Below mentioned recurrent risks do not allow to judge the growth in sales and earnings of this business:
# | Risk | Remarks |
---|---|---|
1 | Regulatory Hurdle | … Temporary green petroleum coke(GPC) import ban in India … CPC import ban impacted blending strategy |
2 | Maintenance shutdowns | Both unplanned and planned |
3 | Weather disruptions | Plant closure |
4 | Seasonality | Impacts demand particularly for Advanced Materials segment |
5 | Weak end-market demand | Margins sustain even though Realizations and EBITDA are lower |
6 | Weak end-market demand and Increase in raw material prices | Margins impacted negatively alongwith Realizations and EBITDA |
7 | Suspending operations until market dynamics improve | Due to high energy costs or Weak end-market demand and Increase in raw material prices |
8 | Delay in pass through of incremental raw material costs | |
9 | High energy costs (natural gas prices) | |
10 | Supply chain disruptions |
Too much debt storyline:
Year |
Net Debt, Million USD |
Remarks |
---|---|---|
CY15 | 1013 | Bought back SSN of US$51.4 million 2 tranche of HY bonds, Maturing in Dec2018 and Jan20221 |
CY16 | 927 | Expect Capex at ~$60 million, Balance will be used for expansion/deleverage/return to shareholders |
CY17 | 999 | slight increase compared to CY16 due to the unfavorable Euro vs USD conversion rate and debt refinancing costs An ideal debt-mix between Euro and US Dollar debt to match the underlying cash flows of the company; the effective average rate of interest is reduced by 250 BPS.average interest rate after the January refinancing is about 5.3%. |
CY18 | 993 | refinancing decreased its average interest rate to 5.3% compared to approximately 7.6% in 2017 |
CY19 | 937 | Average cost of borrowing stood at 5.14% |
CY20 | 932 | $280 million of cash, increased significantly due to proceeds from the sale of our Polymers business; average borrowing cost stood at ~5%. The primary goal is to reduce debt and interest expense |
CY21 | 914 | must continue our metamorphosis into a 21st century company that transforms industrial by-products into essential materials for lighter, cleaner, and faster products and applications |
CY22 | 958 | high earnings we enjoyed throughout 2021 and into first half 2022 |
CY23 (WIP) | 890 → 852 | planning to buy back any shares? immediate goal is reduction of debt, considering the increase in the interest rates. plans for debt repayment and refinancing? expecting an increase in interest expense as the cost of capital has increased globally….watching the debt mkt closely and will continue to watch them to find the optimal time to refinance our debt. initiated the refinancing of our debt maturing during early 2025 and are expected to complete the same in next couple of weeks. |
Management is again looking to refinance the debt that is due in 2025 like it did in 2017 when the due date was in 2021. This is the only option as I do not see any alternative to repay all the amount within 2 years. However, interest cost will increase after refinancing due to current credit market conditions.
Why debt was not repaid with urgency (in the last 7+ Yrs. that I charted in the above table)?
Per my understanding:
- Debt had a low cost of capital compared to the ROCE. In turn, it enabled the business to earn decent ROE on their capital-intensive operations.
- With the above in mind, management focused on spending spare cash flows in strategic capex to improve the amount of operating profits.
What next on Debt?
I sense that debt repayment will become a key focus area in the coming years due to increased cost of borrowings. Paying interest expense will not be a problem but repaying the majority of the debt anytime soon is not possible. Business can do NORMALIZED OPM of 15%. In turn, EBITDA could be around 2500 Cr. Capex (maintenance), Interest, Taxes and Dividend would take away ~650 Cr., ~550Cr., ~350 Cr. and ~100 Cr. respectively. Hence, business will be left with ~800Cr. on a yearly basis to decide whether to repay the debt or do a strategic Capex.
Let us see how reality unfolds.
Disc: No Position.
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