| NMDC Steel Limited | ||||
| Rating continues on ‘Watch Developing’ | ||||
| Rating Action | ||||
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| Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings. | ||||
| 1 crore = 10 million | ||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has continued its rating on the long-term bank facility of NMDC Steel Limited (NSL) on ‘Rating Watch with Developing Implications.’
The rating factors in the stabilisation risk as the steel plant has achieved commercial operations from August 31, 2023, but its operational performance is yet to stabilise at expected levels. Further, CRISIL Ratings takes note of the support NSL is receiving from being a Government of India (GoI) entity, through NMDC Ltd (NMDC), though limited till the time divestment is completed* (GoI, at present holds 60.79% stake in NSL).
CRISIL Ratings notes that the GoI 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, GoI has mandated NMDC to provide necessary support to NSL till it is divested by GoI. Also, CRISIL Ratings understands that the on-going divestment by GoI is yet in the preliminary stage, wherein expression of interests (EOI) has been received and financials bids are expected to commence soon. Given the proposed divestment plan by GoI results in uncertainty around the long-term ownership structure and future plans for NSL, the outlook has been placed on ‘Watch developing’. Future developments regarding the divestment will be a key monitorable.
The Ministry of Steel, GoI 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/administrative support to NSL which is expected to continue in future till it is divested. Any change in the aforementioned support philosophy will be a key rating sensitivity factor.
The rating also factors in the risk of susceptibility to cyclicality associated with the steel industry and availability of key raw materials, and exposure to risks related to stabilisation of operations.
*GoI is in the process of divesting its stake in NSL. EOI for this divestment was floated on December 01, 2022, and the government has received multiple bids for the same. However, official bidding is yet to commence. The divestment process is expected to complete by fiscal 2024. |
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 GoI (through NMDC), considering its strategic importance and the majority ownership (60.79%). |
Key Rating Drivers & Detailed Description Strengths: GoI support to continue till the time divestment is completed GoI plans to divest its stake in NSL and the same is in process, 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/administrative support to NSL. 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 key monitorable. Additionally, any change in the aforementioned support philosophy by GoI towards NSL will be a key rating sensitivity factor.
Business and financial risk profile expected to be supported by robust industry outlook, raw material security and low project debt over the medium term With the steel plant successfully commencing production of the final product – hot-rolled products from August 2023, the company has declared August 31, 2023, as date of commencement of commercial operations. While stabilisation risk of the plant will be a key monitorable (given that the plant is yet to establish a track record of operational performance), CRISIL Ratings understands that business and financial risk profiles of NSL are expected to be supported by healthy domestic demand outlook, robust realisations despite moderations over the past fiscal, raw material security, and low project debt.
NSL has entered into a nine-year contract with NMDC for iron ore procurement (transactions will be done on arm’s length basis). Further, iron ore will be procured from Bailadila Mines, Chhattisgarh which is in close proximity to the steel plant in Nagarnar, Chhattisgarh (distance of around 130 kilometers) thereby providing raw material linkage. Also, 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 – Rs 25,000 crore) thereby resulting in low finance cost and supporting capital structure over the medium term. Also, CRISIL Ratings understands that NSL’s outstanding debt repayments is rescheduled to commence from June 2024 which lends comfort (earlier understanding was that debt repayment will commence from December 2023).
Weaknesses: 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.
Exposure to risks related to stabilisation of operations The company faces significant stabilisation risk as the plant achieved commercial operations from August 31, 2023. Stabilisation of operations at the expected levels, without any material cost overruns, is essential for achieving timely operational profitability and hence will be a key monitorable. Further, CRISIL Ratings takes note that there has been a revision in debt repayment schedule and the same is now slated to commence from June 2024 (against December 2023 earlier). Cash and equivalents stood around Rs 150 crore as on August 31, 2023, and sanctioned fund-based working capital limit at Rs 2,600 crore, against debt obligation of around Rs 530 crore (only interest payment, principal repayment will commence from fiscal 2025) in fiscal 2024 lends comfort to an extent. |
Liquidity: Adequate As on September 30, 2023, NSL reported cash and equivalents of around Rs 1,024 crore. Further, the company has availed of fund-based working capital limit worth Rs 2,600 crore against nil principal repayment in fiscal 2024. Also, till the time divestment is completed, NSL is expected to receive GoI support in case of any exigency. |
Rating Sensitivity Factors Upward Factors
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About the Company NMDC has set up a 3-million tonne per annum steel plant at Nagarnar -- Naganar Iron & Steel Plant (NISP) -- under greenfield expansion. During most of the development and construction phase, the plant was constructed within NMDC, rather than being constructed in a separate special purpose vehicle. Subsequently it was decided to demerge NISP into a separate entity -- NSL -- followed by divestment of the GoI. |
Key Financial Indicators
NM: Not meaningful |
Any other information: Not Applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
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| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||
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| All amounts are in Rs.Cr. | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annexure - Details of Bank Lenders & Facilities | ||||||||
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Criteria Details
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