Fitch Ratings has affirmed Tata Chemicals Limited's (TCL) Long-Term Foreign Currency Issuer Default Rating (IDR) at 'BB+'.
The Outlook is Stable.
The rating affirmation reflects our view that the strong balance sheet buffers built by TCL in recent years will support its financial profile through the ongoing period of oversupply in the global soda ash industry, despite weakening EBITDA margins. The rating is also supported by TCL's strong business profile as one of the world's largest soda ash producers, its cost competitive and geographically diversified operations, and the industry's end-market diversification.
The Stable Outlook reflects our view that TCL's EBITDA net leverage will remain commensurate for its rating over the financial years ending March 2025 (FY25)-FY28.
Key Rating Drivers
Adequate Financial Profile: We expect TCL's EBITDA net leverage to have moderate headroom under its negative sensitivities, despite rising to 2.5x-2.7x over FY25-FY28 (FY24: 1.4x). The rise in leverage reflects lower EBITDA margins than historical averages and high capex intensity. A prolonged period of pricing pressure in the industry could limit the financial buffers.
Industry Conditions Pressure Pricing: We expect FY26 soda ash prices to remain stable in India and the US, but fall in most other markets amid persistent oversupply, before they begin to normalise from FY27. We expect FY26 Indian soda ash prices to be supported by the minimum import price imposed by the government in December 2024. Global soda ash prices have been declining so far in FY25, on capacity addition by industry players and pockets of weak demand in geographies like Western Europe and South America, particularly in the glass segment.
Margins Below Historical Averages: We expect TCL's EBITDA margins to fall to 13%-14% over FY25-FY26 (FY24: 18%) amid pricing pressures. We forecast margins to gradually improve from FY27 as the industry benefits from normalising prices, steady demand, capacity rationalisation and lower input energy costs. The company's focus on cost optimization and higher margin products should also help. Nonetheless, we forecast margins to remain below historical averages (FY17-FY24: 18%), given risks of a prolonged period of industry oversupply.
Steady Volume Growth: We expect 1%-4% volume growth for TCL over FY25-FY28. This is driven by a demand recovery in currently weak areas, steady demand across most other traditional end-markets, growth in sustainability-linked end-use applications, and increased capacity at its India operations. This is despite lost volumes from TCL decommissioning its unprofitable soda ash plant in the UK that had capacity of 400 kilotonnes.
High Capex; Flexibility Likely: We expect TCL's capex intensity to remain high at 13%-14% over FY25-FY28E (FY21-FY24 average: 11%). TCL has increased its soda ash, sodium bicarbonate and salt capacity in India by 0.7 million tonnes (mnt) since FY22 and plans to increase it by another 0.32mnt over the next few years. TCL also plans to increase capacity in the US and Kenya by 0.75mnt, but is likely to invest according to market conditions and availability of internal accruals.
Strong Market Position: TCL is one of the world's largest soda ash producers. Most of its soda ash capacity is in the US and Kenya, and it benefits from natural trona mineral deposits, which require low conversion costs. In India, TCL is among the lowest-cost synthetic soda ash producers in Gujarat, aided by proximity to limestone quarries, economies of scale and an integrated cement plant utilising waste generated from soda-ash manufacturing. This underpins the company's cost competitiveness relative to peers.
Diversification Mitigates Volatility: We believe TCL's geographically diversified operation and the soda ash sector's diverse end-market mix reduce the volatility in operating earnings associated with regional downturns and product concentration. TCL's soda ash capacity (including bicarbonate and salt) is diversified across India (46% of capacity), the US (39%), the UK (9%) and Africa (5%). The sector also has end-uses across multiple non-discretionary sectors, such as salt, detergents, glassware and chemical products and discretionary segments, like flat glass.
Derivation Summary
The business profiles of TCL and WE Soda Ltd. (BB-/Stable) are comparable, as both companies are among the world's leading soda ash producers. TCL has better geographic diversification but lower EBITDA margin, as WE Soda's entire production comes from lower-cost natural trona-based mining in Turkiye. However, WE Soda's lower rating incorporates a weaker operating environment and corporate governance.
TCL's EBITDA scale is slightly larger and its operation is more geographically diversified than that 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 its around 39% EBITDA exposure to the energy processing, logistics and salt segments, which we consider to be 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 low-single digit percentages in FY26 amid industry oversupply, and gradually improve thereafter.
Soda ash, sodium bicarbonate, and salt sales growth of 1%-4% over FY25-FY28.
EBITDA margins falling to 13%-14% over FY25-FY26, and increasing to 16% thereafter.
Capex of INR18 billion-20 billion a year over FY25-FY28.
Dividend pay-out of INR15 per share (around INR3.8 billion in total) a year over FY25-FY28.
RATING SENSITIVITIES
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.
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.
Liquidity and Debt Structure
TCL's liquidity is strong, supported by its cash balance of INR14 billion and undrawn working capital limits of INR18 billion at end-December 2024, which are likely to be sufficient to fund INR5 billion of debt maturities in 4QFY25 and INR22 billion in FY26. TCL also had investments of INR76 billion at book value in various Tata group entities as of FYE24, including unquoted investments, such as around a 2.5% stake in Tata Sons Private Limited. This boosts TCL's liquidity options. TCL has strong access to credit markets as a part of Tata group and its financial flexibility remains strong.
Issuer Profile
TCL is one of the world's largest producers of soda ash, with a global capacity of 3.981 mnt per annum (4.401 mnt including sodium bicarbonate, 6.501 mnt including salt as well). 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.
MACROECONOMIC ASSUMPTIONS AND SECTOR FORECASTS
Click here to access Fitch's latest quarterly Global Corporates Macro and Sector Forecasts data file which aggregates key data points used in our credit analysis. Fitch's macroeconomic forecasts, commodity price assumptions, default rate forecasts, sector key performance indicators and sector-level forecasts are among the data items included.
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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