ICRA Revises Deepak Fertilizers' NCD issue, Term Loans

ICRA has revised the long term rating assigned to the Rs 600 crore 1 non-convertible debenture programme, Rs 575 crore (increased from Rs 500 crore) long term fund based limits and Rs 141.44 crore term loans of Deepak Fertilisers & Petrochemicals Corporation Limited (DFPCL)2 from [ICRA]AA (pronounced ICRA double A) to [ICRA]AA- (pronounced ICRA double A minus). The outlook on the rating is ‘Negative’. ICRA has reaffirmed the short term rating assigned to the Rs 750 crore commercial paper programme and Rs 1425 crore (reduced from Rs 1500 crore) non fund based limits of the company at [ICRA]A1+ (pronounced ICRA A one plus).

The revision in the long-term rating takes into account the deterioration in the financial profile of the company owing to the continued regulatory overhang over the gas supply issue and the recovery of unintended benefits from players manufacturing Nutrient “N” using domestic gas. Moreover the company’s working capital position has weakened over the last one year due to holding up of subsidy payments by DoF pending recovery of unintended benefits, resulting in significant build up of short term debt. However, ICRA takes comfort from the fact that the DoF is expected to release outstanding subsidy arrears shortly (except an amount of Rs. 310.52 crores which is to be withheld by DoF and is already under the purview of Honourbale Courts for final award) which would improve the overall liquidity position of the company. As per ICRA, timely resumption of domestic gas supply and receipt of balance subsidy outstanding from the Government remain critical to DFPCL’s credit profile and would be the key rating sensitivities going forward.

ICRA notes that, the domestic gas supply has not yet been resumed for the company despite favourable order from the Honourable High Court of Delhi (Order dated July 7, 2015 from Single Bench and dated October 19, 2015 from the Division Bench) which had asked the Government of India to resume supply of domestic gas to DFPCL for the manufacture of NPK fertilizers. The company had been offered gas at higher tariff rate, which was not matching the domestic gas prices; hence, as the proposed commercial terms were not in conformity with the directions of the Honourable Court, the company has challenged it before the Court. Due to the above ongoing litigation with the GoI, the company’s subsidy receivables remain stuck and at elevated levels (Rs 795 crore as on March 31, 2016), which has led to sharp increase in its borrowing levels (gearing level increased from 0.64 times as on March 31, 2014 to 1.22 times as on March 31, 2016) and consequent high interest costs during FY2016. However, as large portion of the outstanding subsidy is expected to be released shortly, as per the management, overall cash flow position of the company is expected to improve.

ICRA also notes that the matter relating to the issue of recovery of unintended benefits accruing to units using domestic gas for manufacture of Nutrient “N” has been referred and is pending before an Inter-Ministerial Committee (IMC) for deliberation. DFPCL’s management believes that actual recovery will be low after factoring in the benefits passed on to farmers and income tax already paid by the company. While arriving at the ratings, ICRA has not factored in the event risk pertaining to the above issue.