Detailed Rationale

CRISIL Ratings has reaffirmed its 'CRISIL AA-/Stable' rating on the bank facilities of Essel Mining and Industries Limited (EMIL).

The ratings continue to reflect the healthy financial risk profile of EMIL, supported by strong cash flow from the mining business, coupled with reduction in overall debt over the two fiscals through 2022. Debt reduction over the past fiscals (from about Rs 6,200 crore as on March 31, 2019, to ~Rs 3,500 crore as on March 31, 2022) was supported by equity infusion of around Rs 2,500 crore during fiscal 2020, Rs 1,600 crore in fiscal 2021 and Rs 830 crore in fiscal 2022, coupled with healthy cash flow from operations. Furthermore, stable cash accrual in other businesses, cash and cash equivalent of Rs 2,500 crore and the value of investments under IGH Holdings Pvt Ltd (IGH) of over Rs 25,000 crore as on May 23, 2022, supports healthy liquidity profile.

The ratings also consider the company’s strong financial flexibility from being a key holding company of the Aditya Birla group, its experience in the mining business (iron ore and coal) and stable cash accruals from other diversified businesses, such as contract coal mining and renewables. These strengths are partially offset by susceptibility to regulatory risks in the mining business and significant capital expenditure (capex) over the medium term.

When operations were impacted by the Covid-19 pandemic in fiscals 2021 and 2022, mining cash flow was supported by sale of inventory from Jilling, Kaisa and Koira mines as well as higher realisations. The cash flow was used towards debt reduction and boosting liquid investments for future capex.

While company is expected to witness reduction in business cash flow from fiscal 2023 onwards, on account of expiry of its iron ore mining licenses during fiscal 2022, the same is to be partially offset by existing healthy financial profile, expected ramp up of pellet plant (commissioned in January 2021) as well as company’s plan to increase the coal mining business over the medium term.

The company has won commercial mining license through a wholly owned subsidiary (EMIL Mines and Mineral Resources Limited) for two coal mines in Radhikapur and Bandha. Over the next 3-4 fiscals, the company plans to incur substantial capex of more than Rs 7000 crore for the coal mining business (commercial and coal mine developer and operator [MDO]), which is expected to be funded through a mix of fund infusion from the Aditya Birla group, external borrowings and existing cash reserves maintained by the company. Consequently, with minimal iron ore mining cash flow, the ability of the company to achieve desired progress in the coal mining (MDO as well as commercial mining) business will remain a key monitorable.

Key Rating Drivers & Detailed Description

Strengths

Strong financial flexibility from being part of the Aditya Birla group; improvement in financial risk profile supported by debt reduction: EMIL, through one of its subsidiaries, IGH, has investments in the Aditya Birla group companies - Hindalco Industries Ltd ('CRISIL AA+/Stable/CRISIL A1+'), Grasim Industries Ltd ('CRISIL AAA/Stable/CRISIL A1+'), Aditya Birla Fashion and Retail Ltd ('CRISIL AA/Stable/CRISIL A1+'), Aditya Birla Capital Ltd (‘CRISIL A1+’), Vodafone Idea Ltd and Century Textiles and Industries Ltd ('CRISIL AA/Stable/CRISIL A1+'). These businesses are sizeable and strategic, making EMIL a key entity in the Aditya Birla group. Market value of EMIL's stake in these companies is valued at over Rs 25,000 crore as on May 23, 2022, providing healthy financial flexibility. Increased cash flows from mining business and equity infusion of more than Rs 4900 crore from the Aditya Birla group has led to substantial debt reduction and improvement on liquidity over the past three fiscals. The promoters have plans to infuse further equity of about Rs 1,400 crore to support planned capex over the medium term. Any material deterioration in the credit risk profile of the underlying investments or change in the investment cover will remain a key rating sensitivity factor.

Extensive experience in the mining business: EMIL has experience of more than five decades in mining business. It has been one of the largest iron ore mining, processing and trading companies in the non-captive private sector. Apart from iron ore, the company has extensive experience in the coal MDO business wherein it mines coal for Eastern Coalfields Ltd and Mahanadi Coalfields Ltd, on a contractual basis. The company has also won bids for coal MDO, commercial coal mining and diamond mining, for which commercial operations are expected to commence from fiscal 2025-2026 onwards. Extensive experience in the Indian mining business should continue to support the company in getting the required approvals and commence commercial operations in a timely manner and the same will be a key monitorable.

Increasing contribution to cash accrual from diversified businesses such as contract coal mining and renewables: EMIL undertakes contract coal mining through BCML and RCML for Mahanadi Coalfields Ltd and Eastern Coalfields Ltd, respectively, which are subsidiaries of Coal India Ltd ('CRISIL AAA/Stable/CRISIL A1+'). Contract coal mining lends stability to the company's credit risk profile due to a fixed revenue stream, strong counterparty and high operating efficiency due to pass-through cost structure. The company has mining agreements till the first half of fiscal 2024 and fiscal 2026, respectively. The renewable segment comprises solar and wind capacity of about 150 megawatt (MW), which are operating for many years at a steady state with earnings before interest, taxes, depreciation and amortisation (EBITDA) contribution of Rs 80-100 crore in fiscal 2022.

In fiscal 2019, EMIL acquired Pro Minerals Pvt Ltd (PMPL) which had one million tonne per annum (mtpa) capacity of beneficiation plant and pellet plant. Commercial operation was declared for the pellet plant on January 1, 2021. On February 15, 2022, PMPL has been merged with EMIL, effective April 1 2021, in line with earlier announcement by the company. The same is expected to streamline the corporate structure, lower the cost of financing, and benefit from synergies arising from resource pooling, rationalisation of administration and employee cost. Expected ramp up of the pellet plant over the next couple of years will further support cash accrual for EMIL going ahead.

Weaknesses

Lower cash accrual over the medium term due to expiry of iron ore mining licenses: Iron mining business contributed significant portion of consolidated EBITDA for EMIL (share of 80-85% in fiscals 2021 and 2022). However, company’s mining licenses of Jilling and Kasia iron ore mines expired in March 2020 and of Koira iron ore mine (capacity of 6 mtpa) in August 2021. Also, given the aggressive bidding seen by the captive and merchant miners, the company was not able to win any Odisha iron ore mine blocks, which came under bidding during February 2020. Consequently, the mining cash accrual is expected to decline substantially from fiscal 2023 onwards.

Significant capex over the medium term: The company has won Madannagar, Amelia and Subhadra coal blocks under the MDO route. Also, it has been selected as the preferred bidder by the Government of Madhya Pradesh in the Bunder Diamond project. In fiscal 2021, the company also won commercial coal mining for two blocks, Radhikapur and Bandha. While these projects have high gestation period and entail large capex requirement (more than Rs 7000 crore) from fiscal 2023 to fiscal 2026, company’s ability to receive the required regulatory and environmental approvals remains monitorable. The promoters infused about Rs 1,600 crore in fiscal 2021, about Rs 830 crore in fiscal 2022, and have plans to further infuse Rs 1,400 crore, based on equity requirement, over the medium term, which along with external borrowings and existing cash and equivalent of Rs 2,550 crore will support the capex.

Financial risk profile characterised by moderate debt protection metrics: The gearing remains comfortable at estimated value of 0.1 time as on March 31, 2022, supported by reduction in debt, mark-to-maket value of investments, healthy accrual and equity infusion. Moderate interest coverage and net cash accrual to adjusted debt (NCAAD) ratios are estimated at 6.5 times and 0.25 time, respectively, as on March 31, 2022, compared to 8 times and 0.5 time, respectively, as on March 31, 2021. Further, the interest coverage ratio and NCAAD ratio are expected to moderate to 1.6 times and 0.03 time in FY23 & 24, on account of reduced cash accruals.

However, limited debt obligation in fiscal 2023 and healthy liquidity lends comfort. The cash accrual along with surplus cash will be sufficient to meet the debt obligation over the next two fiscals.

About the Company

EMIL is closely held by the Aditya Birla group. The company is an established player in the iron ore mining business, with a track record of over five decades. EMIL has a ferro chemicals division in Vapi, Gujarat, which manufactures low-carbon ferroalloys such as ferrovanadium and ferromolybdenum. The company has investments in various Aditya Birla group companies through a subsidiary, IGH.

As a part of its initiative in the green energy space and environment conservation, EMIL owns windmills in Dhule, Maharashtra; a 27-MW solar power generation project in Rajasthan; projects with 38-MW capacity in Telangana; and a 15-MW solar power plant in Gujarat through a step-down subsidiary, Palace Solar.

RCML and BCML are mine operators for Eastern Coalfields Ltd and Mahanadi Coalfields Ltd, respectively, on a contractual basis.

EMIL acquired PMPL in fiscal 2019. PMPL has beneficiation and pellet plants with capacities of 1 mtpa each and merged with EMIL effective April 2021.

The company has been selected as the preferred bidder by the Government of Madhya Pradesh in the Bunder Diamond project and has also won coal block at Madannagar, Amelia and Subhadra under MDO for Coal India subsidiaries and THDC India Ltd.

EMIL has won two commercial mining blocks through its subsidiary company, EMIL Mines and Mineral Resources Ltd, in fiscal 2021.

Key Financial Indicators

Annexure - List of Entities Consolidated

Note for Media:
This rating rationale is transmitted to you for the sole purpose of dissemination through your newspaper/magazine/agency. The rating rationale may be used by you in full or in part without changing the meaning or context thereof but with due credit to CRISIL Ratings. However, CRISIL Ratings alone has the sole right of distribution (whether directly or indirectly) of its rationales for consideration or otherwise through any media including websites and portals.

About CRISIL Ratings Limited (A subsidiary of CRISIL Limited)

CRISIL Ratings pioneered the concept of credit rating in India in 1987. With a tradition of independence, analytical rigour and innovation, we set the standards in the credit rating business. We rate the entire range of debt instruments, such as bank loans, certificates of deposit, commercial paper, non-convertible/convertible/partially convertible bonds and debentures, perpetual bonds, bank hybrid capital instruments, asset-backed and mortgage-backed securities, partial guarantees and other structured debt instruments. We have rated over 33,000 large and mid-scale corporates and financial institutions. We have also instituted several innovations in India in the rating business, including ratings for municipal bonds, partially guaranteed instruments and infrastructure investment trusts (InvITs).
 
CRISIL Ratings Limited ('CRISIL Ratings') is a wholly-owned subsidiary of CRISIL Limited ('CRISIL'). CRISIL Ratings Limited is registered in India as a credit rating agency with the Securities and Exchange Board of India ("SEBI").
 
For more information, visit www.crisilratings.com 
 

About CRISIL Limited

CRISIL is a global analytical company providing ratings, research, and risk and policy advisory services. We are India's leading ratings agency. We are also the foremost provider of high-end research to the world's largest banks and leading corporations.

CRISIL is majority owned by S&P Global Inc, a leading provider of transparent and independent ratings, benchmarks, analytics and data to the capital and commodity markets worldwide.

For more information, visit www.crisil.com

Connect with us: TWITTER | LINKEDIN | YOUTUBE | FACEBOOK

CRISIL PRIVACY NOTICE
 
CRISIL respects your privacy. We may use your contact information, such as your name, address and email id to fulfil your request and service your account and to provide you with additional information from CRISIL. For further information on CRISIL’s privacy policy please visit www.crisil.com.

DISCLAIMER

This disclaimer is part of and applies to each credit rating report and/or credit rating rationale (‘report’) that is provided by CRISIL Ratings Limited (‘CRISIL Ratings’). To avoid doubt, the term ‘report’ includes the information, ratings and other content forming part of the report. The report is intended for the jurisdiction of India only. This report does not constitute an offer of services. Without limiting the generality of the foregoing, nothing in the report is to be construed as CRISIL Ratings providing or intending to provide any services in jurisdictions where CRISIL Ratings does not have the necessary licenses and/or registration to carry out its business activities referred to above. Access or use of this report does not create a client relationship between CRISIL Ratings and the user.

We are not aware that any user intends to rely on the report or of the manner in which a user intends to use the report. In preparing our report we have not taken into consideration the objectives or particular needs of any particular user. It is made abundantly clear that the report is not intended to and does not constitute an investment advice. The report is not an offer to sell or an offer to purchase or subscribe for any investment in any securities, instruments, facilities or solicitation of any kind to enter into any deal or transaction with the entity to which the report pertains. The report should not be the sole or primary basis for any investment decision within the meaning of any law or regulation (including the laws and regulations applicable in the US).

Ratings from CRISIL Ratings are statements of opinion as of the date they are expressed and not statements of fact or recommendations to purchase, hold or sell any securities/instruments or to make any investment decisions. Any opinions expressed here are in good faith, are subject to change without notice, and are only current as of the stated date of their issue. CRISIL Ratings assumes no obligation to update its opinions following publication in any form or format although CRISIL Ratings may disseminate its opinions and analysis. The rating contained in the report is not a substitute for the skill, judgment and experience of the user, its management, employees, advisors and/or clients when making investment or other business decisions. The recipients of the report should rely on their own judgment and take their own professional advice before acting on the report in any way. CRISIL Ratings or its associates may have other commercial transactions with the entity to which the report pertains.

Neither CRISIL Ratings nor its affiliates, third-party providers, as well as their directors, officers, shareholders, employees or agents (collectively, ‘CRISIL Ratings Parties’) guarantee the accuracy, completeness or adequacy of the report, and no CRISIL Ratings Party shall have any liability for any errors, omissions or interruptions therein, regardless of the cause, or for the results obtained from the use of any part of the report. EACH CRISIL RATINGS PARTY DISCLAIMS ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING BUT NOT LIMITED TO ANY WARRANTIES OF MERCHANTABILITY, SUITABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE. In no event shall any CRISIL Ratings Party be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees or losses (including, without limitation, lost income or lost profits and opportunity costs) in connection with any use of any part of the report even if advised of the possibility of such damages.

CRISIL Ratings may receive compensation for its ratings and certain credit-related analyses, normally from issuers or underwriters of the instruments, facilities, securities or from obligors. Public ratings and analysis by CRISIL Ratings, as are required to be disclosed under the regulations of the Securities and Exchange Board of India (and other applicable regulations, if any), are made available on its website, www.crisilratings.com (free of charge). Reports with more detail and additional information may be available for subscription at a fee – more details about ratings by CRISIL Ratings are available here: www.crisilratings.com.

CRISIL Ratings and its affiliates do not act as a fiduciary. While CRISIL Ratings has obtained information from sources it believes to be reliable, CRISIL Ratings does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives and/or relies on in its reports. CRISIL Ratings has established policies and procedures to maintain the confidentiality of certain non-public information received in connection with each analytical process. CRISIL Ratings has in place a ratings code of conduct and policies for managing conflict of interest. For details please refer to: https://www.crisil.com/en/home/our-businesses/ratings/regulatory-disclosures/highlighted-policies.html.

Rating criteria by CRISIL Ratings are generally available without charge to the public on the CRISIL Ratings public website, www.crisilratings.com. For latest rating information on any instrument of any company rated by CRISIL Ratings, you may contact the CRISIL Ratings desk at crisilratingdesk@crisil.com, or at (0091) 1800 267 1301.

This report should not be reproduced or redistributed to any other person or in any form without prior written consent from CRISIL Ratings.

All rights reserved @ CRISIL Ratings Limited. CRISIL Ratings is a wholly owned subsidiary of CRISIL Limited.
 

CRISIL Ratings uses the prefix ‘PP-MLD’ for the ratings of principal-protected market-linked debentures (PPMLD) with effect from November 1, 2011, to comply with the SEBI circular, "Guidelines for Issue and Listing of Structured Products/Market Linked Debentures". The revision in rating symbols for PPMLDs should not be construed as a change in the rating of the subject instrument. For details on CRISIL Ratings' use of 'PP-MLD' please refer to the notes to Rating scale for Debt Instruments and Structured Finance Instruments at the following link: https://www.crisil.com/en/home/our-businesses/ratings/credit-ratings-scale.html