Rating Rationale
March 02, 2022 | Mumbai
Godawari Power and Ispat Limited
 
Rating Action
Total Bank Loan Facilities RatedRs.958 Crore
Long Term RatingCRISIL A+/Stable
Short Term RatingCRISIL A1
1 crore = 10 million
Refer to Annexure for Details of Instruments & Bank Facilities

Detailed Rationale

CRISIL Ratings ratings on the bank facilities of Godawari Power and Ispat Limited (GPIL) continue to reflect the company’s healthy business risk profile driven by the integrated operations, established market position in the domestic steel industry and improved financial risk profile. These strengths are partially offset by exposure to cyclicality in the steel industry and sizeable greenfield capital expenditure (capex) planned over the medium term.

 

CRISIL Ratings had upgraded its rating on the long-term bank facilities of GPIL to 'CRISIL A+/Stable’ from ‘CRISIL A/Stable’, and has reaffirmed its ‘CRISIL A1’ rating on the short-term bank facilities on October 26, 2021

 

The upgrade reflected the expectation that GPIL’s credit risk profile will improve in the near term aided by faster-than-anticipated deleveraging. On standalone basis, the company turned term debt free in the second quarter of fiscal 2022 and healthy liquidity is expected to be maintained going forward. As a result, consolidated leverage has improved significantly, as indicated by improvement in debt to earnings before interest, tax, depreciation and amortisation (Ebitda) ratio of 0.7 time as on March 31, 2021, compared with 2.7 times a year earlier. Operating efficiency should improve further as entire iron ore requirement will be met through captive mines after ramp up of production on incremental capacity. Additionally, the augmentation of steel-making capacity in the current fiscal will strengthen the market position further.

 

High realisations across the steel industry boosted the performance of GPIL in fiscal 2021 despite disruptions amid the Covid-19 pandemic and the performance is likely to remain strong this fiscal as well. Standalone operating income and operating profit grew by 32% and 139%, respectively, in fiscal 2021, and are likely to further rise in fiscal 2022, as evident from the first quarter financial performance. Operating profitability will structurally improve over the medium term, supported by enhanced backward linkages leading to cost saving, ensuring healthy cash generation.

 

CRISIL Ratings has noted the company’s plan for setting up a greenfield integrated steel plant with capacity of 1.5-2 million tonne (MT) of flat products at estimated capital outlay of around Rs 4,000 crore over the next 3-5 years. The company has initiated the process for land acquisition and other regulatory clearances for setting up the project. Given the initial stage of the project, the structure including the funding mix and other modalities are not yet finalized.  Management articulation that the debt to Ebitda ratio will not exceed 1 time for the entire tenure of the project provides comfort. Any material increase in project cost or deviation in stated leverage philosophy will be a key rating sensitivity factor.

Analytical Approach

For arriving at its rating, CRISIL Ratings has considered consolidated business and financial risk profiles of GPIL and its subsidiaries, associates and joint ventures

 

Please refer Annexure - Details of Consolidation, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:   

* Integrated operations: Operations are backward integrated with two captive iron ore mines that meet more than 80% of the total iron ore requirement at present, and are likely to meet the entire requirement by the end of fiscal 2022. The company meets 100% of its power requirement through its captive power capacity of 73 MW (WHRS 42 MW, biomass 20 MW and coal 11 MW) and an additional 25 MW by an arrangement with Jagdamba Power & Alloys Ltd (JPAL; associate company). In addition, the company has coal linkages with Coal India Ltd for around 46% of its requirement. Forward integration has led to diversified products (wire rods, hard bright [HB] wires and pre-fab structures) and revenue profile with the flexibility of selling products based on realisations. Furthermore, efficiency measures, such as setting up an iron ore beneficiation plant (to improve the iron content and thus realisation) and hot rolling mill in the same premises (reduces transportation cost and reheating requirement) and a captive solar photovoltaic plant for increased steel capacity, will improve the operating efficiency and profitability sustainably.

 

* Established market position: Presence of more than two decades in the steel business and strong expertise of the promoter will continue to support the business. GPIL manufactures multiple products across the steel value chain such as iron ore pellets, sponge iron, steel billets, mild steel (MS) rounds, HB wires and ferro alloys, from its plant at Raipur, Chhattisgarh.

 

* Improved financial risk profile: The financial risk profile has improved significantly aided by substantial deleveraging. The debt to Ebitda ratio has improved to 0.7 time as on March 31, 2021, from 2.7 times a year earlier. Debt protection metrics were comfortable, indicated by interest coverage ratio and net cash accrual to total debt ratio of 8.2 times and 0.86 time, respectively, in fiscal 2021, compared with 2.97 times and 0.19 time, respectively, in the previous fiscal. The improvement in the financial risk profile will be sustained over the medium term backed by strong operating performance.

 

Weaknesses

* Exposure to cyclicality in the steel industry: The steel industry is closely linked to the domestic and global economy as growth depends on the level of construction and infrastructure activities. Any downturn in the economic cycle adversely impacts demand, as seen in fiscal 2016. Furthermore, changes in government policies on import/export also affect the industry. In addition to demand risk, profitability is susceptible to volatility in raw material prices and realisations. Prices are largely subject to global commodity prices. However, the risk of volatility is partly offset by integrated operations and the flexibility in changing the revenue mix between steel and steel intermediates. Any significant variation in demand and pricing scenario will be sensitive to ratings.

 

* Significant capex plans: The company has plans to set up a greenfield integrated steel plant with capacity of 1.5-2 MT of flat products at estimated capital outlay of around Rs 4,000 crore over the next 3-5 years. It has initiated the process for land acquisition and other regulatory clearances for setting up of the project. Given the initial stage of the project, the structure including the funding mix and other modalities is not yet finalized. Management articulation that the debt to Ebitda ratio will not exceed 1 time for the entire tenure of the project provides comfort. Any material increase in project cost or deviation in stated leverage philosophy will be key rating sensitivity factor.

Liquidity: Strong

Consolidated cash accrual, expected over Rs 1,000 crore in fiscal 2022, will comfortably cover minimal term debt obligation. Fund-based bank limit utilisation averaged 36% during the six months through September 2021. CRISIL Ratings believes the accrual will adequately cover capex and working capital requirement over the medium term.

Outlook Stable

CRISIL Ratings believes GPIL will continue to benefit from the integrated operations and captive iron ore mines, leading to higher profitability.

Rating Sensitivity factors

Upward factors:

          Significant improvement in the business risk profile, with blended Ebitda per tonne sustaining above Rs 7,000

          Sustenance of healthy financial risk profile

 

Downward factors:

          Weakening of operating performance as indicated by blended Ebitda per tonne declining below Rs 4,000 on sustained basis

          Larger-than-expected capex or substantial acquisition resulting into significant weakening of the capital structure on sustained basis.

          Stretched working capital cycle weakening the liquidity

About the Company

GPIL was established as Ispat Godawari Ltd in 1999 by Mr B L Agrawal, and got its current name in 2001. The company has two captive iron ore mines (3 MT), pellet plant (2.4 MT) and vertically integrated steel plant in Raipur. The steel plant manufactures sponge iron (595,000 tonne), billets (400,000 tonne), MS rounds (400,000 tonne), HB wires (150,000 tonne), ferro alloys (16,500 tonne) and pre-fab structures (110,000 tonne).

 

The two main operational subsidiaries of GPIL are GGEL (50 MW solar thermal power plant in Jaisalmer, Rajasthan) and HFAL. HFAL engaged in the manufacturing of ferro alloy (60,500 tonne) and has 30 MW power capacity (20 MW thermal, 8.5 MW biomass and 1.5 MW windmill).

 

For the first quarter of fiscal 2022, consolidated profit after tax (PAT) was Rs 427 crore on revenue of Rs 1,126 crore, compared with PAT of Rs 42 crore on revenue of Rs 675 crore in the corresponding period of the previous fiscal.

Key Financial Indicators

As on / for the period ended March 31   2021 2020
Operating Income Rs crore 4072 3289
Adjusted profit after tax (PAT) Rs crore 655 177
PAT margin % 16.1 5.4
Adjusted debt / adjusted networth Times 0.44 1.21
Interest coverage Times 8.2 2.97

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL Ratings' complexity levels are assigned to various types of financial instruments. The CRISIL Ratings' complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL Ratings' complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments.

Annexure - Details of Instrument(s)

ISIN

Name of instrument

Date of allotment

Coupon
rate

Maturity date

Issue size
(Rs crore)

Complexity level

Rating assigned with outlook

NA

Cash Credit*

NA

NA

NA

55

NA

CRISIL A+/Stable

NA

Cash Credit ^ #

NA

NA

NA

21

NA

CRISIL A+/Stable

NA

Cash Credit

NA

NA

NA

55

NA

CRISIL A+/Stable

NA

Cash Credit**

NA

NA

NA

17

NA

CRISIL A+/Stable

NA

Export Packing Credit

NA

NA

NA

25

NA

CRISIL A+/Stable

NA

Export Packing Credit ##

NA

NA

NA

50

NA

CRISIL A1

NA

Proposed working capital facility

NA

NA

NA

85

NA

CRISIL A+/Stable

NA

Letter of Credit @@

NA

NA

NA

145

NA

CRISIL A1

NA

Letter of Credit $

NA

NA

NA

8

NA

CRISIL A1

NA

Bank Guarantee

NA

NA

NA

75

NA

CRISIL A1

NA

Letter of Credit @

NA

NA

NA

65

NA

CRISIL A1

NA

Letter of Credit^^

NA

NA

NA

4.25

NA

CRISIL A1

NA

Proposed Letter of Credit

NA

NA

NA

135.0

NA

CRISIL A+/Stable

NA

Proposed Letter of Credit

NA

NA

NA

127.75

NA

CRISIL A1

NA

Proposed Bank Guarantee

NA

NA

NA

90.00

NA

CRISIL A1

* EPC/PCFC/PSC/PSCFC/EBRD/FBP/FDB limit of Rs 38.0 crore sublimit of CC

^ working capital demand loan limit of Rs 15.75 crore sublimit of CC

# interchangeable with non-fund based limit to extent of Rs 21 crore

** PC/FBP/FBD limit of Rs 6 crore sublimit of CC

## Cash credit of Rs 1 crore, WCDL of Rs 1 crore, PSCFC/FBD/FBN of Rs 50 crore sublimit of EPC

@@ Bank guarantee limit of Rs 45.0 crore sublimit of LC

$ Bank guarantee limit of Rs 1.76 crore sublimit of LC

@Bank guarantee Rs 20 crore, buyer’s credit of Rs 40 crore sublimit of LC

^^ Bank guarantee limit of Rs 2 crore sublimit of LC

Annexure – List of entities consolidated

Name of entities consolidated

Extent of consolidation

Rationale for consolidation

Godawari Green Energy Limited

Full consolidation

Subsidiary, common promoter and increased financial linkages

Hira Ferro Alloys Limited

Full consolidation

Godawari Energy Limited

Full consolidation

Ardent Steel Limited

Proportionate consolidation

JV/Associate

Jagdamba Power and Alloys Limited

Proportionate consolidation

JV/Associate

Chhattisgarh Ispat Bhumi Limited

Proportionate consolidation

JV/Associate

Raipur Infrastructure Company Limited

Proportionate consolidation

JV/Associate

Chhattisgarh Captive Coal Mining Private Limited

Proportionate consolidation

JV/Associate

Annexure - Rating History for last 3 Years
  Current 2022 (History) 2021  2020  2019  Start of 2019
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund Based Facilities LT/ST 308.0 CRISIL A+/Stable / CRISIL A1   -- 26-10-21 CRISIL A+/Stable 04-11-20 CRISIL A1 / CRISIL A/Stable   -- Withdrawn
Non-Fund Based Facilities ST/LT 650.0 CRISIL A+/Stable / CRISIL A1   -- 26-10-21 CRISIL A+/Stable / CRISIL A1 04-11-20 CRISIL A1   -- --
All amounts are in Rs.Cr.
Annexure - Details of Bank Lenders & Facilities
Facility Amount (Rs.Crore) Rating
Bank Guarantee 75 CRISIL A1
Cash Credit& 17 CRISIL A+/Stable
Cash Credit^ 21 CRISIL A+/Stable
Cash Credit% 55 CRISIL A+/Stable
Cash Credit 55 CRISIL A+/Stable
Export Packing Credit$ 50 CRISIL A1
Export Packing Credit 25 CRISIL A+/Stable
Letter of Credit# 4.25 CRISIL A1
Letter of Credit@ 8 CRISIL A1
Letter of Credit! 65 CRISIL A1
Letter of Credit~ 145 CRISIL A1
Proposed Bank Guarantee 90 CRISIL A1
Proposed Letter of Credit 127.75 CRISIL A1
Proposed Letter of Credit 135 CRISIL A+/Stable
Proposed Working Capital Facility 85 CRISIL A+/Stable
& - PC/FBP/FBD limit of Rs 6 crore sublimit of CC
^ - Working capital demand loan limit of Rs 15.75 cr sublimit of CC Interchangeable to non-fund based limit to extent of Rs 21 cr
% - EPC/PCFC/PSC/PSCFC/EBRD/FBP/FDB limit of Rs 38.0 crore sublimit of CC
$ - Cash Credit of Rs 1crore, WCDL of Rs 1 crore, PSCFC/FBD/FBN of Rs 50 crore sublimit of EPC
# - Bank guarantee limit of Rs 2 crore sublimit of LC
@ - Bank Guarantee limit of Rs 1.76 crore sublimit of LC
! - Bank Guarantee Rs 20 crore, Buyers Credit Rs 40 crore sublimit of LC
~ - Bank Guarantee limit of Rs 45.0 crore sublimit of LC
Criteria Details
Links to related criteria
CRISILs Approach to Financial Ratios
Rating criteria for manufaturing and service sector companies
Rating Criteria for Steel Industry
Understanding CRISILs Ratings and Rating Scales
CRISILs Criteria for Consolidation

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