Fitch Ratings assigns stable outlook to Tata Chemicals

Fitch Ratings on Monday said the outlook of Tata Chemical's (TCL) long-term foreign-currency issuer default rating (IDR) was stable at 'BB+' following reduced energy costs, which will support a healthy margin. The rating reflects TCL's globally leading and cost-competitive position in soda ash, geographic diversification, the soda-ash sector's adequate exposure to non-discretionary end-markets, and improving financial profile, Fitch said.

TCL is the world's third-largest soda ash producer, with a geographic footprint across India, the US, the UK and Kenya. It is, however, constrained by TCL's small scale relative to global peers and lack of product diversification. "We maintain a stable outlook notwithstanding lower sales, which are likely to persist for six months, stemming from the coronavirus pandemic," as per the rating agency's report.

Fitch Ratings weaker demand will be mitigated by lower energy costs, which should support a healthy margin, and that soda ash supply will remain largely stable over the long term. Around two-thirds of TCL's 4.3 million tonne of soda ash capacity is based in Wyoming in the US and Lake Magadi in Kenya, two key global regions, along with Turkey, which has natural trona deposits that require low conversion costs. This underpins the company's cost competitiveness relative to producers in other locations, it said.

Further, TCL's operation benefits from superior geographical diversification and Fitch expects around half of EBITDA to come from India in the financial year ending FY20, 45 per cent from developed markets in the US and Europe and the remaining 5 per cent from Africa. The soda ash also has a good mix of discretionary (flat glass) and non-discretionary (detergents, glassware and chemical products) end markets, which limits cyclical variation in volume. "However, this is mitigated by product concentration in soda ash, which, along with sodium bicarbonate and salt manufacturing, forms nearly 90 per cent of FY20 EBITDA, in our view, and exposes TCL to risks associated with the commodity nature of its products," it added. Fitch expects TCL's soda ash revenue to decline by 5 per cent in FY20, driven by a slowdown in the auto and real-estate sectors, and for FY21 sales to fall by around 10 per cent on a like-for-like basis as the demand slowdown is exacerbated by the coronavirus pandemic in the near term. The drop in profitability from depressed sales will be mitigated by lower energy costs, it opined.

"We expect the demand-supply balance to tighten over the medium-term as the business cycle normalises and sales growth improves to mid-single digits. "This is notwithstanding the announced capacity additions by global majors, like Solvay SA (BBB/Positive) and Genesis Alkali, LLC, which may be delayed in light of the current risks to growth in key end-user industries," Fitch added. TCL's financial flexibility remains strong, the rating agency said, adding that "we expect capex to be funded through internal accruals and positive free cash generation over FY21-FY23".

The company's liquidity is supported by its cash balance of Rs 3,800 crore as of end-September 2019 and undrawn credit lines and revolving credit facilities of Rs 570 crore as of end-2019. "TCL has Rs 1,600 crore (USD 225 million) of debt maturing in August 2020 at its North American subsidiary, which we expect it to refinance comfortably," Fitch said. The company also has investments of around Rs 2,450 crore in various Tata group entities, which boosts its liquidity options, it added..

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