OREANDA-NEWS. April 13, 2015. Fitch Ratings has affirmed India-based Tata Chemicals Limited's (TCL) Long-Term Issuer Default Rating (IDR) at 'BB+'. The Outlook is Stable.

KEY RATING DRIVERS
Leading Market Position: TCL is the second-largest soda ash producer globally, and the largest in India with diversified geographic and customer bases and product offerings. TCL's access to trona mines at its U.S. and Kenyan operations support its leading position in the soda ash industry. TCL also benefits from its position as one of the leading players in branded salt, and fertiliser and urea products in India. The rating also factors in the integrated nature of TCL's Indian operations, widening demand/supply gap for fertilisers in India, and TCL's position as one of the most efficient urea producers in India.

Benefits from Kenyan and UK Restructuring: TCL restructured its Kenyan and UK soda ash businesses in the financial year ended 31 March 2015, and Fitch expects this to result in improved profitability at these operations. TCL closed one of its two soda ash plants in Kenya during 2QFY15 and reduced its workforce at a total cost of INR624.3m. TCL's Kenyan and South African operations posted net profit of INR260m during 3QFY15 compared with EBITDA losses during FY14.

TCL expects to complete the restructuring its UK soda ash operation by 2QFY16. The revamp includes closing of the soda ash plant that was impacted by high energy costs. The restructuring also means that TCL will expand its production of sodium bicarbonate and other value-added products. The closure of the soda ash plant will enable the company to reconfigure the heat and power plants at its sites to reduce energy costs. TCL is also setting up a steam turbine to help trim energy costs.

Moderate Financial Profile: Fitch expects TCL's credit profile to remain moderate with net leverage (Net debt/ operating EBITDA) of below 3x over the medium term. The agency expects TCL's improving profitability - mainly due to improvements at the UK and Kenyan operations - and reduction in debt levels to drive its net leverage down to around 3x in FY15 (FY14: 3.67x). In the absence of any large capex, Fitch expects TCL to generate enough free cash flows to support debt reduction over the medium term. TCL's high debt levels (mainly due to large subsidies receivables) and weak profitability stemming from difficulties at the UK and Kenyan operations resulted in weakening of its credit ratios in FY14.

Subsidy Delays Driving Higher Debt: Delays in the receipt of subsidies from the government of India for selling fertiliser below cost have resulted in high debt levels at TCL. The company's net debt remained high at INR66.4bn during FY14 (FY13: INR65.4bn, FY12: INR53.8bn). The subsidy receivables from the government were INR16.6bn at end-3QFY15, little changed from INR16.8n a year earlier. Fitch expects the subsidy receivables to have remained high during FY15 and it would reduce only marginally during FY16 due to lower fuel prices. TCL will continue to be vulnerable to regulatory changes in its fertiliser business.

Linkages with the Tata Group: Fitch believes that TCL should benefit from a one-notch uplift given its moderate linkages with the Tata Group. However this uplift is currently not applied at TCL's current rating level. TCL's rating will benefit from the one-notch uplift if its IDR is downgraded. Tata Group has demonstrated financial support through provision of equity or liquidity in the past; Fitch expects this support to continue, if required.

KEY ASSUMPTIONS

Fitch's key assumptions within our rating case for the issuer include:
- Sustainable improvement in profitability of TCL's Kenyan operations after restructuring
- Completion of restructuring of TCL's UK business in 2QFY16 and improvement in profitability subsequently
- Delays in receipt of fertiliser subsidies in India to continue during FY16
- Absence of any large capex plans

RATING SENSITIVITIES
Positive: Future developments that may, individually or collectively, lead to positive rating action include
- Strong performance of TCL leading to net leverage (adjusted net debt/operating EBITDAR) of below 2x on a sustained basis (FY14: 3.67x).

Negative: Future developments that may, individually or collectively, lead to negative rating action include
- Any adverse change in the fertiliser subsidy policy or a large debt-led capex or acquisition that leads to net financial leverage exceeding 3.5x on a sustained basis
- Any weakening of linkages with the Tata Group