Fitch Ratings has affirmed
The Outlook is Stable.
The rating reflects TCL's leading position as the world's third-largest soda ash producer, its cost-competitive operations and geographic diversification, a healthy financial profile maintained through periods of pandemic-related disruptions, and the soda-ash sector's adequate exposure to non-discretionary end-markets. The rating is constrained by TCL's small scale relative to global peers, and limited product diversification. The Stable Outlook reflects our expectations that TCL's credit metrics would remain adequate for its rating over the medium term.
Key Rating Drivers
Strong Market Position: TCL is the world's third-largest soda ash producer. Its soda ash capacity in the US and
Small Scale: Fitch expects TCL's EBITDA, which we forecast to average around
However, the risk is mitigated by its favourable geographic diversification. Fitch estimates developed markets in the US and
Volume Recovery Underway: Fitch expects TCL's soda ash sales, including salt, to rise by 15% in FY22 and by 2%-4% per year thereafter (9MFY22: 19%). The sharp increase in FY22 is led by an improvement in TCL's US exports (+92% in 9MFY22, -37% in 9MFY21), particularly to south-east
Tight Industry Conditions Support Prices: Fitch expects the tight demand and supply conditions in the global soda ash industry to continue in FY23 and support TCL's ability to increase prices. While demand continues to recover in key end-markets, supply is constrained by stricter environment policies adopted by industry players. Prices for TCL's
Margins Reflect Higher Energy Costs: TCL has effectively navigated the rising energy costs in FY22 through price increases, hedging and inventory management, and we expect it to continue to do so in the medium term. We forecast its EBITDA margins to average 15%-16% over FY22-FY25 versus 14% in FY21 and 18% in FY20, reflecting the pressures from rising energy costs, which are mitigated by the positive operating leverage from increasing demand and soda ash prices.
We believe the recent global geopolitical developments, particularly
Steady Performance at Rallis: Fitch expects TCL's agri-chemical subsidiary Rallis to continue to make up around 15% of EBITDA over the medium term. This reflects our view that the launch of new products, a better product mix, and an increasing share of exports will drive broad-based revenue growth in Rallis' crop care and seeds segments. Our margin estimates reflect higher realisations in certain products, competitive pressures from substitutes for some products (such as the increased availability of illegal cotton seeds in 9MFY22 in
Healthy Financial Profile: Fitch expects TCL's net leverage, defined as net debt/EBITDA, to average around 2.5x over FY22-FY25. TCL's credit metrics have adequate headroom under the negative sensitivities, and were resilient during the pandemic's peak in FY21, when leverage of 2.8x was commensurate with its credit profile. The credit metrics incorporate our view that TCL will incur annual capex of around INR14 billion over the next few years, leading to negative free cash flows, which are balanced by earnings from the additional capacities.
Derivation Summary
TCL's business profile is similar to that of
Both TCL and lower-rated peer
Key Assumptions
Fitch's Key Assumptions Within Our Rating Case for the Issuer
Soda ash sales (including salt) to increase by 15% in FY22, led by improving US exports, and rise by by 2%-4% per year thereafter, supported by the ongoing global economic recovery, capacity expansion, and emergence of new applications.
EBITDA margin of 15%-16% over FY22-FY25 (14% in FY21), reflecting near-term pressures from rising energy costs, offset by the positive operating leverage from increasing demand and steady increases in soda ash prices.
Capex of INR14 billion per year over FY22-FY25.
Dividend pay-out of around INR3 billion per year over FY23-FY25.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
A meaningful improvement in TCL's scale, such that EBITDA increases to more than
Positive free cash flow for a sustained period.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Net leverage exceeding 3.0x for a sustained period.
EBITDA margin deteriorating to below 15% for a sustained period.
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 '
Liquidity and Debt Structure
Strong Liquidity: TCL's liquidity is strong, supported by its cash balance of INR28 billion, and undrawn working-capital facilities of INR11 billion, as of
Issuer Profile
TCL is the world's third-largest producer of soda ash, with a global capacity of 4.137 million tonnes per annum (4.353 million tonnes including sodium bicarbonate) and manufacturing operations spread across
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
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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