Detailed Rationale

CRISIL Ratings has assigned its ‘CRISIL A’ rating to the long-term bank facility of NMDC Steel Limited (NSL) and placed the rating on ‘Rating Watch with Developing Implications’.

 

The rating factors in the exposure to project risk as the steel plant of NSL is yet to be commissioned, though execution risk is limited as the plant is in advanced stages of completion; stabilisation risk continues. CRISIL Ratings also takes note of the support the company is receiving from being a Government of India entity through NMDC Ltd (NMDC); however, the support is 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 (MoS) of GoI has given a mandate to NMDC to provide the necessary support to NSL till it is divested. Also, CRISIL Ratings understands that the on-going divestment by GoI is in the preliminary stages wherein expression of interests have 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 of the company, the outlook on the term loan of NSL has been placed on ‘Watch Developing’. Future developments with regard to the divestment will be a key monitorable.

 

MoS, GoI has given a mandate to NMDC to handhold NSL till it is divested. Accordingly, even after the transfer of assets and liabilities to the new entity i.e. 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 project commissioning and stabilisation of operations.

 

*GoI is in the process of divesting its stake in NSL. Expression of interest for divestment in NSL was floated on December 1, 2022, and the government has received multiple bids for the same. However, official bidding is yet to commence. The divestment process is expected to be completed by fiscal 2024.

Analytical Approach

CRISIL Ratings has considered the standalone business and financial risk profiles of NSL and 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 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 private sector entity and remaining 10% will be held by NMDC. CRISIL Ratings understands that currently only EoIs have been received and financial bids are expected to commence soon. 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 i.e. NSL, NMDC has been providing operational / administrative support to NSL. However, further developments in the divestment process, including announcement of final bidder along with the impact of the proposed acquisition of NSL on the bidder’s credit risk profile, will be a key monitorable. Any change in the aforementioned support philosophy by GoI towards NSL will also 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

The plant is expected to be commissioned by June-end 2023, thereby limiting project execution risk. While stabilisation risk will be a key monitorable, CRISIL Ratings understands that business and financial risk profiles of NSLare expected to be supported by healthy domestic demand outlook, robust realisations despite moderation 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). The 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. CRISIL Ratings understands that NSL’s outstanding debt repayment is expected to be rescheduled to commence from December 2023, six months from the expected date of commissioning. This will be a key monitorable.

 

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 high 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 project commissioning and stabilisation of operations

The plant has witnessed delay in achieving date of commencement of commercial operations (DCCO). It was earlier expected to achieve DCCO in March 2022, which was subsequently revised to March 2023 and is now slated to be June 2023. Though majority of the project work has been completed (~ 95% of the project cost has been incurred till March 2023), thereby limiting the project execution risk. However, the company still faces significant stabilisation risk after commissioning, which will be essential for achieving timely operational profitability. Hence, timely commissioning of the plant along with stabilization of operations, without any material cost overruns, will be a key monitorable. Furthermore, NSL has submitted a request to the lender to revise the debt repayment schedule, to start from December 2023. While discussions with the lender are ongoing, the rating takes comfort from sufficient liquidity available with the company (Rs 1,512 crore as on March 31, 2023) against quarterly repayment of ~Rs 200 crore in fiscal 2024. However, any significant deviation from this understanding will be a monitorable.

Liquidity: Adequate

As on March 31, 2023, cash and equivalent stood at Rs 1,512 crore against expected debt obligation of Rs 922 crore in fiscal 2024, thereby providing cushion (principal debt repayment expected to be rescheduled to start from December 2023 as per the request submitted by NSL to the lender). Furthermore, the board of NSL has approved working capital limit of Rs 5,000 crore, and the company is in discussions with lender to avail the same. Also, till the time divestment is completed, NSL is expected to receive GoI support in case of any exigency.

Rating Sensitivity Factors

Upward Factors

• Timely commissioning of the steel plant without any material cost overruns or any material delay beyond the currently stipulated timelines, under NSL and,
• Timely ramp-up and stabilisation of operations with plant utilisation level significantly more than 50% resulting in healthy operating profitability and robust free cash generation while maintaining strong capital structure

 

Downward Factors

• Significant delay in commissioning of the steel plant resulting in higher-than-expected time or cost overrun in commissioning of the plant leading to lower cash generation and impacting capital structure of the company
• Slower-than-expected ramp-up and stabilisation of operations of the steel plant with utilisation level significantly lower than 50% on a sustained basis, resulting in lower-than-expected profitability and cash accruals
• Change in the support philosophy by the parent towards NSL

About the Company

NMDC has set up (final approvals yet to be received for achieving DCCO) a 3 million tonne per annum steel plant at Nagarnar, Chhattisgarh namely 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. However, subsequently it was decided to demerge NISP into a separate entity –NSL followed by divestment of GoI.

Key Financial Indicators

Particulars	Unit	2022	2021
Operating income	Rs.Crore	NM	NM
Profit After Tax (PAT)	Rs.Crore	NM	NM
PAT Margin	%	NM	NM
Adjusted debt/adjusted networth	Times	NM	NM
Interest coverage	Times	NM	NM

NM: Not meaningful

Company is yet to achieve DCCO, which is expected in June 2023

Any other information: Not applicable

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	Term Loan	NA	7.1	31-Mar-31*	4,500	NA	CRISIL A/Watch Developing

*Above maturity date is assuming principal repayment starts from December 2023 i.e. moratorium of 6 months from DCCO. NSL has submitted a request with the SBI for consideration of June 2023 as the revised DCCO, which is being evaluated by the bank