Fitch: Tata Chemicals' Urea Business Sale to Boost Credit Profile
Yara, the world's largest urea manufacturer by output, agreed to buy the business for USD400m (INR26.70bn) in cash. Yara will also acquire as part of the transaction the urea fertiliser subsidy receivables due from the government of India. Consolidated fertiliser receivables stood at INR19.01bn as of 31 March 2016 (31 March 2015: INR19.71bn), of which about a fourth of the fertiliser subsidies (INR4.70 bn) has been delayed for more than six months.
The sizeable fertiliser subsidy outstanding lengthened TCL's working capital cycle and contributed to its high financial leverage (net adjusted debt / operating EBITDAR). TCL's financial leverage of 3.44x at 31 March 2016 (end-March 2015: 3.40x) was marginally lower than 3.50x, the level at which Fitch would have considered negative rating action. However with the cash inflow from the divestment and the transfer of fertiliser subsidy receivables to Yara, TCL's pro forma financial leverage would improve to around 2.5x.
The divestment of the low-margin urea business would improve TCL's EBITDAR margin. According to Yara's announcement dated 10 August 2016, TCL's urea business registered an EBITDAR margin of about 10% in the financial year to end-March 2016 (FY16) and revenue of INR23.36bn (13% of consolidated revenues). In comparison, TCL's FY16 consolidated margin was 12.2% and revenue was INR177.08bn. Fitch expects TCL to use the divestment proceeds to repay debt and to fund capex. Hence, consolidated interest expenses would also decline from FY18 onwards.
TCL, a Tata group company in which the holding company Tata Sons Limited (TSOL) and other group companies hold an aggregate stake of 30.94%, says the divestment, subject to regulatory clearances, will be completed within a year.