Detailed Rationale

CRISIL Ratings has assigned its ‘CRISIL AA/Stable’ rating to the proposed bank facilities of Ferro Alloys Corporation Limited (FACOR).

 

The rating factors in the established market position of FACOR in the ferro chrome (FC) industry and the improving operational performance, supported by healthy utilisation rates, backward integration into FC mining and the captive power plant. The rating also factors in the strong support to be extended by the parent, Vedanta Ltd (Vedanta) (‘CRISIL AA/Stable/CRISIL A1+’).

 

The ratings also factor in the strong financial risk profile, as reflected in the comfortable networth and debt protection metrics. These strengths are partially offset by exposure to volatility in prices of raw material and finished goods, performance of end-user industry and cyclicality in demand for ferroalloys.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of FACOR and its subsidiary, Facor Power Ltd. (FPL), as the latter is majorly held by FACOR and there are strong operational and managerial linkages between both the entities.

 

CRISIL Ratings has also applied its parent notch-up framework to factor in the extent of distress support available to FACOR from the parent, Vedanta.

 

Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

• Strong support extended by the parent, Vedanta

FACOR is a wholly owned subsidiary of Vedanta, which has strong oversight over the company’s operations with all the board members and top management brought in from various group entities. The parent shall also issue a letter of comfort for the proposed bank facilities of FACOR. It has extended an unsecured loan to fund the acquisition and support operations in the initial period post acquisition. Hence, though operations of FACOR are now self-sustainable, the parent will offer timely support as required.

 

• Established market position in the domestic ferro chrome industry

As of December 31, 2021, FACOR had a production capacity of 75,000 ton per annum, with an estimated market share (in terms of capacity) of around 5% in the domestic FC industry. Ongoing capacity addition of 60,000 tonnes per annum should further boost the market position.

 

The company caters to established players such as SAIL, JSW Steel, POSCO, and maintains high utilisation rates, aided by an inflow of repeat orders. company has strong presence in the export market, with exports accounting for 30-60% of revenue over fiscals 2019 to 2021. However, the share declined to 17.5% in the first nine months of fiscal 2022, as domestic demand picked up.

 

• Improving operating performance with healthy margin

FACOR has backward integration to chrome ore mines, a critical input for manufacturing FC alloys. As market prices of chrome ore are significantly higher than those produced in-house, backward integration provides a competitive advantage. Increase in mining capacity from 150,000 tonnes/annum to 250,000 tonnes/annum, post takeover by Vedanta, has further improved in-house sourcing of chrome ore to 100% in fiscal 2022, from around 70% till fiscal 2021. The company also has a captive power plant, operated under subsidiary, FPL. Though lack of coal supply linkages limits the benefit, it ensures access to power at rates lower than merchant power.

 

Competitive advantage over smaller players has helped the company maintain superior capacity utilisation of over 90%, as against the industry average of around 85% over fiscals 2017 to 2021. Utilisation levels exceeded 100% in the initial nine months of fiscal 2022, as the demand scenario improved.

 

Strong rebound in demand led to a sharp rise in realisations during fiscal 2022 with average realisations estimated at over 100,000/tonne during fiscal 2022, vis-à-vis around 69,000/tonne in fiscal 2021. Better realisations helped FACOR post strong revenue growth during fiscal 2022. Revenue and EBITDA margin of Rs 624 crore and around 39.5% were reported for the first nine months of fiscal 2022, against Rs 489 crore and 15.4% for fiscal 2021.

 

Operating efficiency is also supported by efficient working capital management with the net capital cycle consistently maintained below 50 days.

 

• Healthy financial risk profile

Vedanta acquired FACOR in September 2020, under the Insolvency and Bankruptcy Code, for a total cost of Rs 398 crore (at haircut of around 67%). This, along with scheduled debt repayment, has reduced the consolidated debt (including accrued interest) to Rs 218 crore as of March 2021, from Rs 1,200 crore (including accumulated interest) a year before.

 

Financial risk profile is further supported by healthy networth, estimated around Rs 755 crore as on March 31, 2022 (vis-à-vis Rs 551 crore as on March 31, 2021), led by healthy accretion to reserves. Debt protection metrics have significantly improved on the back of reduced debt and improved profitability, marked by interest coverage, net cash accrual to total debt and leverage (debt to EBITDA) ratios estimated around 21 times, 1.26 times and 0.15 time, respectively, for fiscal 2022 (-8.4 times, -0.25 time and 2.11 times, respectively a year earlier). Also, gearing is low, around 0.25 time estimated as on March 31, 2022 (0.26 time, a year earlier). Capex (including sustenance and expansion capex) of around Rs 370 crore, being undertaken over fiscals 2022 and 2023, is to be largely funded through internal accruals. Hence, gearing is expected to be below 0.3 time over the medium term.

 

Realisations and profitability are expected to moderate over the medium term, however the same are still expected to remain healthy. This, coupled with, robust demand outlook should support healthy cash flows, which shall be sufficient to meet its debt repayment obligations. Capex is also expected to be largely funded through internal accruals. Debt protection metrics are expected to remain comfortable over the medium term.

 

Weakness:

• Susceptibility to cyclicality in demand and volatility in prices of finished goods as well as raw materials

Ferroalloys (including FC) are intermediates for the steel industry. Hence, prospects of the ferroalloy industry are linked to those of the steel industry (stainless steel is the primary consumer of FC). The steel industry is inherently cyclical, as indicated by a downswing during fiscals 2009 and 2016, resulting in a sharp fall in the demand for, and prices of, ferroalloys.

 

Further, operating margin remains vulnerable to fluctuations in prices of inputs such as coal and coke, as well as realisations of finished goods. Any sharp change in input prices with no similar change in realisations, coupled with cyclical demand, can impact profitability.

Liquidity: Strong

Liquidity is supported by strong cash and bank balance of Rs 148 crore as of December 2021. FACOR is expected to generate net cash accrual of over Rs 150 crore per fiscal over 2022-2024, against yearly debt repayment of Rs 71 crore during the same period. This should suffice to cover majority of its planned capex and incremental working capital. Liquidity is also supported by need-based support available from the parent, Vedanta.

Outlook: Stable

CRISIL Ratings believes FACOR will continue to benefit from strong parentage of the Vedanta group and its established position in the chrome alloy industry. Moreover, with ongoing capacity expansion, backward integration to chrome ore mining, and the favourable capital structure, the company is well placed to leverage the healthy demand outlook in the industry.

Rating Sensitivity factors

Upward Factors:

• Change in credit risk profile of the parent, resulting in an upgrade in its rating by one notch
• Stronger-than-expected operating performance driven by higher realisations and improved cost efficiencies resulting in significantly stronger than expected cash accruals.

 

Downward Factors:

• Weakening in the credit risk profile of the parent, resulting in a downgrade in its rating by one notch
• Lower-than-expected operating profitability or significant debt-funded capex resulting in sharp rise in leverage levels.

About the Company

Incorporated by the erstwhile promoters, Mr Uma Shankar Agarwal and the Saraf family in 1955, the FACOR group was trifurcated in April 2004, under FACOR, Facor Alloys Ltd, and FACOR Steels Ltd.

 

In July 2017, FACOR was admitted to the National Company Law Tribunal (NCLT) as the company could not honour the corporate guarantee extended to subsidiary, FPL, which had defaulted in its debt obligation.

 

Vedanta took over FACOR in September 2020, under the NCLT process and currently holds 100% in the company.

 

As on December 31, 2021, FACOR had FC manufacturing capacity of 75,000 tonnes/annum, and chrome ore mines with capacity of 250,000 tonnes/annum. The company, though its 90% held subsidiary FPL, also owns 100 MW coal-based power plant. The plant and mine mining are situated in Odisha.

Key Financial Indicators: Consolidated

As on/for the period ended March 31	Unit	2021	2020
Revenue	Rs Crore	489	444
Profit after tax	Rs Crore	(54)	(177)
PAT margin	%	(11.0)	(39.9)
Adjusted debt/adjusted networth	Times	0.26	(1.69)
Interest coverage	Times	0.84	0.01

(CRISIL adjusted financials)

Any other information: Not applicable