Fitch Ratings has today affirmed India-based Tata Chemicals Limited’s (TCL) Long-term foreign currency Issuer Default Rating (IDR) at ‘BBB-‘ (BBB minus) and removed it from Rating Watch Negative. A Negative Outlook is assigned. Fitch has also assigned TCL a National Long-term rating of ‘AA+ (ind)’ with a Stable Outlook.

At the same time, the agency has assigned TCL’s INR16 billion bank facilities ‘AA+(ind)’/’F1+(ind)’ ratings and its INR2bn commercial paper (CP) programme a ‘F1+(ind)’ rating. The CP programme forms part of TCL’s fund-based working capital lines. The Negative Outlook on the foreign currency IDR reflects growing concerns on the adequacy of the Government of India’s (GoI) funding of fertiliser subsidies, in view of rising raw material prices and higher imports of fertilisers. Although most raw material prices are a pass-through to the GoI under the fertiliser subsidy policy, the increase in prices of key inputs (gas, naphtha, phosphoric rock and sulphuric acid), combined with high prices of imported urea and Diammonium Phosaphate, has resulted in a shortfall in GoI’s annual budgetary allocations for fertiliser subsidies. This, in turn, has resulted in TCL needing to incur higher financial costs to fund the subsidy receivables from GoI. Stability in fertiliser revenues, which provide a cushion to the cyclical earnings from soda ash business, is an important driver in TCL’s current ratings.

TCL had consolidated net debt of INR12.8bn and a comfortable financial leverage, as measured by net debt/EBITDA, of 0.85x at FYE07. However, the acquisition of natural soda ash producer, GCIP, at FYE08, financed through additional debt of USD850 million, has resulted in higher-than-expected financial leverage at FYE08. However, Fitch estimates the deterioration in TCL’s credit profile will be temporary as earnings from GCIP, which will be consolidated in FY09, contribute to improvement in credit metrics and leverage that will be commensurate with its ratings. Fitch notes USD350m of the acquisition loan is due in September 2008 although the ratings have factored in a likely refinancing of the loans with a long-term facility in the near future.

The heightened risks emanating from the increased weight of cyclical soda ash in consolidated earnings are moderated by the low-cost and high-margin nature of GCIP’s natural soda business. Earnings from natural soda ash are expected to be less volatile compared to those from synthetic soda ash; the latter dominated TCL’s soda ash business prior to the GCIP acquisition.

The ratings factor in TCL’s business position as the second-largest soda ash producer in the world (largest in India), with natural and synthetic soda ash manufacturing facilities spread out in four continents (Asia, Africa, North America and Europe). They also reflect the company’s strong and growing profitability across most of its business segments and geographies. The ratings are supported by its diversified business profile, with presence in the more stable domestic fertiliser business, where TCL is one of the most efficient urea manufacturers, and its leadership in the branded edible salt market in India. The ratings incorporate a single notch uplift on account of support expected to be available from its parent, Tata Sons, in case of need.

TCL’s inability to maintain its net financial leverage below 2.5x on a sustained basis, which may be possible if there were to be major debt-funded capex in the urea business after a government investment policy for urea manufacturers is announced would put negative pressure on the ratings. Similarly, accumulation of significant subsidy dues impacting liquidity adversely and/or a larger than anticipated increase in the amount of fertiliser subsidies paid in the form of fertiliser bonds from GoI would act as negative rating drivers. Conversely, the revision of the Outlook to Stable from Negative will require satisfactory resolution of concerns over the current state of fertiliser subsidies.

Fitch’s rating definitions and the terms of use of such ratings are available on the agency’s public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch’s code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the ‘Code of Conduct’ section of this site

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