Rating Rationale
November 04, 2020 | Mumbai
Godawari Power and Ispat Limited
'CRISIL A/Stable/CRISIL A1' assigned to bank debt
 
Rating Action
Total Bank Loan Facilities Rated Rs.1135.1 Crore
Long Term Rating CRISIL A/Stable (Assigned)
Short Term Rating CRISIL A1 (Assigned)
 
Detailed Rationale

CRISIL has assigned its 'CRISIL A/Stable/CRISIL A1' ratings to the bank loan facilities of Godawari Power and Ispat Limited (GPIL).
 
The rating reflects GPIL's healthy business risk profile driven by the integrated nature of operations and established market position in the domestic steel sector. It also reflects expectation of the strengthening of the financial risk profile with accelerated debt repayment and significant improvement in debt protection metrics in fiscal 2021 from the present moderate levels. The rating factors in GPIL's management philosophy to become a net debt-free company over the medium term as reflected in accelerated debt repayment done in the past two and half years, which is expected to continue. These strengths are partially offset by cyclicality in the steel industry.
 
GPIL's operating income in fiscal 2020 was lower by 4% over the previous fiscal owing to decline in realisation across product categories, which also moderated operating margin to 15.8% in fiscal 2020 from 21.6% the previous fiscal.  Operating performance during fiscal 2021 is expected to improve driven by better realisation of end products, especially pellets, and supported by higher use of captive iron ore along with improved efficiency on account of set up of iron ore beneficiation plant (1 MTPA) and rolling mill (0.4 MTPA) in the fourth quarter of fiscal 2020. Improved operating efficiency along with reduced finance cost (on account of accelerated prepayments) is expected to result in better profitability and higher cash accrual and would be a key monitorable.
 
Operations were shut from March 24, 2020 to April 9, 2020 due to the lockdown announced by the Government of India and restarted in a phased manner from mid-April and reached normal capacity by May-end. GPIL had sought moratorium from March to May from its lenders in-line with the relief measure announced by the Reserve Bank of India on debt obligations. However, the company has paid all the deferred amount on account of moratorium post commencement of operations.
Analytical Approach

For arriving at its rating, CRISIL has considered the standalone business and financial risk profiles of GPIL. CRISIL has not consolidated GPIL's two key subsidiaries i.e. Ardent Steel Limited (ASL) and Godawari Green Energy Limited (GGEL) as both are self-sustaining entities prepaying their debt. Further, no additional ongoing support is expected to be extended by GPIL to its subsidiaries/associates/joint ventures or any other group company. Additionally, GPIL intends to exit GGEL completely over the medium term.
Key Rating Drivers & Detailed Description
Strengths
* Integrated nature of 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 as per the company plans. GPIL also meets 100% of its power requirement through its captive power capacity of 73MW (WHRS 42MW, biomass 20MW and coal 11MW) and an additional 25MW by arrangement with Jagdamba Power & Alloys Limited (JPAL, associate company, power assets of JPAL are under process to be acquired by GPIL). In addition, the company has coal linkages with Coal India Limited for 70% of its requirement. Forward integration leads to diversified products (wire rods, HB wires, and pre-fab structures) and revenue profile with the flexibility of selling products based on realisation. Further, recent efficiency measures undertaken such as setting up of iron ore beneficiation plant (to improve the iron content and thus realisation) and setting up of hot rolling mill in the same premises (reduces transportation cost and reheating requirement) would further improve the operating efficiency and thus the profitability sustainably.
 
* Established market position: More than two decade-long presence of the promoter in the steel business, and strong expertise, gained over the years, will continue to support the business risk profile. The group manufactures and sells multiple products across the steel value chain such as iron ore pellets, sponge iron, steel billets, MS rounds, HB wires, and ferro alloys, from its plant at Raipur, Chhattisgarh.
 
* Improving financial risk profile: GPIL has cumulatively repaid Rs 311 crore of term debt in fiscals 2019 and 2020 against scheduled repayment of Rs 159 crore. Company has further repaid Rs 263 crore till October 28, 2020 against scheduled repayment of Rs 55 crore for entire fiscal 2021. On account of accelerated deleveraging, gearing is expected to reach below 0.7 time by the end of fiscal 2021 from 2.02 times as on March 31, 2018. The financial risk profile is expected to improve further with the management's intention to become a net debt free company by fiscal 2023 along with absence of any major debt-funded capital expenditure (capex)/investment plans in the medium term. Management has indicated limited capex requirement of Rs 70-75 crore per annum to be funded entirely from internal accrual. These capex would largely be towards regular maintenance, debottlenecking/efficiency improvement resulting in increased capacity of long steel intermediate products along with increase in mining capacity to 3.0 MTPA from 2.1 MTPA. Further, continued reduction in debt would result in lower financial leverage and would help GPIL sustain any downturn in the steel cycle. Any change in management's debt philosophy and major debt-funded capex/investment in group companies would remain key monitorables.
 
Weaknesses
* Modest debt protection metrics: Debt protection metrics have remained modest due to high interest cost on account of restructuring carried out in fiscal 2017.  Interest coverage and net cash accrual to total debt ratios have been at 2.0-3.4 times and 0.18-0.23 times, respectively, over the past three fiscals. With higher prepayment of debt and expectation of improved operating performance, debt protection metrics are expected to improve over the medium term.
 
* Exposure to cyclicality in the steel industry: The industry is closely linked to the domestic and global economy, as growth depends upon the level of construction and infrastructure activities. Any downturn in the economic cycle adversely impacts demand, as was seen during fiscal 2016. Furthermore, any changes in government policies on imports/exports also affects the industry. In addition to the demand risk, the industry remains exposed to volatility in raw material prices and finished product realisations, which can impact the operating margin. The prices are largely subject to global commodity prices. However, this is partially offset by the integrated nature of operations, flexibility in changing the revenue mix between steel and steel intermediates. Any significant variation in the demand and pricing scenario will be sensitive to ratings.
Liquidity Strong

Cash accrual, expected at over Rs 400 crore per year during fiscal 2022 to 2023, is likely to be utilised towards prepayment of debt after meeting internal capex and working capital requirement as per company plans. Further term debt is repaid till at least March 31, 2021, which adds cushion to any volatility in cash flow due to cyclicality in business. Minimal cash and bank balance is maintained (Rs 17 crore as on March 31, 2020) as excess cash is used towards prepayment. Fund-based bank limit utilisation averaged 65% during the 12 months through September 2020.
Outlook: Stable

CRISIL believes GPIL will continue to benefit from the integrated nature of operations and captive iron ore mines, leading to higher profitability.
 
Rating Sensitivity Factors
Upward factors:
* Substantial increase in cash accrual on account of improved operating performance driven by higher production or realisation
* Sustained improvement in interest coverage ratio to above 5 times driven by deleveraging or improved operating performance
 
Downward factors:
* Substantial decline in cash accrual on account of deteriorating operating performance driven by lower production or realisation
* Sustained decline in interest coverage ratio to less than 3 times due to additional debt or subdued operating performance
About the Company

GPIL was established as Ispat Godawari Ltd in 1999 by Mr B L Agrawal, and got its current name in 2001. GPIL has two captive iron ore mines (2.1 million tonne), pellet plant (2.1 million tonne) and vertically integrated steel plant in Raipur. The steel plant manufactures sponge iron (495,000 tonne capacity), 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 Godawari Green Energy Ltd (GGEL: 50 MW solar thermal power plant in Village Nokh, Jaisalmer district, Rajasthan) and Ardent Steel Ltd (ASL: engaged in the manufacturing of iron ore pellets with 0.69 MTPA capacity in Odisha).
 
For the first quarter of fiscal 2021, profit after tax (PAT) was Rs 25 crore on revenue of Rs 574 crore compared with PAT of Rs 41 crore on revenue of Rs 728 crore in the first quarter of fiscal 2020.
Key Financial Indicators - CRISIL adjusted
As on / for the period ended March 31 2020 2019
Operating Income Rs crore 2,765 2,867
Adjusted profit after tax Rs crore 121 213
PAT margins % 4.4 7.4
Adjusted debt/Adjusted networth Times 1.11 1.37
Interest coverage Times 2.87 3.42

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 levels Rating assigned with outlook
NA Cash Credit NA NA NA 153.80 NA CRISIL A/Stable
NA Export Packing Credit NA NA NA 40.00 NA CRISIL A1
NA Letter of Credit & Bank Guarantee NA NA NA 134.68 NA CRISIL A1
NA Term loan NA NA Mar-32 798.62 NA CRISIL A/Stable
NA Term loan NA NA Mar-22 8.00 NA CRISIL A/Stable
Annexure - Rating History for last 3 Years
  Current 2020 (History) 2019  2018  2017  Start of 2017
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund-based Bank Facilities  LT/ST  1000.42  CRISIL A/Stable/ CRISIL A1    --    --  15-10-18  Withdrawn    --  -- 
                25-01-18  CRISIL BB/Stable       
Non Fund-based Bank Facilities  LT/ST  134.68  CRISIL A1    --    --    --    --  -- 
All amounts are in Rs.Cr.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Cash Credit 153.8 CRISIL A/Stable Proposed Long Term Bank Loan Facility 250 Withdrawn
Letter of credit & Bank Guarantee 134.68 CRISIL A1 - - -
Term Loan 806.62 CRISIL A/Stable - - -
Export Packing Credit 40 CRISIL A1 - - -
Total 1135.1 - Total 250 -
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

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