Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL A/Stable/CRISIL A1’ ratings on the bank loan facilities of Nava Ltd (Nava).

 

The ratings continue to factor in the strong financial risk profile and healthy operating performance of the company in fiscal 2023, which was in line with expectations (though the operating performance has moderated from levels seen in the previous fiscal). In fiscal 2023, dip in the performance of the ferro alloy business was offset by strong performance of the power segment. Furthermore, operations and maintenance (O&M) income from services provided to Maamba Collieries Ltd (MCL), a stepdown subsidiary of Nava, provides stable cash flows.   

 

Further, the company has limited capital expenditure (capex) plans in its ferro alloys and power businesses in India. The company, however, is planning multiple projects under its overseas subsidiaries including – power plant expansion under MCL from 300 megawatt (MW) to 600 MW, agri-business (avocado plantation) in Zambia, and manganese ore mining in Ivory Coast. These are expected to be funded through internal accrual. CRISIL Ratings understands that debt raised for these forays will be non-recourse to Nava and its balance sheet will not be leveraged.

 

These strengths are partially offset by susceptibility to cyclicality in the alloy segment, fluctuations in power realisations and coal prices, and offtake risk in the merchant power segment given the absence of long-term power purchase agreements (PPAs).

 

Furthermore, CRISIL Ratings takes note that the overall financial position of Nava’s stepdown subsidiary, MCL, has improved. MCL had entered into an arbitration with Zambia Electricity Supply Corporation Ltd (ZESCO, the state discom of Zambia) for resolving its receivables issues (pertaining to generation prior to May 2022). The arbitration was ruled in favour of MCL and out of the arbitration award of $518 million, MCL is expected to receive $338 million by December 2023 and another $180 million by December 2024. As on August 31, 2023, MCL has received $226 million from ZESCO. Furthermore, the subsidiary continues to receive timely payments for generation from May 2022.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of Nava, Nava Bharat (Singapore) Pte Ltd (NBSPL), Nava Bharat Energy India Ltd (NBEIL), Nava Bharat Projects Ltd (NBPL), Nava Energy Pte Ltd (NEPL) and Nava Energy Zambia Ltd (NEZL), on account of strong operational, financial and managerial linkages.

 

CRISIL Ratings has not combined the business and financial risk profiles of other subsidiaries of Nava and NBSPL as they are moderately integrated, and their project debt is non-recourse. In addition, the management has articulated that Nava will not support these subsidiaries in debt servicing. CRISIL Ratings has, however, factored in equity investment in some subsidiaries/step-down subsidiaries, including Brahmani Infratech Pvt Ltd, Kawambwa Sugar Ltd (Zambia), MCL, and Tiash Pte Ltd. Any change in the management policy of support to these companies will be a key rating sensitivity factor.

 

Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

• Business risk profile supported by healthy demand outlook in both the alloy and power segments: Performance of the ferro alloy business moderated in fiscal 2023 due to lower demand in the global market as well as increasing cost pressures in the second-half of the fiscal. While performance in the first quarter of fiscal 2024 continues to moderate, healthy domestic demand outlook for steel (major end user of ferro alloys) and increasing participation of the company in export orders is expected to result in improved performance of ferro alloy segment.  In the power segment, though plant load factors (PLFs) decreased to 46% (from 55% in fiscal 2022), higher merchant tariff of around Rs 7 per unit resulted in the segment reporting healthy performance. Further, performance of power segment continues to remain strong in first quarter of this fiscal led by improvement in PLFs and continuation of healthy merchant tariff rates.

 

Operating margin, though likely to witness certain moderation, should remain healthy, given the semi-integrated operations (for alloy segment) with linkages for coal procurement for captive use. Also, CRISIL Ratings understands Nava is looking to increase the share of exports (which fetch higher realisations) in its sales mix. This, along with the favourable outlook for merchant power tariffs, should result in healthy cash flow. However, any material deviation in this understanding, resulting in significantly lower-than-expected cash accrual, will be a key monitorable.

 

• Semi-integrated ferro alloy operations: The 125,000-TPA (tonne per annum) silico manganese facility in Telangana is supported by a 114-MW captive power plant; while the company’s 55,000 TPA silico-manganese capacity in Odisha is backed by a 90-MW captive power plant. Both the power plants have linkages for coal and ability to sell excess power on the exchange after meeting captive norms. This insulates the company from fluctuations in the spot market for coal and ensures steady supply for its alloy operations.

 

• Healthy financial risk profile: The financial risk profile is supported by strong debt protection metrics and comfortable capital structure. Gearing and net cash accrual to debt ratio (CRISIL Ratings adjusted numbers) were 0.05 time and 2.3 times, respectively, as on March 31, 2023 (0.07 time and 2.5 times, respectively, a year earlier). Adjusted interest coverage was 56.4 times in fiscal 2023 (against 80.2 times in fiscal 2022). The debt protection metrics are expected to remain comfortable over the medium term, in the absence of any significant capex in its ferro alloy and power businesses. Planned capex in its overseas subsidiaries is expected to be funded through internal accruals and debt raised will be without any recourse to Nava. Company is expected to generate adequate cash accrual to meet its debt obligations and planned capex. However, any larger-than-expected capex or investment in new business segments, resulting in increased debt or weakening of capital structure, will remain a key monitorable.

 

Weaknesses:

• Susceptibility to cyclicality in the alloys segment: Silico manganese is used as an intermediate in the steel industry, which is inherently cyclical and highly sensitive to shifting business cycles, interest rates and seasonal changes in demand and supply conditions. Furthermore, the Indian ferro alloys industry is intensely competitive.

 

• Fluctuations in power realisations and coal prices for the merchant power segment: While captive power for the ferro alloy business provides stability to cash flow, the merchant power sales are exposed to PPA and offtake risks. Excess power generated in the captive units (204 MW at Telangana and Odisha) and merchant power (capacity of 210 MW; 150 MW under NBEIL in Telangana and 60 MW under Nava in Odisha) is sold through short-term PPAs and on the exchange market. The absence of long-term PPAs exposes the company to offtake risk and volatility in exchange prices. Also, the company procures coal for these capacities through e-auctions. While the merchant power capacity can blend various grades of coal, thereby rationalising cost, input prices remain susceptible to vagaries in the coal spot market.

Liquidity: Strong

Cash and equivalent were healthy at Rs 430 crore as on June 30, 2023. Cash accrual is expected to be Rs 160-190 crore each in fiscals 2024 and 2025 against scheduled debt obligation of around Rs 30 crore per annum. The company does not plan any significant capex plans in its ferro alloys and power business in India over the medium term, except for regular maintenance. For capex to be undertaken in overseas subsidiaries (manganese ore and agri-business), same is expected to be funded through internal accruals and debt (which will be without recourse to Nava). Liquidity is also supported by low fund-based bank limit utilisation of 7% (over the 12 months through June 2023). As on June 30, 2023, unutilised cash credit limit stood at around Rs 57 crore. Internal accrual, cash and equivalent, and unutilised bank limit should be sufficient to meet debt obligation, planned investments and incremental working capital requirement over the medium term.

Outlook: Stable

Nava will maintain its comfortable financial risk profile and strong liquidity, over the medium term, supported by healthy cash balance and sustenance of robust operating margin.

Rating Sensitivity factors

Upward factors:

• Improvement in business risk profile reflected by improved PLF in the power segment supported by long-term PPAs or healthy merchant sales
• Significantly better than expected operating performance with sustenance of operating margin over 20% resulting in material free cash to support debt servicing, and improved return on capital employed

 

Downward factors:

• Significantly weaker than expected operating performance with lower volume in the silico manganese business or lower-than-expected merchant power sales resulting in operating profitability declining below 14-16% on a sustained basis
• More-than-expected investment in other ventures/subsidiaries, resulting in increased debt

About the Company

Nava was incorporated in 1972 as Nava Bharat Ferro Alloys Ltd and was promoted by Dr D Subba Rao. It is now managed by his son, Mr D Ashok (Chairman), and son-in-law, Mr P Trivikrama Prasad (Managing Director). The company began operations in 1975 with a small ferro silicon manufacturing unit at Paloncha in Telangana. In 1997, it set up a second ferro alloy unit in Odisha. It diversified into coal-fired power generation in 1997 as backward integration for its highly power-intensive ferro alloy business, and later pursued the merchant power business for the surplus generation. It now has installed alloy capacity of 180,000 TPA and power generation capacity of 264 MW (at standalone level).

 

NBSPL was incorporated in 2004 to trade Nava's ferro alloy products, and later became the holding company for the group's investment in MCL. NBSPL acquired 65% stake in MCL in Zambia. MCL set up a 300-MW coal-based power plant with 35% equity participation from an investment holding company of the Government of Zambia. Coal production commenced in fiscal 2013 and the power plant began operations in August 2017.

 

NBEIL is a stepdown subsidiary of Nava and operates a 150 MW thermal power plant in Telangana. NBEIL has significant financial linkages with the parent, after Nava took over its term debt obligation in fiscal 2019 by borrowing a similar amount and extending an inter-company loan to the company. NBEIL sells power through short-term PPAs and on the exchange.

 

NBPL is a wholly owned subsidiary of Nava, providing technical and commercial services to the group companies. It holds 74% stake in NBEIL.

 

NEPL is a wholly owned subsidiary of Nava and has strong financial linkages with the parent. Nava has extended performance guarantee on behalf of NEPL to MCL. Also, Nava regularly receives dividend income from NEPL.

 

NEZL is a wholly owned subsidiary of NEPL and receives O&M services-related income from MCL.

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of the instrument	Date of Allotment	Coupon Rate (%)	Maturity Date	Issue size (Rs. Crore)	Complexity Level	Rating assigned with outlook
NA	Bank guarantee*	NA	NA	NA	92	NA	CRISIL A1
NA	Cash credit	NA	NA	NA	86	NA	CRISIL A/Stable
NA	Letter of credit*	NA	NA	NA	122	NA	CRISIL A1
NA	Rupee term loan	NA	NA	Mar-26	185	NA	CRISIL A/Stable

*Interchangeable between letter of credit and bank guarantee