Haldia Petrochemicals Limited Revised

January 25, 2018

Summary of rated instruments Previous Rated Amount Current Rated Amount Instrument Rating Action (Rs. crore) (Rs. crore) Long Term Limits- Term [ICRA]AA-; Upgraded from [ICRA]A+; Loans 4099.99 4162.15 Outlook revised from Positive to Stable

Long-term Limits-Fund-based [ICRA]AA-; Upgraded from [ICRA]A+; 323.00 313.00 Outlook revised from Positive to Stable

Short-term Limits- Non-fund [ICRA]A1+ reaffirmed 3,440.00 Based Limits 2,983.07

Long-term/Short-term [ICRA]AA-; Upgraded from [ICRA]A+; Unallocated 2651.94 2142.85 Outlook revised from Positive to Stable / [ICRA]A1+ reaffirmed

Issuer Rating1 [ICRA]AA-; Upgraded from [ICRA]A+; - - Outlook revised from Positive to Stable

Short Term – Commercial 100.00 100.00 [ICRA]A1+ reaffirmed Paper programme Total 10,158.00 10,158.00 Rating action

ICRA has upgraded the long-term rating from [ICRA]A+ (pronounced ICRA A plus) to [ICRA]AA- (pronounced ICRA double A minus) and reaffirmed the short-term rating at [ICRA]A1+ (pronounced ICRA A one plus) for the various debt programmes of Haldia Petrochemicals Limited (HPL)2. The outlook on the long-term rating has been revised from “Positive” to “Stable”.

ICRA has also upgraded the Issuer Rating of HPL from [ICRA]A+ (pronounced ICRA A plus) to [ICRA]AA- (pronounced ICRA double A minus). The outlook on the Issuer rating has been revised from “Positive” to “Stable”. The issuer rating is only an opinion on the general creditworthiness of the rated entity and not specific to any particular debt instrument.

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

2For complete rating scale and definitions please refer to ICRA's Website www.icra.in or other ICRA Rating Publications

Rationale

The upgrade in the long term reflects the improvement in the financial performance aided by healthy tolling margins and near full capacity utilisation of the plant leading to healthy cash accruals. Due to its sustained healthy financial performance, the company has built up healthy cash reserves owing to which it has become debt free on a net debt basis at the end of H1 FY2018. Though the tolling margins are expected to moderate from the current high levels owing to the increase in crude oil prices, they are nevertheless expected to remain above their five year averages over the medium term owing to demand supply dynamics being favourable for the producers. Additionally, by the end of H1 FY2018, the company has reduced the contingent liability towards meeting its export obligations to almost a quarter of the original Rs. 3,171 crore liability for which the company had submitted a bank guarantee by maintaining a high level of exports. Nevertheless the same still remains a large contingent liability for the company; however, if exports are sustained at current levels, the overall liability should be discharged before the stipulated extension of four years allowed by the Ministry of Finance.

In November 2016, TCG group acquired a 90.4% stake in Mitsubishi Chemical Corporation’s (MCC) unit Materials Chemicals and Performance Intermediaries Private Limited (MCPI) (formerly MCC PTA India Corporation). It further acquired another 9% stake in February 2017 taking the aggregate shareholding to 99.4%

The ratings continue to factor in HPL’s demonstrated track record in the petrochemicals business, the strength of its promoter(s), and its leading market position in the eastern Indian market for polymers. 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 HPL’s track record of losses as well as the operational risks emanating from receding draft levels at the Haldia port, through which it imports naphtha and the ability of the company to run its plant without significant disruptions. However, off late the draft level has stabilised. Any large acquisition, investment or capex plans would remain an event based sensitivity.

HPL has set up a Singapore-based subsidiary, HPL Global, with the objective of undertaking, inter-alia, commodity risk management activities. HPL has incorporated another subsidiary Advanced Performance Materials (ADPERMA) to foray into speciality chemicals using HPL’s product slate to develop higher value added downstream chemical products. Additionally, for retailing of Motor Spirit and High Speed Diesel to cater to requirement of entire East India Region, another subsidiary HPLGO has been formed. HPLGO has already obtained license for Motor Spirit and applied for High Speed Diesel Oil license.

Outlook: Stable Going forward, ICRA expects the company to report healthy cash accruals in the near to medium term owing to improving global supply–demand conditions for ethylene and propylene derivatives, improved economics of naphtha crackers due to the decline in naphtha prices following the decline in crude oil prices and high capacity utilisation of the plant. Though the company has large debt repayments, its debt servicing ability is expected to remain healthy over the medium term with strong cash flows backed by healthy EBITDA generation.

Key rating drivers

Credit strengths Demonstrated track record in the petrochemicals business, with established customers - The domestic polyolefins market is oligopolistic with few participants—namely, Reliance Industries Ltd., HPL, Indian Oil Corporation Limited, GAIL India, HPCL Mittal Energy Limited, Mangalore Refinery and Petrochemicals Limited etc. Following the re-start of plant in January 2015, HPL has been able to regain its customers and reclaim its position in the petrochemical industry.

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; although large capacity additions are likely to exceed demand in India in the medium term - 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. ICRA expects the rate of growth in the demand for polymers to be in the range of 8-10% per annum over the long-term, given the favourable growth expected in key end-user industries like FMCG, automobiles, infrastructure and agriculture.

Strong tolling margins due to healthy demand growth, which is expected to persist in the near term - The international prices of crude oil have declined precipitously from July 2014 onwards and accordingly the prices of naphtha have also declined. Because of the steeper fall in the price of naphtha as compared to the prices of polymer products, the tolling margins of naphtha crackers have been strong. Though the tolling margins are expected to moderate from the current high levels owing to the increase in crude oil prices, they are nevertheless expected to remain above their five year averages over the medium term owing to demand supply dynamics being favourable for producers. 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.

Decline in crude oil and naphtha prices has improved the economics of naphtha crackers, besides reducing the working capital requirements due to which the manufacturing plant is operated at almost full capacity -With the decline in crude oil prices from the levels of $100-110/barrel (in early 2014), naphtha prices have declined which has improved the economics of naphtha crackers vis-à-vis gas crackers as the feedstock price gaps have declined. Due to lower naphtha prices, working capital requirements have also declined. The company’s plant is being operated at almost full capacity utilisation owing to strong tolling margins, healthy liquidity and lower working capital requirements.

Resolution of ownership dispute and vesting of management control to TCG has enabled the new management to undertake capex for value-added projects to improve returns from the business over the long-term - Pursuant to the SPA signed between the West Bengal government and TCG Group and upon payment of the first tranche of Rs 653 crore in December 31, 2015 to West Bengal Industrial Development Corporation the change of management was effectutated. Under the new management, HPL is setting up a Butene-1 plant and a pygas de-sulfurisation project at an estimated capex of about Rs. 403 crore. The Butene-1 produced would meet in-house demand for manufacture of HDPE and LLDPE and the balance would be sold in the domestic market and the pygas de-sulfurisation project would enable the company to meet BS-VI specs for MS which would be applicable from April 1, 2020. 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.

Significant improvement in the liquidity position following robust cash accruals from operations since restart of operations in January 2015 - HPL has completed a restructuring exercise within its group entities for consolidation of business, simplification of group structure and reduction of administrative overheads. The new structure has resulted in significant revaluation of assets and increase in net worth, although ICRA takes limited comfort from the same. The operating profitability improved in FY2017 due to higher tolling margins. The operating margin increased from 26.5% in FY2016 to 32.8% in FY2017. The net profit of the company was Rs 863.4 crore in FY2017 as against Rs 119.8 crore in FY2016. The net cash accruals increased from Rs 2035.5 crore in FY2016 to Rs 2758.4 crore in FY2017. The cash and cash equivalents increased from Rs 2123.3 crore at FY2016 end to Rs 4103.3 crore at FY2017. Owing to healthy profitability and cash accruals the NCA/TD increased from 38.5% in FY2016 to 54.5% in FY2017 and Total Debt/OPBDITA declined from 1.0 in FY2016 to 1.5 in FY2017 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 receding 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 exposed to receding 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. The high capacity utilisation has resulted in cost efficiencies in manufacturing expenses and better fixed cost absorption and any decline in the capacity utilisation would adversely impact the cost structure of the company.

Past track record of losses -HPL’s plant underwent a long stabilisation period after the commissioning of the Supermax project, when there were several trips along with a fire incident. On July 6, 2014 the plant was shut down due to a technical snag and subsequently, the company was unable to recommence operations of the plant owing to the severe liquidity crisis faced by it. Following the settlement between the promoters and grant of the interim refinance package, however, the plant was re-started on January 28, 2015. Owing to the aforementioned reasons the company has a past track record of losses. Nevertheless, HPL has successfully operated close to 3 years post restart of the plant, clocking robust overall performance and highest ever profitability in the previous FY.

Large 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 imposed a penalty of Rs. 3,171 crore for violation of Foreign Trade (Development and Regulation) Act 1992. However the Ministry of Finance 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 August 2017, the company has reduced the contingent liability towards meeting its export obligations to almost a third of the original Rs. 3,171 crore. Nevertheless, the same remains a large contingent liability for the company, however, if exports are sustained at current levels, the overall liability should decline significantly in the near term and would be discharged before the stipulated extension of four year allowed by the Ministry of Finance.

Analytical approach: For arriving at the ratings, ICRA has applied its rating methodologies as indicated below.

Links to applicable criteria:

Corporate Credit Rating Methodology

Rating Methodology for Entities in the Chemical Industry

About the company: Haldia Petrochemicals Limited (HPL) was set up as a joint venture (JV) between the Government of West Bengal (GoWB), the Dr.Purnendu Chatterjee-led Chatterjee Petrochem (Mauritius) and the Tata Group. With the sale of the first tranche of shares by GoWB in December 2015, the majority shareholding as well as the management control of the JV 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: 670 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 the recently commissioned ONGC Petro Additions Limited.

Key financial indicators (audited) FY2016 FY2017 H1 FY2018 (Unaudited)

Operating Income (Rs. crore) 10218.7 10381.7 4933.6 PAT (Rs. crore) 119.8 863.4 224.6 OPBDIT/ OI (%) 26.5% 32.8% 28.3% RoCE (%) 6.8% 9.4% 4.6%

Total Debt/ TNW (times) 0.4 0.4 0.4 Total Debt/ OPBDIT (times) 2.0 1.5 1.9 Interest coverage (times) 4.3 5.5 5.2 NWC/ OI (%) -2.3% 1.2% - Source:Haldia Petrochemicals Limited

Status of non-cooperation with previous CRA: Not applicable

Any other information: None

Rating history for last three years: Current Rating (FY2018) Chronology of Rating History for the past 3 years Amount Date & Date & Date & Date Outstandi Rating Rating Rating & ng (Rs. Date & Rating in Date & Rating in Rating crore) FY2017 FY2016 in Amount FY201 Rated 4 S. (Rs. January Novemb April Septemb June Februar Septemb March N Instrument Type crore) 2018 er 2017 2017 er 2016 2016 y er 2015 2014 o. 2016 Long Term [ICRA] [ICRA] [ICRA] [ICRA] [ICRA] [ICRA] [ICRA] [ICRA] Long 1 Limits- Term 4162.15 3898.00 AA- A+ A+ A- BBB+ BBB BB+ D Term Loans (Stable) (Positive) (Stable) (Stable) (Stable) (Stable) (Stable) Long-term [ICRA] [ICRA] [ICRA] [ICRA] [ICRA] [ICRA] [ICRA] Long [ICRA] 2 Limits-Fund- 313.00 AA- A+ A+ A- BBB+ BBB BB+ Term D based (Stable) (Positive) (Stable) (Stable) (Stable) (Stable) (Stable) Short-term [ICRA]A1 [ICRA]A1 [ICRA]A1 [ICRA]A2 Limits- Non- Short [ICRA]A3 [ICRA]A4 [ICRA] 3 3440.00 + + + + [ICRA]A2+ fund Based Term + + D Limits [ICRA]A [ICRA]A+ [ICRA]A+ Long A- (Positive) Long-term/ (Stable)/ term/S 2142.85 (Stable)/ / - 4 Short-term [ICRA]A1 - - - - hort [ICRA]A1 [ICRA]A1 Unallocated + Term + +

[ICRA] [ICRA]A+ [ICRA]A+ [ICRA]A- [ICRA]BB [ICRA]BB Issuer Rating AA- [ICRA]BB [ICRA] 5 - (Positive) (Stable) (Stable) B+ B (Stable) + (Stable) D (Stable) (Stable) Short Term- Commercial [ICRA]A1 [ICRA]A1 Short - - 6 Paper 100.00 + + - - - - Term Programme

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 www.icra.in

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- January 10.5% March 2029 4162.15 [ICRA]AA- NA Term Loans 2015 (Stable) Long-term Limits- - - - 313.00 [ICRA]AA- NA Fund-based (Stable) Short-term Limits- 3440.00 [ICRA]A1+ NA Non-fund Based Limits Long-term/Short- 2142.85 [ICRA]AA- NA term Unallocated (Stable)/ [ICRA]A1+ Issuer Rating N.A. [ICRA]AA- NA (Stable) Short Term – 7-90 days 100.00 [ICRA]A1+ NA Commercial Paper programme Source: Haldia Petrochemicals Limited

Corrigendum

Rating Rationale dated January 25, 2018 has been corrected with revisions as detailed below:

 Deletion of mention of any investment by HPL in MCPI being a key rating sensitivity on page no 2. Section under ‘Rationale’ already includes this information.  Mention of subsidiaries added on page no 2 as these are expected to grow significantly over the medium term  Mention is made of the significant decline expected in contingent liabilities in the near term on page 4 owing to the healthy level of exports by the company in order to meet its export obligations.

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

RELATIONSHIP CONTACT L Shivakumar +91 22 6114 3406 [email protected]

MEDIA AND PUBLIC RELATIONS CONTACT Ms. Naznin Prodhani Tel: +91 124 4545 860 [email protected]

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+91-124-2866928 (open Monday to Friday, from 9:30 am to 6 pm) [email protected]

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