCL reported net sales of
Rs 7.5 billion and a PAT of Rs 28.0 million as against net
sales of Rs 8.4 billion and a PAT of Rs 272.0 million in the
corresponding period last year. HLCL earned a net profit of
Rs 300.3 million on an operating income of Rs 9.73 billion
for the year ended March 31, 2003.
On a proforma basis, complex fertilisers and the chemicals
business (comprising soda ash, branded salt and cement) accounted
for around 33 per cent each of the merged company's sales
in the first nine months of 2003-04 followed by urea at 29
per cent and STPP at 5 per cent. The chemicals business contributed
around 48 per cent of the merged entity's profit before interest
and tax (PBIT) while the urea business contributed 46 per
cent, and STPP, business 7 per cent. There was a small loss
(2 per cent of PBIT) in the complex fertiliser business.