Fitch Ratings has revised the Outlook on Tata Chemicals Limited's (TCL) Long-Term Foreign-Currency Issuer Default Rating (IDR) to Stable from Positive and affirmed the rating at 'BB+'.

The Outlook revision follows our view that the global soda ash industry will remain oversupplied for longer than we previously anticipated. Demand in Europe (particularly the glass segment) has been weaker than expected in the financial year ending March 2024 (FY24) so far, leading Turkish soda ash exports to pivot to Asia, resulting in industry oversupply pressuring TCL's EBITDA margins. We expect persistent oversupply to weaken TCL's profits and credit metrics in FY25, before a gradual recovery from FY26.

However, we expect TCL's EBITDA net leverage to average 2.2x over FY25-FY27 and be commensurate for its rating, driving the Stable Outlook, despite the near-term industry pressures. The rating also incorporates TCL's leading and geographically diversified market position, cost-competitive operations, and the sector's end-market diversification, mitigating risks to TCL's credit profile from its smaller EBITDA scale versus 'BBB-' rated chemical industry peers.

Key Rating Drivers

Industry Oversupply: Fitch expects the excess supply in the soda ash industry to continue in FY25 as demand growth remains weak in the US and UK, and new capacities are commissioned in the US and China. We expect industry conditions to start rebalancing from FY26, as improving market growth spurs demand, sustainable end-use industries like lithium processing and solar panels aid growth, and producers rationalise capacity amid cost and sustainability pressures. We expect low-single-digit percentage growth in industry demand to balance supply additions over the long term.

Near-Term Margin Pressure: Fitch expects the oversupplied industry conditions to drive a 5% fall in volumes and a 20% fall in prices for TCL's soda ash business in FY25, squeezing its EBITDA margins to 14% in FY25 (FY24 forecast: 18%). Margins will improve to 17% from FY26 supported by a gradual demand recovery, supply tightening, and lower energy cost. However, a prolonged period of unfavorable economic conditions and supply glut in the industry could limit margin improvement.

Capex to Aid Growth: We expect TCL's capex intensity to remain high at an average of 12% over FY24-FY27 (FY20-FY23 average: 11%). This will be driven by its plan to increase domestic soda ash and sodium bicarbonate capacities by 30% and 40%, respectively, beyond the ongoing expansion, which is likely to be complete by FYE24, on top of investments in specialty products. TCL will also invest in raising its soda ash capacity in the US and Kenya by 0.6 million metric tonnes over the next few years. We expect the capacity increase to support TCL's revenue growth over the long term.

Adequate Financial Profile: Fitch believes that TCL's credit metrics provide adequate headroom for its current rating, although we expect EBITDA net leverage to rise to 2.1x - 2.4x over FY25-FY27 (FY23: 1.1x, FY24 forecast: 1.5x). The increase in leverage will be driven by EBITDA falling from high levels over FY23-FY24, and the company generating mildly negative free cash flows given its capex and shareholder distribution needs. Weaker-than-expected EBITDA or higher-than-expected capex could limit the financial buffers.

Strong Market Position: TCL is the world's third-largest soda ash producer. Its soda ash capacity in the US and Kenya (64% of total capacity) benefits from natural trona deposits, which require low conversion costs. TCL's capacity in Gujarat, India (24% of total) is one of the lowest-cost producers of synthetic soda ash, aided by proximity to limestone quarries, economies of scale, and an integrated cement plant utilising waste generated from soda-ash manufacturing. These underpin the company's cost competitiveness relative to peers.

Diversification Mitigates Volatility: Fitch believes that TCL's geographically diversified operations and soda ash's diverse end-markets reduce the risk of volatility in operating earnings associated with regional downturns and product concentration. TCL's soda ash capacity is diversified across India 24%, the US 56%, the UK 12%, and Africa 8%, and the sector has end-uses across multiple non-discretionary sectors, such as salt, detergents, glassware and chemical products, and discretionary segments like flat glass.

Derivation Summary

Both TCL and WE Soda Ltd. (BB-/Stable) are among the top three global soda ash producers and their business profiles are comparable. TCL's geographic diversification is better than WE's, although TCL's EBITDA margins are lower than those of WE, whose entire production comes from the lower cost natural trona-based mining in Turkiye. WE's lower rating also incorporates a weaker operating environment and corporate governance limitations compared with TCL.

TCL's EBITDA scale is slightly larger and its operations more geographically diversified than those of Cydsa, S.A.B. de C.V. (BB+/Stable), with Mexico contributing to 90% of Cydsa's economic value. However, Cydsa's ratings are supported by around 39% of EBITDA exposure to the energy processing and logistics and salt segments, which we consider as more resilient than pure chemical portfolios.

Key Assumptions

Fitch's Key Assumptions Within Our Rating Case for the Issuer

Soda ash prices to fall by 20% in FY25 amid industry oversupply and falling input energy costs. Prices to stabilise thereafter.

Soda ash sales to fall by 5% in FY25 amidst weak demand and competition from cheaper imports in some regions. Volumes to stabilise thereafter.

EBITDA margins falling to 14%-17% over FY25-FY27 (FY23: 22%, FY24 forecast: 18%) amid industry oversupply.

Capex of INR17 billion per year over FY24-FY27.

Dividend pay-out of INR12.5 per share (around INR3 billion) per year over FY25-FY27.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

TCL generating at least neutral FCF over a sustained period, while maintaining EBITDA net leverage below 2.0x.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

EBITDA net leverage exceeding 3.0x for a sustained period.

EBITDA margin deteriorating to below 15% for a sustained period on account of a weaker business profile.

Liquidity and Debt Structure

Strong Liquidity: TCL's liquidity is strong, supported by its cash balance of INR15 billion and undrawn working capital limits of INR9 billion at end-December 2023, versus INR17 billion of debt maturities in FY25 (none in 4QFY24). TCL also had investments of INR50 billion at book value in various Tata group entities as of FYE23 (including unquoted ones, such as a 2.5% stake in Tata Sons Private Limited), which boosts its liquidity options. TCL has easy access to credit markets being part of the Tata group, and its financial flexibility remains strong.

Issuer Profile

TCL is the world's third-largest producer of soda ash, with a global capacity of 4.117 million tonnes per annum (4.359 million tonnes including sodium bicarbonate). Its manufacturing operations are spread across India, the US, the UK and Kenya.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.

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