Tata Chemicals Limited -- Moody's affirms Tata Chemicals Ba2 ratings; outlook remains stable

RATINGS RATIONALE

"TCL's performance in recent years has benefited from steady growth derived from both acquisitions and organic expansion while maintaining an adjusted EBITDA margin of more than 17%", says Alan Greene, a Moody's Vice President and Senior Credit Officer. "This level of margin is strong for its rating category, but its balance sheet and liquidity profile are commensurate with a Ba range rating" adds Greene who is also Moody's Lead Analyst for Tata Chemicals.

The acquisitions have provided given scale and geographic diversification to the Group's soda ash and salt businesses, and TCL is the world's second largest producer of soda ash. Approximately 60% of Group EBITDA is generated by its Inorganic Chemical operations. Acquisitions in this area include US- based General Chemicals Industrial Products (GCIP) acquired in 2008, while its European business has been built on the purchases of Brunner Mond (acquired 2006) and British Salt (purchased 2011). GCIP is TCL's largest soda ash operation and uses trona ore to produce soda ash whereas its Indian and European plants use the higher cost synthetic production process.

TCL's Indian companies account for around 60% of Group operating profit, including Rallis, its 50.1%-owned agricultural services operation (acquired 2009), which contributes around one fifth of the Indian total. The bulk of profits is derived from its Indian soda ash and salt businesses, and fertiliser operations. Its fertiliser business includes the manufacture and sale of urea and the production and marketing of Potassium and Phosphorus fertiliser compounds. Acquisitions in respect of its fertiliser business have focused on small stakes in overseas phosphate and potash suppliers in order to ensure raw material security.

TCL has considered large scale expansion of its existing urea plant in India, which would help to reduce the country's imports of the fertiliser, but the supply of natural gas has been a stumbling block. Moody's expects TCL to continue at its current brisk rate of growth with further small investments to bolster existing activities and continuing cost reduction and productivity improvements.

"Overall, TCL has a very good track record of integrating acquisitions and of eking out efficiency gains across its operations, while the resultant geographic and product balance of the business has reduced volatility", adds Greene. "The disciplined nature of the US soda ash market and TCL's leading position in the regulated fertiliser market in India are key components of the company's stability", continues Greene.

Future large scale investments by TCL are likely to be undertaken as joint ventures and utilizing project finance where possible. In September 2011, TCL announced a joint venture with Olam International and the Government of Gabon to build a urea plant in Gabon to utilize that country's natural gas resource.

TCL's credit metrics are strong and with interest coverage trending higher. Nevertheless, leverage (Adjusted debt/Adjusted EBITDA) of 3.4x as at FYE March 2012 (FY2011: 3.4x), aligns well to the Ba2 rating.

TCL generates strong cash flows but these are largely consumed by capex and the investment to support growth. This has led to negative free cash flow in three of the last five years. At the same time, near-term debt repayments are fairly sizeable. As at 30th September 2012, TCL had cash and equivalents of INR12 billion and debt repayable within one year of some INR18 billion.

"While debt repayments can be met from cash balances and operating cash flows, the reduction in financial flexibility is sufficient to limit any advance in the rating, at this time", comments Greene.

In order to improve comparability with other rated chemical companies, a retained cash flow to debt trigger is being added to the up/down trigger thresholds.

TCL's working capital requirements are highly correlated with movements in raw material costs, selling price and seasonality. TCL supports these with various fund and non-fund credit lines which are adequate in size. The Tata Group has subscribed to preferential share placings made by TCL. As part of the Tata Group, Moody's expects TCL to enjoy continued, favourable access to bank facilities.

The rating could be upgraded if consistent improvement in performance is observed across its businesses, including consistent discipline in global soda ash markets and continued support for the Indian fertilizer operations from the regulatory framework. Financial metrics that Moody's would consider for an upgrade include Adjusted Debt/EBITDA ratio of below 2.5-3.0x, Adjusted EBITDA/Interest above 4.5-5.0x and RCF/Debt over 17%, on a consistent basis.

On the other hand, the rating could be downgraded if the outlook for soda ash deteriorates and TCL's profitability declines beyond Moody's expectations. Credit measures that Moody's would consider include Adjusted Debt/EBITDA exceeding 4.0x-4.5x, EBITDA/interest coverage falling and then remaining below 3.0x-3.5x and RCF/Debt below 13% on a sustained basis.

The principal methodology used in rating Tata Chemicals Limited was the Global Chemical Industry Methodology published in December 2009. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

Tata Chemicals Ltd, based in Mumbai, India, is the flagship chemical company of the Tata Group, which owns 31.2% of TCL. It is currently the world's second largest producer of soda ash and a domestic leader for branded salt, fertilizer and urea products.

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Alan Greene VP - Senior Credit Officer Corporate Finance Group Moody'sInvestors Service Singapore Pte. Ltd.50 Raffles Place #23-06 Singapore Land TowerSingapore 48623 Singapore JOURNALISTS: (852) 3758 -1350 SUBSCRIBERS: (65) 6398-8308 Philipp L. Lotter MD - Corporate Finance Corporate Finance Group JOURNALISTS: (852) 3758 -1350 SUBSCRIBERS: (65) 6398-8308 Releasing Office: Moody's Investors Service Singapore Pte. Ltd.50 Raffles Place #23-06 Singapore Land TowerSingapore 48623 Singapore JOURNALISTS: (852) 3758 -1350 SUBSCRIBERS: (65) 6398-8308 (C) 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.

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