Detailed Rationale

CRISIL Ratings has downgraded its rating on the long-term bank facilities of Ferro Alloys Corporation Limited (FACOR; part of the Vedanta group) to ‘CRISIL AA-’ from ‘CRISIL AA’. And revised its rating watch to 'Rating Watch with Developing Implications' from 'Rating Watch with Negative Implications'.

 

The rating action reflects a corresponding rating downgrade on the bank facilities and debt instruments of the parent company, Vedanta Limited (Vedanta), to ‘CRISIL AA-/Watch developing/CRISIL A1+/Watch developing’ from ‘CRISIL AA/Watch Negative/CRISIL A1+’. This is because rating takes into account the support FACOR derives from its parent, Vedanta.

 

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 ratings also factor in the strong financial risk profile, as reflected in the comfortable net-worth 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 also applied its parent notch-up framework to factor in the extent of distress support available to FACOR from the parent, Vedanta.

 

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. Further, FPL has now been merged with FACOR from third quarter of fiscal 2023. 

 

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 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: With new capacity of 60,000 tonnes per annum got commissioned in February 2023, FACOR’s total production capacity has increased to 1,40,000 tonnes per annum, strengthening the already strong market position in domestic FC industry. FACOR is the second largest supplier of HCFC in the domestic merchant market. 

 

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 ~15% of revenue during fiscal 2023.

 

• Improving operating performance with healthy margin post acquisition by Vedanta: 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%. The company also has a captive power plant with capacity of 100 MW. 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%.

 

Realisations has remained stable during fiscal 2023 and Q1 of current fiscal 2024, with average realisations of over Rs 110,000/tonne. Better realisations helped FACOR post strong revenue growth during fiscal 2023. Revenue and EBITDA margin of Rs 768 crore and around 19.4% were reported during fiscal 2023, against Rs 833 crore and 36% for fiscal 2022. However, during first three months of fiscal 2024, FACOR reported revenue of Rs 210 crore with slight moderation in EBITDA margin to 17%, due to planned maintenance shutdown.

 

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, had reduced the consolidated debt (including accrued interest) to Rs 128 crore as of March 2022, and further to Rs 107 crore as on March 2023, from Rs 1,200 crore (including accumulated interest) as on March 31, 2020.

 

Financial risk profile is further supported by healthy net-worth, estimated over Rs 1,100 crore as on March 31, 2024 (vis-à-vis Rs 1,041 crore as on March 31, 2022), led by healthy accretion to reserves. Debt protection metrics have significantly improved on the back of reduced debt and improved profitability, marked by gearing which is low, around 0.10 time estimated as on March 31, 2023 (0.2 time, a year earlier).

 

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 around Rs 23 crore as of March 2023. FACOR is expected to generate net cash accrual of over Rs 100-130 crore per fiscal over 2024-2026, against yearly debt repayment of Rs 45 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.

Rating Sensitivity factors

Upward factors:

• Change in credit risk profile of the parent, resulting in an upgrade in its rating by 1 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 1 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 June 30, 2023, FACOR had FC manufacturing capacity of 140,000 tonnes/annum, and chrome ore mines with capacity of 250,000 tonnes/annum. The company also owns 100 MW coal-based power plant. The plant and mine mining are situated in Odisha.

About the Group

Vedanta is a diversified metals, mining, power, and oil and gas company. London-based Vedanta Resources Ltd holds 63.9% stake in the company. Vedanta’s operations include copper, iron ore and aluminium assets at Jharsuguda and Lanjigarh in Odisha, and power (2,400-MW and 1,215-MW captive power plants for the aluminium business). The company also has aluminium operations through its subsidiary, Bharat Aluminium Company Ltd (BALCO). Also, a part of the power business (1,980 MW) is conducted through wholly owned subsidiary, Talwandi Sabo Power Ltd. The oil and gas business has now been merged with Vedanta and the group operates the zinc business through Hindustan Zinc Ltd (HZL) and Zinc International in South Africa and Namibia. In June 2018, Vedanta, through its wholly owned subsidiary, Vedanta Star Ltd (VSL), acquired 90% stake in ESL Steels Ltd (ESL, current operational capacity of 1.5 million tonne per annum [MTPA]) for Rs 5,320 crore. However, effective from March 25, 2020, VSL has been merged with ESL and Vedanta now directly holds 95.5% share in ESL.

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of the instrument	Date of Allotment	Coupon Rate (%)	Maturity Date	Issue size (Rs.Crore)	Complexity Level	Rating assigned with outlook
NA	Non-Fund Based Limit*	NA	NA	NA	100	NA	CRISIL AA-/Watch Developing

*includes main limit as letter of credit of Rs 100 cr. with sublimit as cash credit of Rs 10 cr, WCDL of Rs 10 cr., Inland bills purchased of Rs 70 cr., FUBD/PSCFC of Rs 70 cr., Bank guarantee of Rs 20 cr.