Rising losses coupled with a planned debt-fuelled capex in Haldia Petrochemicals’ downstream business have led to a rating downgrade by Icra.

The rating agency feels the company’s debt matrix will remain under pressure as HPL faces a global supply glut in the petrochemical market amidst muted demand..

The rating of long-term loans was revised one notch downward to A+ (negative) from AA-(negative), which indicates that HPL has breached some of the debt related covenants in FY24. The agency said HPL has sizable debt repayments in the next fiscal for which it will have to depend on the available cash balances.

HPL, which suffered a consolidated loss of ₹1,028.4 crore in FY24 compared with ₹700.7 crore in FY23, had a debt of ₹8,336.4 crore as on March 31, 2024 compared with ₹7,980.2 crore at the end of FY23.

Icra expects FY25 to be marginally better even though it will continue to be weak as the tolling margins — the difference between the price of a petrochemical product and the price of the feedstock used to make it — will remain under pressure for sometime given the tepid demand and supply build-up.

A spokesperson of the company argued that HPL has ‘significant amount of cash reserve’ and it is well positioned to meet all its financial obligations.

Admitting it has breached some of the financial covenants of long-term borrowing, the spokesperson said, “HPL, like all petrochemical players, has weathered multiple business cycles and has always met its financial commitments. It has longstanding relations with its lenders, and having gone through multiple such cycles together, lenders have given confidence towards not accelerating any repayment.”

According to the company, HPL remains a ‘safe bet’ with an asset base of more than $2.5 billion and ‘small’ long-term outstanding liabilities. The company has cash and investment of ₹3,132 crore as on March 31, the Icra note said.

Operating environment

HPL believes the demand-supply balance is expected to shift in favour of producers in India in FY25. The domestic market has been impacted due to the commissioning and stabilisation of one of the largest petrochemical capacities in the country, adding capacity equivalent to 12-15 per cent of the entire domestic demand. It noted that the petrochemical industry has been challenging globally due to capacity overhang and volatility in feedstock.

The company argued that HPL is better placed compared with several global and Indian peers in terms of conversion costs and operating margins. HPL’s average tolling margin stood at $115/mt in FY24 against $150/mt in FY23.

Downstream expansion

One of the concerns Icra raised is that HPL is planning to undertake a phenol-acetone capex under one of its subsidiaries, which can keep the overall debt levels elevated in the medium term. The project, which is expected to go live by the end of FY26, will be funded by a debt and equity ratio of 75:25.

The ratings, however, continue to factor in HPL’s demonstrated track record in petrochemicals, its experienced management and its leading market position in eastern India for polymers.

The HPL spokesperson said the ₹5,000-crore project is being implemented by step-down subsidiary AdPlus Polymers and Chemicals Private Limited (AdPlus) and is being funded by its holding company and another HPL subsidiary Advanced Performance Materials. AdPlus is raising the required project finance and HPL is not raising any capital on its books for funding.

“The group is expected to realise an enhancement in profitability, countercyclical to existing HPL business and ensure major synergic gains to existing HPL complex,” the spokesperson said.