Haldia Petrochemicals Limited

April 12, 2019

Summary of rating action Previous Rated Current Rated Instrument* Amount Amount Rating Action (Rs. crore) (Rs. crore) Long Term Limits- Term Loans 4,162.15 3,031.30 [ICRA]AA (Stable); reaffirmed Long-term Limits-Fund-based 313.00 319.00 [ICRA]AA (Stable); reaffirmed Short-term Limits- Non-fund Based 3,440.00 3,687.00 [ICRA]A1+; reaffirmed Limits Long-term/Short-term Unallocated 2,142.85 3,020.70 [ICRA]AA (Stable)/[ICRA]A1+; reaffirmed Proposed NCD Programme 1,000.00 1,000.00 [ICRA]AA (Stable); reaffirmed Issuer Rating1 - - [ICRA]AA (Stable); reaffirmed Short Term – Commercial Paper 100.00 100.00 [ICRA]A1+; reaffirmed programme Total 11,158.00 11,158.00 *Instrument details are provided in Annexure-1

Rationale The rating reaffirmation reflects the robust key credit metrics of the company aided by healthy tolling margins leading to large cash build up in excess of the gross debt levels of the company. In FY 2019 the tolling margins contracted owing to global supply exceeding demand with the latter impacted by the US-China trade war, besides which the company suffered inventory losses during Q3 2018-19 owing to decline in the prices of naphtha and products following drop in crude prices. The capacity utilisation of the company’s plant also declined in FY2019 due to a turnaround spanning May- June 2018 besides some technical issues, which led to a brief shutdown in October 2018 and lower throughput for a few days in Feb 2019. Accordingly, the profitability and cash accruals were subdued in FY2019 vis-à-vis FY2018. Going forward, while the tolling margins are expected to remain subdued given the supply overhang amid continuing US-China trade war led demand slowdown, they should be well above the breakeven levels for debt servicing.

By the end of March 2019, the company has maintained high level of exports, thus significantly reducing the contingent liability towards meeting its export obligations to almost one tenth of the original Rs. 3,171 crore liability for which the company had submitted a bank guarantee. If exports are sustained at current levels, the overall liability should be discharged before the stipulated extended timeline allowed by the Ministry of Finance.

ICRA notes that the company has signed non-binding MoUs with the Governments of Andhra Pradesh and Orissa for setting up a refinery cum petrochemicals complex. Though the investments in any of the aforementioned projects would be large however these plans are as yet preliminary and accordingly, ICRA has not factored in any large long term acquisitions/investments by HPL, which would be a key rating sensitivity. In this context, the company has indicated that while it’s pursing several growth opportunities, cash outlay on these ventures would be made keeping in mind the

1With effect from Sep 1, 2017, ICRA has aligned the symbols and the definitions of ratings pertaining to the Issuer Rating Scale with that of the Long-Term Rating Scale. The change in the symbol is not to be construed as a change in the credit rating. Please refer to ICRA’s website for more details

overall liquidity requirement of HPL and also spread over a long tenor, leading to healthy free cash flow generation. ICRA shall review the ratings if the company were to embark on large debt funded projects that impacts its financial profile.

The ratings continue to factor in HPL’s demonstrated track record in the petrochemicals business, the strength of its promoter, and its leading market position in the eastern Indian market for polymers and its quality of products including chemicals. Its locational advantages in servicing eastern India and Asian exports demand, along with a favourable outlook for polymers demand in India over the long-term from several end-users are other rating comforts. The ratings also consider the cyclicality inherent in the petrochemicals business and the vulnerability of its profitability to the changes in import duty levels and the Rupee–US dollar movement. However, the pricing of HPL’s key raw materials and finished products is largely based on import parity, limiting the impact of forex fluctuations on its overall profits. The ratings also factor in the operational risks emanating from the low draft conditions at the Haldia port, through which it imports naphtha and the ability of the company to run its plant without significant disruptions.

HPL has undertaken a project to change the fuel of its power plant’s boilers from carbon black feed stock (CBFS)to coal. The capex for the project is estimated at Rs 360 crore. The project is estimated to be completed by the Q4 of CY2020 and would have a short payback period owing to the substantial savings in steam and power cost that would accrue to the company. While the capex plans would entail project execution risks, nevertheless these are largely mitigated by the experience of the company in executing large and complex projects.

HPL had set up a Singapore-based subsidiary, HPL Global, with the objective of undertaking physical or paper trading and purchasing and selling for HPL and other companies, which has commenced operations by procuring feed stock/ selling exported products for MCPI Private Limited (MCPI) and HPL. HPL had also set up another wholly owned subsidiary namely Advance Performance Materials Pvt. Ltd. (AdPerMa) for speciality chemical business to which it has transferred its Butene-1 plant. The commercial production of Methyl Tertiary Butyl Ether (MTBE) and Butene 1 has already commenced in March 2019. It had also, incorporated HPL Go, another wholly owned subsidiary, for retailing of auto fuel pursuant to obtaining licence from GoI, which is still awaited. Any material rise in intra group transactions without meaningful returns will also be a rating sensitivity.

Outlook: Stable Going forward, ICRA expects the company continues to report healthy cash accruals in the near to medium term aided by high capacity utilisation in the prevailing moderate tolling margins. The commissioning of Butene-1 plant in March 2019 and expected commissioning of Pygas desulphurisation project soon along with the yield and capacity improvement projects implemented during the shutdown in May-June 2018 are expected to support the tolling margins. Though the company has sizable debt repayments, its debt servicing ability is expected to remain healthy over the medium term with strong cash flows from operations.

Key rating drivers

Credit strengths Demonstrated track record in the petrochemicals business, with established customers - The domestic polyolefins market has major participants—namely, Reliance Industries Ltd., HPL, Indian Oil Corporation Limited, GAIL India, HPCL Mittal Energy Limited, Mangalore Refinery and Petrochemicals Limited, ONGC Petro Additions Limited etc. wherein, HPL has been able to maintain its niche position through its quality and customer focus.

Dominant market position in eastern India and logistical advantage in exporting to the East Asian region - HPL has enjoyed a strong market position in eastern and northern India and sells most of its products in the High Netback regions

of these markets. Additionally, owing to the location of plant at Haldia, the company enjoys logistical advantage in exporting to the East Asian region.

Favourable outlook for polyolefins demand in India - The domestic per capita consumption as well as absolute consumption of commodity polymers are expected to show secular growth due to various economic and demographic factors such as increase in urban population and rise in per capita income. Notwithstanding increasing concerns on the use of single use plastics which will curtail growth rate for polymers, ICRA expects the rate of growth in the demand for commodity polymers to be in the range of 7-8% per annum over the long-term, given the favourable growth expected in key end-user industries like FMCG, automobiles, infrastructure and agriculture.

Moderate tolling margins which is expected to persist in the near term -Cracker margins have moderated from their earlier highs owing to increasing global supply and low demand growth amid US-China trade war. In the near term the tolling margins would remain contingent on the demand growth which is expected to remain subdued owing to weak global economic growth. However, over the long term the tolling margins would depend upon the demand growth of polymers and chemicals, new supply additions, relative prices of different feedstock (gas, naphtha), etc.

Value-added projects to improve returns from the business over the long-term - Under the new management post signing of SPA between West Bengal government and TCG group, HPL set up a Butene-1 plant (under its subsidiary) with a capex of about Rs 300 crore; met by internal accruals and also setting up a pygas de-sulfurisation project at an estimated capex of about Rs. 105crore. The commercial production from Butene-1 plant has commenced in March 2019 and the Pygas de-sulfurisation project is expected to be commissioned soon with both the projects being setup without any cost over runs. In addition to the aforementioned projects the company has planned a project to change the fuel of its power plant’s boilers from CBFS to coal. The capex for the project is estimated at Rs 360 crore. The project is estimated to be completed by the Q4 of CY2020 and would have short payback period owing to the substantial savings in steam and power cost that would accrue to the company. While the capex plans would entail project execution risks, nevertheless these are largely mitigated by the experience of the company in executing large and complex projects

Post-acquisition of the first tranche of 26 million shares from West Bengal Industrial Development Corporation upon payment of Rs 653 crore in December 31, 2015 and consequent change of management, the TCG group, in October 2018 bought out the second tranche of 26 million shares for an aggregate sum of Rs. 653 crore at Rs 25.10/share from the West Bengal Government thus increasing its stake to 72.5%.

Significant improvement in the liquidity position following robust cash accruals from operations since restart of operations in January 2015 - Post restart of operations in Jan 2015, the company has performed significantly well; however, the operating profitability declined in FY2018 due to some technical issues impacting the capacity utilisation of the plant. The operating margin declined from 32.8% in FY2017 to 22.9% in FY2018. The net profit of the company was Rs 102.4 crore in FY2018 as against Rs 863.4 crore in FY2017. The net cash accruals declined from Rs 2758.4 crore in FY2017 to Rs 2002.80 crore in FY2018. The cash and cash equivalents increased from Rs 4103.3 crore as at FY2017 end to Rs 4673.3 crore as at FY2018 end. The company has been prepaying its debt due to which its gearing declined to 0.3x as on March 31, 2018 as against 0.4x as on March 31, 2017. Owing to healthy profitability and cash accruals the NCA/TD was 46% in FY2018 and Total Debt/OPBDITA was 1.95x in FY2018.

9M FY2019 performance-As per unaudited and provisional results on standalone basis, the company has achieved revenue of Rs 7605.5 crore and EBITDA of Rs 877.7 crore in 9M FY2019 end. While there are net losses, given the high non-cash charges, the company’s cash accruals have been healthy. Total debt outstanding as on December 31, 2019 was Rs 3646.7 crore and total cash and liquid investments was about Rs 3461.6 crore (including loans and advances to group concerns) for 9M FY2019 end. Also, the company has non-current investments of about Rs 1055.9 crores which includes investments in bonds and investments in other group companies as on December 31, 2018.

Credit challenges Vulnerability of profitability to cyclicality inherent in the petrochemical business, import duty levels and exchange fluctuations -Despite the current healthy cash accruals of the company, the profitability remains vulnerable to cyclicality inherent in the petrochemical business, import duty levels and exchange fluctuations.

Operational risks emanating from draft levels at Haldia port, through which HPL imports naphtha; sustainability of cost structure will also be sensitive to the ability of the company to run its plant without significant downturns -The company is dependent on the draft at the Haldia port, owing to which HPL unloads cargo from the mother vessel to a daughter vessel at the Vizag port and both the mother and daughter vessels with relatively lower weight are unloaded at the Haldia port. However, with the draft level stabilising off late, the risk emanating from receding draft has been offset to some extent. While the high capacity utilisation has resulted in cost efficiencies in manufacturing expenses and better fixed cost absorption in the past and any material decline in the capacity utilisation would adversely impact the cost structure of the company.

Material contingent liabilities on export obligations, albeit on a declining level -As HPL could not meet its export obligations against advance license obtained for importing duty free naphtha, the Directorate-General of Foreign Trade allowed an extension of the export obligations period to the company by 4 years upto 2019 upon its furnishing a bank guarantee of Rs. 3,171 crore. As of March 2019 end, the company has significantly reduced the contingent liability towards meeting its export obligations to almost one tenth of the original Rs. 3,171 crore. While the same remains a contingent liability for the company, going by the exports as sustained at current levels, the overall liability should be discharged before the stipulated timeline allowed by the Ministry of Finance.

Liquidity Position: The company has developed large cash reserves aided by healthy tolling margins and high capacity utilisation of its plant in the past few years. Accordingly, the liquidity position of the company is expected to remain healthy supported by healthy cash accruals and cash and liquid investments, which would be suffice to meet the annual debt repayment obligations of Rs 354.2 crore and annual capex of about Rs 200 crore in FY2020.

Analytical approach:

Analytical Approach Comments Corporate Credit Rating Methodology Applicable Rating Methodologies Rating Methodology for Entities in the Chemical Industry Parent/Group Support Parent/Group Company: NA Consolidation / Standalone The rating is based on consolidated financial statements of the issuer.

About the company Haldia Petrochemicals Limited (HPL) was set up as a joint venture (JV) between the Dr Purnendu Chatterjee-led Chatterjee Petrochem (Mauritius) and the Government of West Bengal (GoWB), With the sale of the first tranche of shares by GoWB in December 2015 and second tranche in October 2018 the majority shareholding as well as the management control of the company is now with the Chatterjee Group (TCG). HPL manufactures commodity polymers like high-density polyethylene (HDPE), linear low-density polyethylene (LLDPE), and polypropylene (PP), as well as chemicals/fuels like benzene and butadiene with intermediates sourced from a naphtha cracker (capacity: 700 KTA of ethylene) at Haldia, West Bengal. The company is the fourth largest player in the domestic polyolefins market after Reliance Industries Limited Indian Oil Corporation and ONGC Petro Additions Limited.

Key financial indicators (audited)

FY2017 FY2018

Operating Income (Rs. crore) 10381.7 9761.8 PAT (Rs. crore) 863.4 102.4 OPBDIT/ OI (%) 32.8% 22.9% RoCE (%) 9.4% 3.3%

Total Debt/ TNW (times) 0.4 0.3 Total Debt/ OPBDIT (times) 1.5 1.9 Interest coverage (times) 5.5 3.9 NWC/ OI (%) 1.2% 5.4%

Status of non-cooperation with previous CRA: Not applicable

Any other information: None

Rating history for last three years: Current Chronology of Rating History for the past 3 years Rating (FY2019) Amount Date& Date & Date & Rating in Outstandin Rating Date &Rating in FY2018 Rating in FY2017 S. Amount Rated g (Rs. crore) FY2016 No Instrument Type (Rs. crore) April August Februar Januar Decembe May Septembe June February . 2019 2018 y 2018 y 2018 r 2017 2017 r 2016 2016 2016 Long Term- Proposed [ICRA] 1,000.0 [ICRA]AA [ICRA]AA 1 NCD Long Term - AA ------0 (Stable) - (Stable) Programm (Stable) e [ICRA] AA Long Term (Stable) [ICRA] [ICRA] [ICRA] [ICRA] [ICRA] [ICRA] [ICRA] [ICRA] Limits- 2 Long Term 3031.30 3,031.30 (Reduced AA AA- AA- A+ A+ A- BBB+ BBB Term from Rs (Stable) (Stable) (Stable) (Positive) (Stable) (Stable) (Stable) (Stable) Loans 4162.15 crore) [ICRA] AA Long-term (Stable) [ICRA] [ICRA] [ICRA] [ICRA] [ICRA] [ICRA] [ICRA] [ICRA] Limits- 3 Long Term 319.00 - (increased AA AA- AA- A+ A+ A- BBB+ BBB Fund- from (Stable) (Stable) (Stable) (Positive) (Stable) (Stable) (Stable) (Stable) based Rs 313.00 crore) Short-term [ICRA]A1+ Limits- (increased Short 3,687.0 [ICRA]A1 [ICRA]A1 [ICRA]A1 [ICRA]A1 [ICRA]A2 [ICRA]A3 4 Non-fund - from Rs [ICRA]A1+ [ICRA]A2+ Term 0 + + + + + + Based 3,440 Limits crore) Long- [ICRA]AA [ICRA]AA [ICRA]AA [ICRA]A+ [ICRA]A+ Long [ICRA]AA- term/Short (Stable)/ (Stable)/ - (Positive) (Stable)/ 5 term/Shor 3020.70 - (Stable)/ - - - -term [ICRA]A1+ [ICRA]A1 (Stable)/ / [ICRA]A1 t Term [ICRA]A1+ Unallocate (increased + [ICRA]A1 [ICRA]A1 + 6

Current Chronology of Rating History for the past 3 years Rating (FY2019) Amount Date& Date & Date & Rating in Outstandin Rating Date &Rating in FY2018 Rating in FY2017 S. Amount Rated g (Rs. crore) FY2016 No Instrument Type (Rs. crore) April August Februar Januar Decembe May Septembe June February . 2019 2018 y 2018 y 2018 r 2017 2017 r 2016 2016 2016 d from Rs + + 2142.85 crore) [ICRA]AA Issuer [ICRA]AA [ICRA]AA [ICRA]AA- [ICRA]AA- [ICRA]A+ [ICRA]A+ [ICRA]A- [ICRA]BB 6 - - - Rating (Stable) (Stable) (Stable) (Stable) (Positive) (Stable) (Stable) B (Stable) (Stable) Short Term- Commercia Short [ICRA]A1 [ICRA]A1 [ICRA]A1 [ICRA]A1 7 100.00 - [ICRA]A1+ [ICRA]A1+ l Paper Term + + + + Programm e

Complexity level of the rated instrument: ICRA has classified various instruments based on their complexity as "Simple", "Complex" and "Highly Complex". The classification of instruments according to their complexity levels is available on the website click here

Annexure-1: Instrument Details Date of Amount Issuance / Coupon Maturity Rated Current Rating ISIN No Instrument Name Sanction Rate Date (Rs. crore) and Outlook Long Term Limits- Proposed - - - 1000.00 [ICRA]AA (Stable) NA NCD programme NA Long Term Limits- Term Loans January 2015 10.5% March 2029 3031.30 [ICRA]AA(Stable) NA Long-term Limits-Fund-based - - - 319.00 [ICRA]AA(Stable) Short-term Limits- Non-fund 3687.00 [ICRA]A1+ NA Based Limits Long-term/Short-term 3020.70 [ICRA]AA(Stable)/ NA Unallocated [ICRA]A1+ NA Issuer Rating N.A. [ICRA]AA(Stable) Short Term – Commercial 7-90 days 100.00 [ICRA]A1+ NA Paper programme Source: Haldia Petrochemicals Limited

Annexure-2: List of entities considered for consolidated analysis Company Name Ownership Consolidation Approach Haldia Riverside Estates Limited 100.00% Full consolidation HPL Go Private Limited 100.00% Full consolidation Advanced Performance Material Private Limited 100.00% Full consolidation HPL Global Pte limited 100.00% Full consolidation

ANALYST CONTACTS K Ravichandran Prashant Vasisht +91 44 4596 4301 +91 124 4545 322 [email protected] [email protected]

Mohit Lohia +91 124 4545 814 [email protected]

RELATIONSHIP CONTACT Jayanta Chatterjee +91 80 4332 6401 [email protected]

MEDIA AND PUBLIC RELATIONS CONTACT

Ms. Naznin Prodhani Tel: +91 124 4545 860 [email protected]

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