Detailed Rationale

Crisil Ratings has continued its rating on the long-term bank facilities of NMDC Steel Limited (NSL) on ‘Rating Watch with Developing Implications’.

 

The rating reflects the sequential ramp-up in NSL’s operations, albeit at slower pace than anticipated, with capacity utilization levels improving to 55% in Q4FY25 and 52% in Q3FY25, up from 41% in H1FY25. Crisil Ratings understands that NSL is in the process of stabilizing different grades of the finished product in the market and focusing on optimizing the production cost. Improving utilisation rate and sales volume are expected to support improvement in operational efficiency over the medium term.

 

The profitability through the past fiscal was impacted due to lower-than-expected realizations that the company witnessed in ten months through fiscal 2025, due to challenges faced by domestic primary steel industry. That said, realizations have been on uptrend in February and March 2025. Notably, Crisil Ratings understands that for the first time since commissioning NSL achieved neutral earnings before interest, taxes, depreciation and amortisation (EBITDA) in the month of March 2025, driven by improved utilization and realizations. The ramp-up has been modest, but the company has shown a directionally positive trend and is expected to continue making operational improvements going forward. The company's progress in achieving sustainable operational efficiencies and sustaining positive EBITDA will be a key monitorable.

 

Generating sustainable operating profits will be crucial for supporting debt servicing in fiscal 2026, considering the company has a bullet NCD repayment of Rs 524 crores due on August 31, 2025, over and above regular debt servicing obligations. Any deviation from this will be a rating sensitivity factor and the rating may be downgraded if operating losses continue further.

 

The rating continues to factor in the support it is receiving as a Government of India (GoI) entity, through NMDC Ltd (NMDC), though limited till the time divestment is completed[1] (GoI currently holds 60.79% stake in NSL).
 

The government is in the process of divesting majority of its stake (50.79% out of 60.79%) in NSL while the remaining 10% stake will be transferred to NMDC. However, Crisil Ratings understands that the Ministry of Steel has mandated NMDC to provide necessary support to NSL till it is divested by the government. Crisil Ratings understands that the ongoing divestment is yet to be completed, wherein Expressions of interest (EOI) have been received, and financial bids are expected to commence soon. Since this results in uncertainty around the long-term ownership structure and future plans for NSL, the ratings continue to be on developing watch. Future developments regarding the divestment will be a key monitorable.

 

The Ministry of Steel has mandated NMDC to handhold NSL till the divestment is completed. Accordingly, even after the transfer of assets and liabilities to the new entity - NSL, NMDC has been providing operational and administrative support to NSL which is expected to continue in the future till it is divested. Any change in the support philosophy will be a key rating sensitivity factor.

 

The rating also factors in the susceptibility of NSL to cyclicality in the steel industry, and to risks related to availability of key raw materials and stabilisation of operations.

[1]The Government of India is in the process of divesting its stake in NSL. EoI for this divestment was floated on December 1, 2022, and the government has received multiple bids for the same. However, official bidding is yet to commence.

 

Analytical Approach

Crisil Ratings has considered the standalone business and financial risk profiles of NSL.

 

Crisil Ratings has also applied its criteria for notching up standalone ratings of entities based on government support. Crisil Ratings believes that till the time divestment is completed, NSL will receive support from the government (through NMDC), considering its strategic importance and majority ownership (60.79%).

Key Rating Drivers & Detailed Description

Strengths:

Business risk profile expected to improve, supported by raw material security: The steel plant declared commencement of commercial operations on August 31, 2023. While lower than earlier expectation, the operations have posted sequential improvement, with utilization reaching 55% in Q4FY25, up from 38% Q4FY24. NSL is likely to report operating loss in fiscal 2025 as well due to challenges in utilisation rate and below-average market realization. However, operating losses have narrowed with ~Rs 525 crore EBITDA expected in Q4FY25, compared to Rs 656 crore losses in the previous quarter and Rs 1,680 crore losses in the fourth quarter of fiscal 2024.

 

The cash accruals generated by NSL are supported by the nine-year contract with NMDC for iron ore procurement (transactions done on arm’s length basis). The iron-ore comprises 15-20% of the overall cost of production for NSL. Crisil Ratings understands that the payments to NMDC are made on ad-hoc basis, basis the strength of the performance of NSL.  Any surplus generated will be utilized to repay NMDC payables, however, these will be subordinate to external debt obligations. Improvement in operating performance along with liquidity levels will be a critical monitorable going forward.

 

Government support to continue till the divestment is completed: The government plans to divest its stake in NSL, wherein 50.79% stake will be sold to a private sector entity and the remaining 10% will be held by NMDC. Crisil Ratings understands that currently only EoI has been received and financial bids are yet to commence However, Crisil Ratings understands that till the time divestment is completed, GoI, through NMDC, will continue to provide operational/administrative and need-based support in case of any exigency. Accordingly, even after the transfer of assets and liabilities of the steel plant to the new entity -- NSL, NMDC has been providing operational and administrative support to it. However, further developments in the process of divestment, including announcement of the final bidder and impact of the proposed acquisition of NSL on the credit risk profile of the bidder, will be monitorable. Additionally, any change in the support philosophy of the government towards NSL will be a key rating sensitivity factor.

 

Weaknesses:

Moderation in financial risk profile due to continued operating losses: NSL has faced significant delay in ramp-up and stabilisation of operations against expectations, resulting in operational losses upto February 2025. Further, during Q3FY25, the industry realisations had been under pressure due to the high quantum of cheaper imports. However, prices of steel have started improving in the domestic market from March 2025, resulting in improvement in realizations. Going forward, the company is expected to witness improvement in utilisation rates and improved integration. This will support the operating performance, cash accrual and debt servicing.

 

The slower-than-expected ramp up and operational hindrances upto 9MFY25 contributed to operating losses resulting in weakening of NSL’s financial risk profile. The operations have slowly ramped up further in Q4 FY25 and are expected to further improve in Q1FY26. NSL is likely to achieve breakeven profitability at the EBITDA level by H1FY26. However, with most of the capex of the steel plant being funded through equity, existing external project debt is low (total debt of ~ Rs 5,000 crore against total project cost of Rs 24,000-25,000 crore) thereby resulting in low finance cost and supporting capital structure over the medium term. While interest servicing has been monthly, quarterly principal repayments for NSL’s outstanding debt has commenced from March 2024 and has been serviced in a timely manner. NSL has bulky repayments, over and above its regular principal and interest obligations over the next six months, and the ability to timely shore up liquidity for it will be a key monitorable.

 

Susceptibility to cyclicality associated with the steel industry and availability of key raw materials: The inherent cyclicality in the steel industry exposes steelmakers to a high degree of volatility in operating margin and, in turn, to debt protection metrics. Demand for steel is sensitive to trends in key end-user industries, such as automobiles, infrastructure, construction and consumer durables. However, raw material security, by way of long-term contract with NMDC for procurement of iron ore, mitigates the risk to an extent.

Liquidity: Adequate

Liquidity is supported by unencumbered cash and equivalents of ~Rs 252 crore and unutilised fund-based limit of ~Rs 765 crore as on February 28, 2025, against ~Rs 448 crore principal debt obligation and interest obligation of ~Rs 645 crore in fiscal 2026. The company also has non-convertible debentures due payable in August 31, 2025 of Rs 523.8 crore. Crisil Ratings expects NSL to have sufficient funds to repay the NCD, or if required, to get refinanced atleast 45 days before date of repayment.

 

Liquidity will also be supported by the company getting extended credit from NMDC Ltd for iron ore purchases. Also, till the time divestment is completed, NSL is expected to receive government support in case of any exigency.

Rating sensitivity factors

Upward factors

• Ramp up and stabilization of operations with plant utilization rates significantly more than 50%
• Healthy operating profitability and robust free cash generation while maintaining strong capital structure

 

Downward factors

• Slower than expected ramp up and stabilization of operations of the steel plant with utilization rates significantly lower than 50% on sustained basis resulting in lower-than-expected profitability and cash accruals
• Change in support philosophy by the parent towards NSL
• Weaker than expected operating performance with operating losses in oncoming quarters, leading to stretched liquidity

About the Company

NMDC has set up a 3 million tonne per annum steel plant at Nagarnar — Nagarnar Iron & Steel Plant (NISP) - under greenfield expansion. During most of the development and construction phase, the plant was constructed under NMDC, rather than in a special purpose vehicle. Subsequently, it was decided to demerge NISP into a separate entity, NSL, followed by divestment by the government of India.

Key Financial Indicators*

Particulars	Unit	2024	2023
Operating income	Rs crore	3,049	NM
Profit after tax (PAT)	Rs crore	(1,560)	NM
PAT margin	%	(49.2)	NM
Adjusted debt/adjusted networth	Times	0.4	NM
Interest coverage	Times	(4.0)	NM

NM: Not meaningful

*as per analytical adjustments made by Crisil Ratings

Note: During the first nine months of the fiscal 2025, the company reported revenue of Rs.5,665 crore with EBITDA of Rs. -1,286 crores and Profit after tax of Rs. -1,900 crores.

Any other information: Not Applicable