Rating Rationale
April 01, 2020 | Mumbai
Nava Bharat Ventures Limited
Ratings downgraded to 'CRISIL A-/Stable/CRISIL A2+'
 
Rating Action
Total Bank Loan Facilities Rated Rs.1084.5 Crore
Long Term Rating CRISIL A-/Stable (Downgraded from 'CRISIL A/Stable')
Short Term Rating CRISIL A2+ (Downgraded from 'CRISIL A1')
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has downgraded its ratings on the bank facilities of Nava Bharat Ventures Limited (NBVL) to 'CRISIL A-/Stable/CRISIL A2+' from 'CRISIL A/Stable/CRISIL A1'.
 
The downgrade reflects significant decline in operating performance in the ferroalloys and power segments for the first 9 months of fiscal 2020, and the subdued outlook for fiscal 2021.
 
NVBL experienced weak volume and decline in realisations in silico-manganese alloys in fiscal 2020. Additionally, offtake by local distribution companies (discoms) was lower than expected despite short-term power purchase agreements (PPAs). CRISIL estimates NVBL's EBITDA (earnings before interest, tax, depreciation, and amortisation) for fiscal 2020 is expected at Rs 195 crore against the earlier expectation of Rs 296 crore as per the analytical approach.
 
CRISIL expects only a modest recovery in NVBL's operating performance in fiscal 2021 given the subdued outlook for silico-manganese prices and the impact of the Novel Coronavirus (Covid-19) pandemic. While the renewal of the ferro chrome conversion license with Tata Steel Ltd for a year is a positive, medium-term renewal risks persist. The captive power capacity should continue to support profitability in the ferroalloy segment. However, offtake and renewal risks persist for external power sales. The company plans to enter into a group captive arrangement for the 150 MW capacity at Nava Bharat Energy India Ltd (NBEIL), which will help improve cash flow visibility. 
 
The financial risk profile remains healthy with the company likely to reduce debt to Rs 200 crore as on March 31, 2020. 
 
The ratings continue to be supported by NBVL's integrated business operations (with captive power) for its silico manganese alloys and ferrochrome conversion business. The financial risk profile is healthy, reflected in moderate debt protection metrics, adequate liquidity, and comfortable capital structure. However, the ratings are constrained by susceptibility to cyclicality in the ferroalloys and sugar businesses, and the significant investment in group entities, particularly Maamba Collieries Ltd (MCL).

Analytical Approach

For arriving at its ratings, CRISIL has fully combined the business and financial risk profiles of NBVL, Nava Bharat (Singapore) Pte Ltd (NBSPL), and Nava Bharat Energy India Ltd (NBEIL)
 
NBSPL is wholly owned by, and has significant business and financial linkages with, NBVL, especially for funding the equity required by NBVL's overseas step-down subsidiaries, which are held by NBSPL.
 
NBEIL is a step-down subsidiary of NBVL and operates a 150 MW thermal power plant (TPP) in Telangana. NBEIL has significant financial linkages with the parent, after NBVL took over its term debt obligation in fiscal 2019 by borrowing a similar amount and extending an inter-company loan to the company.
 
CRISIL has not combined the business and financial risk profiles of other subsidiaries of NBVL and NBSPL, as they are moderately integrated, and their project debt is of a non-recourse nature. In addition, the management has articulated that NBVL will not support these subsidiaries in debt servicing. CRISIL has, however, factored in equity investment in some subsidiaries/step-down subsidiaries, including Brahmani Infratech Pvt Ltd, Nava Bharat Projects Ltd, Kawambwa Sugar Ltd (Zambia), and MCL. Any change in the management's policy of support to these companies will be a key rating sensitivity factor.

Please refer Annexure - Details of Consolidation, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description
Strengths:
* Healthy financial risk profile
NBVL has a comfortable financial risk profile, reflected in moderate debt protection metrics, adequate liquidity, and a comfortable capital structure. NBVL had a low gearing, estimated at 0.18 time as on December 31, 2019, even after adjusting networth for investment in group entities (mainly MCL). Interest coverage and net cash accrual to total debt ratios are expected to remain comfortable in fiscals 2020 and 2021, despite subdued profitability, because of debt.
 
* Integrated ferro chrome operations
NBVL's 125,000-MTPA silico manganese manufacturing facility in Telangana is supported by a 114-MW captive power plant, while its 75,000 MTPA ferrochrome conversion facility in Orissa is supported by a 90-MW captive power plant. Both the power plants have e-auction/auction-linkages for coal, and sell excess power at the IEX exchange or under short-term PPAs. The company recently entered into short-term PPAs (from July 2019 till March 2020) with local discoms in Telangana for sale of excess power of 50-megawatt at its Telangana plant, and for 135-MW generation capacity of the IPP operated by NBEIL although offtake has been impacted. NBVL started providing operations and maintenance (O&M) support to MCL's 300 MW power plant in Zambia in fiscal 2018, which resulted in steady additional revenue. The company's 4000-TCD sugar facility is also fully integrated with a 20-KLPD distillery and a cogeneration plant. The integrated operations mitigate the impact of cyclicality in the businesses.
 
Weaknesses:
* Susceptibility to cyclicality in the ferroalloys segment, and to fluctuations in power realisations and coal prices in NBEIL  
The ferroalloys segment, which is the main driver of NBVL's profitability, is susceptible to cyclicality in the steel industry. Moreover, the domestic ferroalloys industry has many unorganised players. While NBVL's ferrochrome segment is a conversion business and is insulated from cyclicality to some extent, the contract with Tata Steel Ltd is only up to March 2021 exposing NBVL to renewal risks.
 
The sugar industry is also highly regulated, with guidelines regarding the pricing and supply of sugarcane, and the sale of sugar. Consequently, the credit quality of domestic players in the sugar industry continues to hinge on sugarcane price regulations, and the export-import policy. Also, the sugar industry is cyclical and is governed by the cane cultivation pattern. Nevertheless, this segment comprises less than 15% of the company's revenue.
 
While the captive power for the ferroalloy business provides stability to cash flow, the merchant power sales are exposed to PPA and offtake risks as witnessed in fiscal 2020.
 
The 150-MW IPP in NBEIL depends on short-term PPAs and short-term energy markets for sale, in the absence of a long-term PPA. However, the company is looking to enter into a group captive arrangement which should improve visibility of cash flow. 
 
* Significant investment in MCL, which is yet to generate returns for NBVL
NBVL, through its step down subsidiary MCL, has set up a 300-MW (two units of 150 MW each) power project and a coal handling and processing plant (CHPP) in Zambia for which MCL had availed debt of USD 590 million (around Rs 4,150 crore). Moreover, through NBSPL, NBVL has invested about Rs 1,500 crore as equity/loans in MCL. The power project has been operational since August 2017.
 
MCL's operating performance has been satisfactory, reflected in average plant availability factor (PAF) of 71.6% for the first 9 months of fiscal 2020 (75.4% in fiscal 2019). The project's cash flow, however, remains constrained by delays in payment by its counterparty ZESCO, a state-owned power distribution company in Zambia. As on December 31, 2019, MCL had realised about 66% of its energy billings since commissioning in July 2016. In this period, MCL repaid 27% of the long-term debt availed for the project. However, NBVL has not generated any return in the form of dividends from the investment in MCL so far.
 
Given the non-recourse nature of debt for the project and the management's articulation of not providing support for debt servicing, CRISIL has not factored any further cash outflow to MCL from NBVL. Apart from MCL, NBVL is investing in other projects through overseas subsidiaries, such as a multi-product agro farm block in Zambia under Kawambwa Sugar Ltd. CRISIL has factored in equity investments in these step-down subsidiaries. More-than-anticipated investments in these entities, or any recourse to NBVL for the debt raised at these entities could have a significant bearing on NBVL's financial risk profile.
Liquidity Adequate

The liquidity will be supported by expected cash accrual of Rs 140-150 crore in fiscal 2021, and cash and cash equivalent of Rs 42 crore as on December 31, 2019. NBVL also has access to unutilised fund-based limit of Rs 150 crore at NVBL and NBEIL. The company has long-term debt obligation of Rs 20 crore in fiscal 2020 and Rs 26 crore in fiscal 2021, while capex and investments in group entities are expected at Rs 35 crore per fiscal. CRISIL expects internal accrual, cash and cash equivalent, and unutilised bank lines to be sufficient to meet debt obligation and incremental working capital requirement.

Outlook: Stable

CRISIL believes NBVL will maintain its comfortable financial risk profile with adequate liquidity over the medium term, supported by its cash balance and stable operating margin in the ferroalloys business.
 
Rating sensitivity factors
Upward factors
* Recovery in operating profitability to above 18% and return on capital employed of above 15% a sustained basis
* Improvement in business risk profile reflected by renewal of contracts in the ferroalloys business at favourable terms and long-term PPAs in the power segment
 
Downward factors
* Deterioration in operating profitability and return on capital employed
* More-than-expected investment in other ventures/subsidiaries from the current level of Rs 1,918 crore, resulting in increased debt

About the Company

NBVL was incorporated in 1972 as Nava Bharat Ferro Alloys Ltd (Nava Bharat), which began operations in 1975 with a small ferrosilicon manufacturing unit in Paloncha, Andhra Pradesh. In 1980, Nava Bharat ventured into sugar manufacturing, with the amalgamation of The Deccan Sugar and Abkhari Co Ltd, an EID Parry company. In 1997, it set up a second ferroalloy unit in Odisha. It diversified into coal-fired power generation in 1997 as backward integration for its highly power-intensive ferroalloy business, and later pursued the merchant power business for the surplus generation capacity. The company got its present name in 2006.
 
NBVL was promoted by Dr D Subba Rao and is managed by his son, Mr D Ashok, and son-in-law, Mr P Trivikrama Prasad. The company has three key business divisions: ferroalloys, power, and sugar. It has installed ferroalloy capacity of 200,000 tonne per annum, power generation capacity of 422 MW, and an integrated sugar business with a crushing capacity of 4000 TPD, a 40-KLPD distillery, and a 9-MW cogeneration facility. NBSPL was incorporated in 2004 to trade Nava Bharat's ferroalloy products, and later became the holding company for the group's overseas expansions. NBSPL acquired a 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 commenced operations in August 2017.
 
NBEIL, a step-down subsidiary of NBVL, operates a 150 MW merchant thermal power plant commissioned in February 2013 in Telangana.

Key Financial Indicators
As on / for the period ended March 31   2019 2018
Revenue Rs crore 1359 1313
Profit after tax (PAT) Rs crore 166 155
PAT margin % 12.2 11.8
Adjusted debt/adjusted networth Times 0.11 0.24
Interest coverage Times 9.47 16.83

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL 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)
Rating assigned with outlook
NA Bank guarantee* NA NA NA 68.00 CRISIL A-/Stable
NA Cash credit NA NA NA 86.00 CRISIL A2+
NA Letter of comfort NA NA NA 165.00 CRISIL A2+
NA Letter of credit* NA NA NA 100.00 CRISIL A2+
NA Term loan NA NA  Jul-20 495.00 CRISIL A-/Stable
NA Rupee term loan NA NA Mar-26 155.00 CRISIL A-/Stable
NA Rupee term loan NA NA Mar-24 15.50 CRISIL A-/Stable
*Interchangeable between letter of credit and bank guarantee
 
Annexure - List of entities consolidated
Entities consolidated  Extent of consolidation Rationale for consolidation
Nava Bharat (Singapore) Pte Ltd  Full Significant business and financial linkages, especially for funding the equity requirement of NBVL's overseas step-down subsidiaries, which are held by NBSPL.
Nava Bharat Energy (India) Ltd    Full Similar business, and significant financial linkages, following NBVL's undertaking of the company's entire term debt obligation in fiscal 2019 by borrowing a similar amount and extending an inter-company loan to the company.
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  751.50  CRISIL A-/Stable      05-07-19  CRISIL A/Stable  19-12-18  CRISIL A/Stable  31-10-17  CRISIL A+/Stable  CRISIL A+/Stable 
                07-12-18  CRISIL A/Stable       
Non Fund-based Bank Facilities  LT/ST  333.00  CRISIL A2+      05-07-19  CRISIL A1  19-12-18  CRISIL A1  31-10-17  CRISIL A1  CRISIL A1 
                07-12-18  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
Bank Guarantee* 68 CRISIL A2+ Bank Guarantee* 78 CRISIL A1
Cash Credit 86 CRISIL A-/Stable Cash Credit 66 CRISIL A/Stable
Letter of Comfort 165 CRISIL A2+ Letter of Comfort 165 CRISIL A1
Letter of Credit* 100 CRISIL A2+ Letter of Credit* 110 CRISIL A1
Rupee Term Loan 170.5 CRISIL A-/Stable Rupee Term Loan 170.5 CRISIL A/Stable
Term Loan 495 CRISIL A-/Stable Term Loan 495 CRISIL A/Stable
Total 1084.5 -- Total 1084.5 --
*Interchangeable between letter of credit and bank guarantee
Links to related criteria
CRISILs Approach to Financial Ratios
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating Criteria for Power Distribution Utilities
Rating criteria for manufaturing and service sector companies
CRISILs Criteria for Consolidation
CRISILs Criteria for rating short term debt

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