Fitch Ratings has affirmed Tata Chemicals Limited's (TCL) Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'BB+'.

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 Kenya (68% of TCL's total capacity of 4.1 million tonnes) benefits from natural trona deposits, which require low conversion costs. TCL's capacity in Gujarat, India (23% of total) is one of the lowest-cost producers of synthetic soda ash, aided by proximity to limestone quarries and economies of scale. It also has an integrated cement plant that uses waste generated from soda-ash manufacturing. These underpin the company's cost competitiveness relative to peers.

Small Scale: Fitch expects TCL's EBITDA, which we forecast to average around USD280 million in the financial year ending March 2022 (FY22) to FY25, to be one the lowest among Fitch-rated chemical companies in APAC. We expect around 85% of TCL's EBITDA to be from soda ash-related products and salt. This exposes TCL to higher risks associated with the commodity nature of soda ash than peers that are larger or sell multiple products.

However, the risk is mitigated by its favourable geographic diversification. Fitch estimates developed markets in the US and Europe account for around 40% of TCL's soda ash EBITDA, and the company has a good mix of discretionary (flat glass) and non-discretionary (salt, detergents, glassware and chemical products) end-markets.

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 Asia and Latin America, as demand recovered from the pandemic lows. The ongoing global economic recovery, emergence of new applications like lithium carbonate and solar glass, and capacity expansion at TCL's India operations should support sales over the medium term.

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 India and Africa contracts, which are short-term in nature, have been increased in recent quarters, while those for its US and UK contracts are negotiated annually and should see increases in FY23.

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 Russia's invasion of Ukraine and the subsequent sanctions on Russia, have minimal impact on energy availability for TCL's operations. However, energy-cost inflation sustained beyond our baseline scenario could present downside risks to our profitability estimates.

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 India) and volatility in input costs due to tight supplies from China.

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 Cydsa, S.A.B. de C.V. (BB+/Stable). Both companies have small scales with EBITDA of less than USD300 million. Cydsa's product and service portfolio includes chlorine-caustic soda, refrigerant gases and underground hydrocarbon storage, but most of its assets are in Mexico, which accounts for 92% of overall revenues. TCL's product portfolio is concentrated in soda ash, but its operations are diversified across the US, the UK, India and Africa, with 72% of non-current assets located in the US and UK. Cydsa's expected leverage is similar to TCL's.

Both TCL and lower-rated peer H.B. Fuller Company (FUL, BB/Positive) have EBITDA of less than USD500 million and strong geographic diversification. TCL's EBITDA margins are typically in the mid-to-high teens given its strong market position and low-cost operations in the commoditised soda ash market. This is somewhat better than FUL's margins, which are in the early-to-mid teens, despite higher exposure to specialised products. TCL's credit metrics are better than FUL's, which justifies the one-notch difference in their ratings.

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 USD500 million with net leverage (as measured by net debt/operating EBITDA) sustained below 2.0x.

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 '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

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 end-December 2021. TCL also had investments of INR33 billion in various Tata Group entities as of FYE21 (including unquoted ones, such as around 2.5% stake in Tata Sons Private Limited), which boosts its liquidity options. TCL refinanced INR15 billion of its debt in FY22 and we expect it to comfortably refinance its INR28 billion of debt maturing in FY23. TCL has easy access to credit markets as it is part of the Tata group, one of India's largest conglomerates, and its financial flexibility remains strong.

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 India, the US, UK and Kenya.

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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