Detailed Rationale CRISIL Ratings has upgraded its rating on the long-term bank facilities of Godawari Power and Ispat Ltd (GPIL) to 'CRISIL A+/Stable’ from ‘CRISIL A/Stable’, and has reaffirmed its ‘CRISIL A1’ rating on the short-term bank facilities. Simultaneously, it has withdrawn its rating on the bank loan facilities aggregating Rs 177.1 crore based on no due certificate, receipt of confirmation from bank and at the client’s request. The withdrawal is in line with the CRISIL Ratings policy on withdrawal of ratings.
The upgrade reflects 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.
The ratings 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. |
Analytical Approach For arriving at its rating, CRISIL Ratings has changed its analytical approach to consolidated (combined the business and financial risk profiles of GPIL and its subsidiaries, associates and joint ventures) from earlier standalone approach owing to increased financial linkages with group companies. GPIL proposed to increase its stake in subsidiary Godawari Green Energy Ltd (GGEL) to 100% (increased to 99.95% as on October 1, 2021) from 76.12%. GPIL has also proposed to invest Rs 70.2 crore as equity in Hira Ferro Alloys Ltd (HFAL), increasing its stake to 56.45% (increased to 50.72% as on October 01, 2021) from 48.45%, thus turning the latter to its subsidiary.
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
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Any other information: Not applicable |
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Annexure - Details of Instrument(s)
* 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
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| Annexure - Rating History for last 3 Years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Annexure - Details of Bank Lenders & Facilities | |||||||||||||||||||||||||||||||||||||||||||||||||||
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Criteria Details
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