Fitch Ratings has affirmed Inpasa Agroindustrial S.A (Inpasa) Long-Term Local and Foreign Currency Issuer Default Ratings (IDR) at 'BB-', and its Long-Term National Scale rating at 'A+(bra)'.

The Rating Outlook is Stable.

The ratings reflect Inpasa's large-scale operations and low production cash cost in the volatile Brazilian ethanol industry. The high volatility of Brazil's corn and ethanol prices and the lack of meaningful short-term price correlation between these two commodities remain as key considerations.

Inpasa's cash flow generation capacity should improve as the company increases its crushing capacity and the ratings incorporate the expectation of negative FCF in 2022 due to expansionary investments, with a quick recovery in 2023 as the expansion project starts operations. Inpasa's adequate liquidity and more concentrated debt amortization profile were also considered in the analysis.

The Stable Outlook reflects the expectation that net leverage should reduce to below 1.0x in 2023, supported by higher sales volume.

Key Rating Drivers

High Price Volatility: Inpasa is exposed to price volatility from corn, its main raw material, and ethanol, its main output. Corn prices adjust rapidly to global supply and demand imbalances and follow parity with Chicago Board of Trade (CBOT) corn prices over the long run. Brazilian ethanol prices depend largely on local gasoline price levels, which move in tandem with international oil prices and the Brazilian FX rate, according to the price policy set by Petrobras. Ethanol prices are also indirectly influenced by sugar prices, as near 90% of all Brazilian ethanol produced comes from sugar cane processors, which typically shift a portion of production between ethanol and sugar depending on prevailing price parity with sugar.

Weaker Corn and Ethanol Prices in Short Term: Corn prices in Brazil are currently at historical highs but are expected to decline in 2023 following an expected reduction in international price levels. Fitch projects international corn prices of USD6,75 per bushel in 2022 and USD6,00 per bushel in 2023. Hydrous ethanol prices are currently trading at near BRL2.33/liter, which is 36% lower than ethanol prices of BRL3.62/liter in April 2022 due to a temporary reduction of taxes on fuels set by the Brazilian Government that finishes in the end of 2022. Fitch projects average Brent prices of USD100/bbl in 2022 and of USD85/bbl in 2023.

Large Scale Corn-Based Ethanol Producer: Inpasa's business model benefits from its sizable ethanol production capacity. The company's cash flow generation should improve over the rating period, as the company increases its crushing capacity to 6.5 million tons and annual ethanol production capacity to 2.9 billion liters by the end of 2023, making Inpasa Brazil's largest corn-based ethanol producer.

The new plant in Dourados, State of Mato Grosso do Sul became operational in May 2022 and added 2 million tons of crushing capacity and 900 million liters of ethanol volume annually. In 2021, Inpasa completed an investment in Sinop that added 1 million tons and 470 million liters of corn crushing and ethanol production capacities, respectively. In 2023, Inpasa will complete the investments in Nova Mutum plant that will add 1 million tons and 460 million liters corn crushing and ethanol production capacities.

Competitive Cost Structure: Inpasa is the most efficient corn-based ethanol producer in the country and its cash cost structure is in line with some of the most efficient sugar cane producers. The company produces and sells DDGS and corn oil, the prices of which tend to correlate with corn prices, providing a natural hedge against corn price volatility. The expected 55% coverage of corn costs provided by animal nutrition products from 2022 to 2024 is high in for industry standards. The average cost of the corn was around BRL64,00 per bag in 2021, and Fitch estimates it will increase to around BRL 66,00 per bag in 2022. The company already fixed all of its expected corn needs until June 2023 at an average price of BRL67,00 per bag.

Strong Operating Cash Flows: Inpasa is expected to generate EBITDA of BRL2.3 billion and negative CFFO of BRL283 million in 2022, due to higher working capital needs, compared with EBITDA of BRL1.5 billion and CFFO of BRL879 million in 2021. In 2023, EBITDA of BRL4.5 billion and CFFO of BRL2.3 billion are expected due to higher sales volume. The expectation of lower ethanol prices and higher corn costs and corn resale activity should reduce EBITDA margin to 28% in 2022 and 35% in 2023. Fitch expects negative FCF of BRL1.9 billion in 2022 due to Inpasa expansionary investments, but positive FCF of BRL1.5 billion in 2023 when new sales volume kicks in. Base case projection incorporates investments of BRL1.3 billion in 2022 and BRL400 million in 2023, with dividends pay-out of 25% from 2022 on.

Low Leverage: Fitch expects Inpasa to preserve net leverage at low levels during its new investment cycle. Inpasa's net debt/EBITDA should temporarily increase to 1.6x in the end of 2022 and reduce to below 1.0x in 2023, as volume increase. This compares with 1.1x in 2021. Initially, the company's growth in Brazil has been largely financed by the group, with intercompany loans, and short-term bank debt, but this has been gradually replaced by bank debt as operating cash flow generation improves. Inpasa reported total debt of BRL2.5 billion as of June 30, 2022, of which bank debt and related party loans amounted to BRL2.1 billion and BRL480 million respectively. The former includes a BRL600 million 4.5-year syndicated debenture and short-term borrowings secured by corn inventories.

Derivation Summary

Inpasa's IDR's are four notches lower than Raizen S.A. and Raizen Energia S.A. (together Raizen; BBB/Stable). Inpasa has lower scale; is more exposed to commodity price risk compared with sugar cane processors, which rely on a market pricing mechanism that links sugar cane costs to commodity prices; and has weaker liquidity than Raizen.

Inpasa's business model is similar to FS Ltda. (FS; BB-/Stable, National Scale AA-[bra]/Stable) and both companies are low-cost producers, with capacity to produce ethanol with cash cost comparable with Jalles Machado S.A. (AA-[bra]/Stable), a cost benchmark in the industry. Both FS and Inpasa are investing to build their third plant, and a quick deleveraging capacity is expected following the startup of the plant. FS's National Scale rating benefits from its stronger liquidity and more diversified access to financing compared to Inpasa, while Inpasa is still challenged to increase its access to both the banking and capital markets in Brazil.

Inpasa's National Scale Rating is one notch below that of Jalles Machado (Jalles; National Scale AA-[bra]/Stable). Both companies are well positioned in the Brazilian food and renewable energy market landscape in terms of cash costs. Jalles should consume its currently high liquidity as it advances with its investments plan, but still its National Scale rating benefits from stronger liquidity and more diversified access to financing than Inpasa.

Key Assumptions

Fitch's Key Assumptions Within Our Rating Case for the Issuer:

Ethanol sales volumes of 2.0 billion liters in 2022 and 2.9 billion liters in 2023 following investments in capacity expansion. Hydrous ethanol will make up 75% of total ethanol volumes going forward.

Sales of animal nutrition products of 1.2 million tons in 2022 and over 1.5 million tons in 2023.

Ethanol prices to vary in tandem with a combination of oil prices and the FX rate. Brent crude prices have been forecast to average USD100/bbl in 2022 and USD85/bbl in 2023.

Corn prices at BRL66,3/bag in 2022 and BRL68,7/bag in 2023. The company already fixed all of its expected corn needs until June/2023 at average price of BRL67/bag.

Average FX rate at BRL5.20/USD in fiscal 2022 and 2023.

Animal nutrition products providing more an average 55% coverage for total corn costs.

Total investments of BRL1.3 billion in 2022 and BRL400 million in 2023.

Dividends equivalent of 25% of net profit as from 2022.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

Longer track record in different cycles of ethanol and corn prices;

FCF consistently positive, with the maintenance of conservative capital structure;

Improved liquidity and positive track record in accessing the banking and capital markets.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

Deterioration in liquidity and/or difficulties refinancing short-term debt;

EBITDA margins below 20% on a sustainable basis;

Net leverage above 3.0x on a sustainable basis.

Best/Worst Case Rating Scenario

International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

Liquidity and Debt Structure

Improving Liquidity: Inpasa's liquidity has improved, but the company will need to increase bankability and access to the capital markets with long-term credit facilities to finance working capital and investments on a sustainable basis. As of June 30 2022, Inpasa reported cash and marketable securities of BRL1.3 billion and total debt of BRL2.5 billion, of which BRL1.4 billion is due in the short term.

Corn inventories and offtake contracts with large fuel distributors reduce refinancing risks and improve financial flexibility; inventories can be easily monetized and accounts receivables can be used as collateral under new credit facilities, if required.

Issuer Profile

Inpasa produces corn-based hydrous and anhydrous ethanol, dried distillers' grains with Solubles for animal nutrition, corn oil and energy from cogeneration. The company runs three plants with total capacity to crush 4.5 million tons of corn and produce 2.0 billion liters of ethanol annually.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

Inpasa has an ESG Relevance Score of '4' for Governance Structure due to lack of board independence and effectiveness. Inpasa has no independent members on the board and one-man risk is present, as decision making is highly concentrated in the hands of the founder and main shareholder. The ESG Relevance Score of '4' has a negative impact on the credit profile, and is relevant to the rating in conjunction with other factors.

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg

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