Fitch Ratings has affirmed India-based JBF Industries Ltd's (JBF) National Long-Term rating at 'Fitch A(ind)'. The Outlook is Stable. A list of additional rating actions is provided at the end of this commentary.

The affirmation reflects the continuous strong operating performance of JBF in India and at Ras-Al-Khaimah (RAK) in Middle East. The latter, which contributed around 45% to the company's consolidated net sales in FY11 (financial year ending March), has resulted in an overall improvement in JBF's product profile and geographical diversification. Revenue grew 31% yoy to RS. 64,656m in FY11 and 15.7% yoy to RS. 52,466m in 9MFY12. The ratings also factor in JBF's status of one of India's leading manufacturers of textile grade chips, bottle grade chips and polyester yarn.

The ratings also draw support from JBF's strong liquidity position; approximately RS. 1.9bn and Rs. 4bn were unutilised out of its total RS. 3bn fund-based and RS. 11bn of non-fund based limits, respectively, as on end-January 2012. Also, it had RS. 3,154m of cash and cash equivalent available at end-FY11. JBF has also been generating positive cash flow from operations for the last five years (FY11: RS. 6,811m, FY10: RS. 1,080m).

The ratings are, however, constrained by the cyclical nature of the Indian petro-chemical industry. Also, with additional capacities being built in the man-made fibre industry, there could be pressure on sales realisation and margins. EBITDA margin declined to 10.2% in 9MFY12 (FY11: 14.8%) from 15.0% in 9MFY11 due to higher costs of raw materials, which are mainly a derivative of crude oil, and a weak Indian rupee vs USD. Partially oriented yarn segment was also adversely hit due to oversupply in the market during the beginning of FY12.

The ratings are also constrained by substantial marked-to-market (MTM) losses of around Rs. 1,769.3m on JBF's derivative contract in 9MFY12, for which the company has not made any provision in its books. This may materialise in FY13-FY14, and thus may result in deterioration of capital structure during the same period. These MTM losses are mainly on account of an external commercial borrowing of Japanese YEN equivalent of USD20m, for which the company entered into a swap contract to convert its obligations in USD. After the repayment of USD4m in July 2011 and USD12m due in July 2012 under the ECB, only USD4m will be the outstanding amount to be paid in July 2013, thus the losses should come down considerably in the coming period.

The ratings are further constrained by JBF's USD600m greenfield capex for a 1.12 metric tonne per annum purified terephthalic acid (PTA) plant in Mangalore SEZ, India. PTA is one of the key raw materials in polyethelene terephthalate manufacturing and constitutes around 70% of JBF's total raw material costs. Once completed, the plant will lead to backward integration and cater to the PTA needs of the company both in India and Middle East, leading to margin expansions.

However, the capex would put pressure on JBF's net financial leverage during FY14- FY16, and expose the company to construction risks in the form of cost and time overruns. Net debt/EBITDA of more than 3.5x on a sustained basis could result in negative rating action.

In 9MFY12, JBF reported a consolidated EBITDA of RS. 5,372m (9MFY11: RS. 6,805m) and interest coverage of RS. 1,001m (RS. 1,045m). Based on annualized EBITDA, net financial leverage was estimated to be around 2.5x for 9MFY12 (FY11: 1.6x).

Rating actions on JBF's bank loans:

• Rs. 3,102m long-term bank loan (enhanced from RS. 750m): affirmed at 'Fitch A(ind)'
• RS. 3,000m fund-based facilities (enhanced from RS. 1,200m): affirmed at 'Fitch A(ind)'
• Proposed RS. 4,800m fund-based facilities: assigned 'Fitch A(ind)(EXP)'