Bharat Aluminium Company Limited

Rating outlook revised to 'Negative'; ratings reaffirmed

Total Bank Loan Facilities Rated Rs.43.55 Billion Long Term Rating CRISIL AA-/Negative (Outlook revised from 'Stable' and rating reaffirmed) Short Term Rating CRISIL A1+ (Reaffirmed)

(Refer to Annexure 1 for Facility-wise details)

Rs.5 Billion Non Convertible Debentures CRISIL AA-/Negative (Outlook Revised from Stable; Rating Reaffirmed) Rs.10 Billion Non Convertible Debentures CRISIL AA-/Negative (Outlook Revised from Stable; Rating Reaffirmed) Rs.15 Billion Non Convertible Debentures CRISIL AA-/Negative (Outlook Revised from Stable; Rating Reaffirmed) Rs.22.5 Billion Short Term Debt CRISIL A1+ (Reaffirmed)

CRISIL has revised its rating outlook on the debt instruments and bank facilities of Bharat Aluminium Company Ltd (Balco) to 'Negative' from 'Stable' while reaffirming its ratings at 'CRISIL AA-/CRISIL A1+'.
 
The outlook revision reflects the revision in the outlook of Balco's parent Sesa Sterlite Ltd (Sesa Sterlite; rated 'CRISIL AA+/Negative/CRISIL A1+'). The outlook revision also factors in the likelihood that commissioning of power and smelting capacities in Balco will take longer than expected and the expectation that Balco's cost of production of aluminium will remain high over the medium term.
 
The ratings on Balco derive substantial credit support from Sesa Sterlite and the outlook revision in Balco centrally factors in the similar revision in the rating outlook of Sesa Sterlite. The outlook revision in Sesa Sterlite reflects CRISIL's belief that Sesa Sterlite's consolidated cash flows are likely to be lower than earlier expectations driven by a combination of lower oil prices, delayed ramping up of aluminium smelting and power capacities (in Sesa Sterlite and Balco) and lower volumes from the iron ore business.
 
Balco is undertaking modular implementation of the 325 kilo tonnes per annum (ktpa) smelter and 1200 megawatt (MW) power plant. The company's expenditure on the two projects aggregated to Rs.89.0 billion (unspent capital expenditure of about Rs.10 billion) as on September 30, 2014. However, on account of lack of regulatory approvals, the ramp up has been slower than expected. While the first phase of the 325 ktpa smelter was commissioned in March 2014, the remaining three phases of smelter will be commissioned in 2015-16 (refers to financial year, April 1 to March 31). In January 2015, Balco received the approval from the Chhattisgarh government to start the 1200-MW power plant. All the four units of the power plant are expected to be operational by March 2016. The time taken to ramp up the aluminium and power capacities ramp up and the resultant cash flows are key rating sensitivity factors.
 
The company's average cost of aluminium production increased to Rs.118,200 per tonne (USD1964 per tonne) for the first six months of 2014-15 vis-à-vis Rs.107,700 per tonne (USD1781 per tonne) during 2013-14. This was on account of tapering of the coal linkage from Coal India Ltd (rated 'CRISIL AAA/Stable/CRISIL A1+') for Balco's power plants. Consequently, Balco's operating margin declined to 7.0 per cent for the first six months of 2014-15 from 8.5 per cent during 2013-14. CRISIL believes that Balco's margins will remain moderate over the medium term, because of its high cost of production.
 
CRISIL's ratings on Balco continue to reflect its high financial flexibility as it is a part of the Vedanta group (Sesa Sterlite Ltd [Sesa Sterlite; rated 'CRISIL AA+/Negative/CRISIL A1+'] holds 51 per cent stake in Balco) and healthy market position. These rating strengths are partially offset by the company's susceptibility to volatility in aluminium and alumina prices, a moderate financial risk profile, and exposure to risks associated with large projects.

The 'Negative' outlook reflects the similar revision in the rating outlook of Sesa Sterlite. Also, Balco is likely to generate less-than-expected cash flows because of delay in commissioning its smelting and power capacities and its high cost of production of aluminium. The ratings may be downgraded if Balco is unable to reduce its cost of production of aluminium over the medium term, or if there is significant delay in commissioning its smelting and power capacities. The rating may also be downgraded if there is a revision in the rating of Sesa Sterlite. The outlook may be revised to 'Stable' if there is a similar revision in the outlook of Sesa Sterlite and the company is able to generate healthy cash flows driven by significant reduction in its cost of production of aluminium and ramp up of its aluminium capacity.

Balco was incorporated in 1965 as a public sector unit. In 2001, the Vedanta group acquired 51 per cent stake and management control in Balco for Rs.5.51 billion. The Government of India owns the remaining 49 per cent equity stake. Sesa Sterlite held 51 per cent stake in Balco as on December 31, 2014.
 
As on September 30, 2014, Balco had a total smelting capacity of 245 ktpa. The company also had 810-MW power plants (540 MW and 270 MW) as on the same date. The company is in the process of commissioning its 325 ktpa smelter and 1200-MW power plants, which are expected to be fully commissioned in 2015-16.
 
Balco reported net profit of Rs.0.39 billion on operating income of Rs.36.7 billion for 2013-14 vis-à-vis net profit of Rs.0.58 billion on operating income of Rs.39.2 billion for the previous year. For the half year ended September 30, 2014, Balco reported net loss of Rs.0.95 billion on net sales of Rs.19.9 billion against net loss of Rs.0.35 billion on net sales of Rs.17.8 billion for the corresponding period of the previous year.