The rating reflects TCL's globally leading and cost-competitive position in soda ash, geographic diversification, the soda-ash sector's adequate exposure to non-discretionary end-markets, and improving financial profile. The rating is constrained by TCL's small scale relative to global peers and lack of product diversification.
We maintain a Stable Outlook notwithstanding lower sales, which are likely to persist for six months, stemming from the coronavirus pandemic. We believe weaker demand will be mitigated by lower energy costs, which should support a healthy margin, and that soda ash supply will remain largely stable over the long term.
KEY RATING DRIVERS
Strong Position in Soda Ash: TCL is the world's third-largest soda ash producer, with a geographic footprint across India, the US, the UK and Kenya. Around two-third of TCL's 4.3 million tonnes (mt) of soda ash capacity is based in Wyoming in the US and Lake Magadi in Kenya; two key global regions along with Turkey, which has natural trona deposits that require low conversion costs. This underpins the company's cost competitiveness relative to producers in other locations.
Modest Diversification: TCL's operation benefits from superior geographical diversification. Fitch expects around half of EBITDA to come from India in the financial year ending March 2020 (FY20), 45% from developed markets in US and Europe and the remaining 5% from Africa. The soda ash also has a good mix of discretionary (flat glass) and non-discretionary (detergents, glassware and chemical products) end markets, which limits cyclical variation in volume. However, this is mitigated by product concentration in soda ash, which, along with sodium bicarbonate and salt manufacturing, forms nearly 90% of FY20 EBITDA, in our view, and exposes TCL to risks associated with the commodity nature of its products.
Lower Soda Ash Revenue: Fitch expects TCL's soda ash revenue to decline by 5% in FY20, driven by a slowdown in the auto and real-estate sectors, and for FY21 sales to fall by around 10% on a like-for-like basis as the demand slowdown is exacerbated by the coronavirus pandemic in the near term. The drop in profitability from depressed sales will be mitigated by lower energy costs.
We expect the demand-supply balance to tighten over the medium-term as the business cycle normalises and sales growth improves to mid-single digits. This is notwithstanding the announced capacity additions by global majors, like Solvay SA (BBB/Positive) and Genesis Alkali, LLC, which may be delayed in light of the current risks to growth in key end-user industries.
Strong Financial Profile: We expect leverage, as measured by adjusted debt/operating EBITDAR, to improve to 3.0x in FY20, 2.9x in FY21 and 2.4x in FY22, from 3.4x in FY19, on higher EBITDA and as upcoming capex is largely funded from free cash flow. The nutraceutical and highly dispersible silica plants, which required capex of INR6 billion, are nearly complete and are likely to start contributing to EBITDA from end-FY21. TCL is also spending around INR25 billion over the next three years to enhance its domestic soda ash capacity to 1.1mt a year, from 0.9mt a year, and its salt manufacturing capacity by 40% to 1.4mt a year. This should support revenue growth over the medium term.
Consumer Exit Neutral: Fitch does not expect TCL's rating to be affected by the demerger of its consumer business, given its strong position in soda ash and its improving financial profile. TCL has received approval from the National Company Law Tribunal to demerge its consumer product business, which includes the sourcing, packaging, marketing, distribution and sales of salt, spices and protein foods, into Tata Global Beverages Limited. The transaction is being done through a share swap. TCL's capex, including that for salt manufacturing, remains unchanged.
No Uplift from Tata Group Linkage: We do not apply any uplift to TCL's IDR due to our assessment of the company's 'Moderate' strategic linkages to the Tata group and 'Weaker' operational and legal linkages in light of limited operational overlap and no explicit debt guarantees.
TCL's competitive and geographically diversified presence in soda ash compares well with Ineos Group Holdings S.A. 's (BB+/Stable) business profile as a large commodity chemical producer of olefins and polymers and leading market positions in the US and Europe. Ineos has a much larger operating scale than TCL, but its higher financial leverage justifies a similar rating.
The rating of CF Industries Holdings, Inc. (BB+/Positive) is supported by its position as the largest nitrogen fertiliser producer in North America and cost competitive operations, similar to TCL's cost competitive soda ash operation. TCL's business profile is weaker than that of CF, as evidenced by CF's larger scale and stronger profitability. However, this is counterbalanced by CF's higher leverage, justifying the similar ratings. The Positive Outlook on CF reflects debt repayment of USD750 million in 2019, product price improvement and reduced absolute dividends.