Rating Rationale for JKCL

Rating Rationale Brickwork Ratings (BWR) has revised the rating to ‘BWR AA+’ from ‘BWR AAA’ for Tata Chemicals Ltd.’s Long Term Unsecured Non-Convertible Debentures issue of ₹ 250 Cr with a tenor up to 10 years.

Brickwork Ratings has revised the Rating1 to ‘BWR AA+’ (Pronounced BWR Double A plus) Outlook - Stable from ‘BWR AAA’ (Pronounced BWR Triple A) Outlook - Stable for Tata Chemicals Ltd.’s (TCL) Unsecured Non-convertible Debenture (NCD) issue of ₹ 250 Cr with tenor up to 10 years.

Instrument Amount Rating1Review Issue Date Rating1 History

Rs. 250 BWR AA+ BWR AAA Unsecured NCD June 2009 crores (Stable) (Stable)

The rating has, inter alia, factored the Company’s diversified product portfolio & geographical presence, large market share, strong management and group support enjoyed by the Company. The rating is constrained by profitability susceptible to volatility in raw material prices, exposure to cyclical soda ash and highly regulated fertilizer business, under recovery of subsidy to stretch working capital cycle and the weak performance of its relatively high-cost European and Kenyan operations.

Background TCL is currently the world’s second largest producer of soda ash with manufacturing plants in India, the UK, Kenya and the US. It is one of India’s largest producers of inorganic chemicals and fertilizers. Over the years TCL has expanded its operations into edible salt (Tata salt, I- Shakti, Tata Salt Plus and Flavoritz), Phosphatic fertilisers, urea and cement and its agri business includes crop nutrition, agric chemicals and pesticides. The growth has largely been driven by inorganic growth opportunities worldwide.

Operational Performance The Company‘s operation is organized under four segments i.e. (1) Inorganic Chemicals comprising soda ash, salt, sodium bicarbonate, marine chemicals, caustic soda and cement; (2) Fertilizers comprising fertilizers and other traded products; (3) Other Agri-inputs including Rallis India Limited’s operations and (4) others - comprising water purifier, nutritional solutions and pulses. On a consolidated basis, in FY14 inorganic chemicals segment achieved sales of Rs.8029.22 crores as compared to Rs. 7365.21 crores FY13. During FY14, Fertilizer segment contributed

1 Please refer to www.brickworkratings.com for definition of the Ratings

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revenues of Rs. 5508.08 crores as compared to Rs. 5436.58 crores FY13, whereas other agri inputs contributed revenues of Rs. 2023.51 crores in FY14 compared to Rs. 1680 crores in FY13. FY 2013-14 saw a 2% de-growth in the domestic soda ash market. During the year FY14, TCE (TATA Chemicals Europe) ceased operation of its soda ash facilities at Winnington while investing in increased sodium bicarbonate capacity and quality improvements at the same to feed the growing high value sodium bicarbonate sectors. Tata Chemical Magadi Limited also witnessed high operating losses due to missed production targets caused by worsening plant efficiencies, significant decrease in prices during the year and high energy cost. The company has initiated restructuring in Europe and Africa by closing soda ash facilities at Winnington and mothballing one plant in Kenya. The company is expected to reap benefits of restructuring by FY16 onwards. In terms of Farm Essentials, In FY 2013-14, the domestic production for urea at 22.7 million tonnes was marginally higher than FY 2012-13 and urea imports into India were 7 million tonnes, lower by 12% as compared to the previous year. With no change in the MRP of urea, the year witnessed a marginal 1% increase in urea sales. The demand for phosphatic fertilizers remained subdued in FY 2013-14 due to the inventory overhang. The sales of DAP and NPK shrunk by 25% and 2%, respectively, during the year. Going forward the company is expected to focus on deregulated products primarily specialty fertilizers, the seeds & pesticides business to enhance profitability and improve working capital cycle. Rallis India Limited registered a growth of 20%, on consolidated revenues of Rs. 1746.56 Crs in FY14 from Rs. 1458.18 Crs in FY13.

Financial Performance: Revenues for FY14 on standalone basis registered growth of 3.7% to Rs. 8689.64 crores from Rs. 8382.06 crores in FY13 backed by higher sales volumes of manufactured phosphatic fertilizers, soda ash and salt. EBITDA recorded decline of 11.3% to Rs. 927.87 crores from Rs. 1046.37 crores in FY13, mainly on account of higher raw material cost and increase in power & fuel cost. Consequently profit after tax was at Rs. 436.07 crores, down 32.2% over the previous year. The consolidated net revenue from the operations increased from Rs. 14,711.02 crores to Rs. 15,895.43 crores, an increase of 8% over the previous year. EBITDA was at Rs. 1,809.43 crores as against Rs. 2,162.91 crores, down 16.3% over the previous year. Consolidated operating profit decline in FY14, mainly on account of higher operating loss incurred at Tata Chemical Europe on account of lower volumes and low price realization due to challenging demand scenario in Europe. Tata Chemical Magadi Limited also witnessed high operating losses due to missed production targets caused by worsening plant efficiencies, significant decrease in prices during the year and high energy cost. Restructuring at TCE and TCML is expected to further impact the consolidated profitability of the company in 2nd half of FY15. The company is expecting cost of $8 to $9mn relating to VRS for 200 odd employees at TCML. However the company is expected to reap benefits of restructuring from FY16 onwards. Consequently the company reported net

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loss after deducting minority interest amounting to Rs. 1032 cores in FY14. The reported loss was largely on account of exceptional items aggregating to Rs. 1420.21 crores (net) primarily towards impairment of certain assets, restructuring cost, write down of goodwill and certain investments and exchange loss. Revenues for 1Q’15 on standalone basis registered growth of 28% to Rs. 2116 crores, whereas net profit recorded increase of 69% to Rs. 169 crores compared to previous year on account of better realisations and better volumes in India across all the businesses. Revenues in consolidated for 1Q’15 increased by 17% to Rs. 3847 crores and net profit increase by 133% to Rs. 176 crores mainly driven by better realizations at TATA Chemicals North American business. However on consolidated basis profitability is expected to impact by ongoing restructuring in Europe and Kenya.

Rating Outlook: The Rating reflects TCL’s moderate leverage, ability to generate adequate cash flows to service debts and healthy return on capital. TCL continues to lead the market in the branded salt category and Soda ash category. The Company’s diversified businesses add further stability to its overall operations. TCL’s overseas subsidiary, British Salt’s robust performance is providing additional comfort to its operations. Combined with the backing of the TATA group and the excellent management to lead its growth, TCL is expected to remain on course with respect to its performance and debt servicing capacity. However the ability of TCL to sustain its profit margins amidst increasing input costs and implementation of restructuring as envisaged are the key rating sensitivities.

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