Fitch Ratings has upgraded India Glycols Limited's (IGL) National Long-Term rating to 'Fitch A-(ind)' from 'Fitch BBB+(ind). The Outlook is Stable. IGL's short- term debt rating has also been upgraded to 'Fitch A2+(ind)' from 'Fitch A2(ind)'. A full rating breakdown is provided at the end of this commentary.

The upgrade reflects IGL's improved credit metrics due to a consistent improvement in its profitability and revenue since FY10 (year end March). Net financial leverage (total adjusted net debt/operating EBITDA) improved to 5.1x in FY12 from 10x in FY11 (FY10: 15.7x) and net interest coverage (operating EBITDA/net interest expense) improved to 2.8x from 1.4x (1.1x). Operating EBITDA margin improved to 14.4% in FY12 from 9.2% in FY11 (FY10: 6.9%) and revenue grew 53% yoy to Rs. 26.3bn in FY12 (FY10: Rs. 11.9bn).

The continuous improvement in the financial performance is a result of IGL's changing revenue mix. At the standalone level, guar gum exports accounted for 16% of the total revenue in FY12, significantly up from 3.7% in FY11. Total revenue contribution from glycols in FY12 (24.1%) was around FY11 levels (24.3%). However, bio-mono ethylene glycols (MEG) exports under the cost plus contracts increased to 72% of total MEG sales in FY12 (FY11: 39%).

The ratings draw comfort from IGL's established position in the domestic market as a producer of bio MEG and ethylene oxide derivatives (EODs) and the company's varied product offerings from its EOD segment. IGL also has flexibility in switching between molasses and ethyl alcohol as a raw material, depending on

cost viability.

The ratings are, however, constrained by continued net losses at IGL's subsidiary - Shakumbari Sugar and Allied Industries Limited (SSAIL) - as a result of low capacity utilisation due to lack of sugar cane availability within the close proximity of the mill and high financing costs. SSAIL's losses increased in FY12 to Rs. 365m from Rs. 325m in FY11. Also, consolidated gross debt increased by around 28% in FY12 to Rs. 21.7bn due to increased working capital requirements and a rise in foreign-currency debt due to rupee depreciation.

Negative rating action may result from net financial leverage exceeding 4.5x on a sustained basis due to any debt-led capex and/ or a decline in profitability. Conversely, net financial leverage below 3x on a sustained basis from sustained revenue growth and stable profitability without stretching of working capital cycle (FY12: 103 days, FY11: 106 days) would be positive for the ratings. IGL commenced operations in 1983 as a MEG manufacturer. It currently manufactures green technology-based bulk, specialty and performance chemicals and natural gums, spirits, industrial gases, sugar and nutraceuticals. Its product offerings include glycols, ethoxylates, glycol ethers and acetates, and various performance chemicals.

Rating actions on IGL's bank loans:

• Rs. 7,456.7m (enhanced from Rs. 6,323.2m) long-term loans upgraded to National Long-Term 'Fitch A-(ind)' from 'Fitch BBB+(ind)'

• Rs. 4,050m fund-based limits upgraded to National Long-Term 'Fitch A-(ind)' from 'Fitch BBB+(ind)' and National Short-Term 'Fitch A2+(ind)' from 'Fitch A2(ind)'

• Rs. 7,750m non-fund-based limits upgraded to National Short-Term 'Fitch A2+(ind)' from 'Fitch A2(ind)'