(The following statement was released by the rating agency)
March 20 - Fitch Ratings has affirmed Indian Farmers Fertiliser Cooperative Ltd’s (IFFCO) National Long-Term Rating at ‘Fitch AA(ind)’ with a Stable Outlook. A list of additional rating actions is provided below.
IFFCO’s ratings reflect improvement in the company’s financial profile, liquidity and operating efficiencies. During FY11 (year end March), IFFCO’s net revenue increased 26.1% to INR211.9bn, operating margin improved by 330 bps to 9.1% and net debt reduced to INR88bn from INR105bn after the company liquidated fertiliser bonds of INR23.7bn. During H1FY12 IFFCO further sold fertiliser bonds for INR33.2 bn.
The ratings also continue to factor in IFFCO’s position as India’s largest fertiliser producer, as well as its country-wide distribution network supported by 40,000 farmer cooperatives. The ratings also reflect its multiple manufacturing facilities, diversified product offerings, strong demand for fertilisers in India, continued government support for the fertiliser industry and IFFCO’s successful turnaround of its Paradeep-based phosphate fertiliser plant. The ratings further take into account potential liquidity support from the government of India (GoI), if needed, given IFFCO’s systemic importance.
The ratings are, however, constrained by the fertiliser industry’s susceptibility to unfavourable changes to GoI’s fertiliser subsidy policy which have impacted the profitability and liquidity of fertiliser manufacturers in the past. While GoI in recent years has provided adequate budgetary allocations to meet its subsidy obligations, subsidy dues continue to accumulate at GoI’s most financial year-ends, causing payment of subsidy to be late. At FYE11 IFFCO had a subsidy build-up of INR31bn (FYE10: INR26.5bn) which was funded out of short-term debt. This risk is partially mitigated by IFFCO’s strong access to bank loans and GoI’s eventual payment of accumulated subsidies in the next financial year.
IFFCO is exposed to raw material availability and price risks, given that most of its inputs are in short supply domestically and prone to volatile commodity prices internationally. However, IFFCO mitigates availability risk by securing firm allocations of natural gas under priority accorded by GoI to the fertiliser industry and, for supply of phosphoric acid and ammonia, by forming joint ventures in resource-rich countries. Input price risk is mitigated by the GoI’s subsidy policy which either allows compensation for increases in raw material costs through increases in subsidy or increases in retail prices of fertilisers.
Improved timeliness in payment of subsidies resulting in lower interest costs and improved net interest coverage would be positive for the ratings. Any unfavorable changes to the fertiliser subsidy policy and/or large unexpected debt-led capex leading to deterioration in credit metrics would be negative for IFFCO’s ratings.
IFFCO, the largest fertiliser manufacture in the country, is a society owned by 40,000 farmer co-operatives that also act as its distributors. In H1FY12 the company reported revenue of INR103.4bn with an operating EBITDA margin of 8.2%
Rating actions on IFFCO’s instruments:
- INR4.33bn (reduced from INR8.93bn) long-term loans affirmed at ‘Fitch AA(ind)’
- INR143.5bn (increased from INR138.15bn) fund-based working capital facilities affirmed at ‘Fitch AA(ind)'/‘Fitch A1+(ind)’
- INR76.53bn (increased from INR64.66bn) non fund-based working capital facilities affirmed at ‘Fitch AA(ind)'/‘Fitch A1+(ind)’
- INR1bn commercial paper programme affirmed at ‘Fitch A1+(ind)'