Rating Rationale
December 19, 2018 | Mumbai
Nava Bharat Ventures Limited
Rated amount enhanced
 
Rating Action
Total Bank Loan Facilities Rated Rs.1069 Crore (Enhanced from Rs.880 Crore)
Long Term Rating CRISIL A/Stable (Reaffirmed)
Short Term Rating CRISIL A1 (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has reaffirmed its 'CRISIL A/Stable/CRISIL A1' ratings on the bank loan facilities of Nava Bharat Ventures Limited (NBVL).

On December 7, 218 CRISIL had downgraded the long term rating on the bank facilities of NBVL to 'CRISIL A/Stable' from 'CRISIL A+/Stable' while reaffirming its short term rating at 'CRISIL A1'. 

The rating action factored in the weakening of NBVL's business risk profile considering the consolidation of its step-down subsidiary, Nava Bharat Energy India Ltd (NBEIL) which does not enjoy a long-term PPA or fuel security. CRISIL changed the analytical approach and consolidated NBEIL (considered only equity investment earlier), after NBVL, in H1FY19 raised debt of Rs 155 crore to extend an inter-corporate loan to NBEIL, which utilized it to prepay its existing term loan. The support by NBVL also led to higher-than-expected debt. The financial risk profile was also impacted by an additional loan of about Rs. 110 crore extended to Maamba Collieries Limited (MCL) in fiscal 2018, against expectation of dividends of about Rs. 100 crore in this period. Moreover, the ratings are constrained by exposure to cyclicality in its ferroalloys and sugar businesses and the significant amount of investment in group entities, particularly in MCL, which is yet to generate returns.

However, the ratings continue to be supported by NBVL's integrated business operations (with captive power), improvement in operating performance owing to healthy demand conditions for silico manganese alloys and steady profitability of its ferrochrome conversion business.

Analytical Approach

For arriving at its ratings, CRISIL has fully consolidated the business and financial risk profiles of NBVL, Nava Bharat (Singapore) Pte Ltd (NBSPL) and NBEIL.

NBSPL is consolidated owing to its significant business linkages with NBVL, as it is used to route the bulk of its exports of ferroalloys. Moreover, there are significant financial linkages between the two companies, especially for funding the equity requirement of 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) based out of Telangana. CRISIL has consolidated NBEIL owing to significant financial linkages with its parent, following NBVL's undertaking of the company's entire term debt obligations in FY 2018-19 by borrowing a similar amount and extending an inter-company loan to the company.

However, CRISIL has not combined the business and financial risk profiles of the other subsidiaries of NBVL and NBSPL, as they are moderately integrated, and their project debt is non-recourse in nature. In addition, the management has articulated that NBVL shall not extend support to these subsidiaries for meeting their debt repayment obligations. CRISIL has, however, factored in further equity investments in some of these entities. These subsidiaries/step-down subsidiaries include 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 net worth of Rs1,282 crores (after adjusting for investments and loans and advances of Rs1,428 crores) and low gearing of 0.26 times as on March 31, 2018. Debt protection metrics such as interest coverage and Net cash accruals to total debt (NCATD) are expected to remain adequate in fiscal 2019, owing to steady profitability and moderate debt levels.

* Integrated nature of Ferro-chrome operations
NBVL's 125,000 MTPA silico manganese manufacturing facility in Telangana is supported by a 114 MW captive power plant (CPP), while its 75,000 MTPA ferrochrome conversion facility in Orissa is supported by a 60 MW CPP ' both the CPPs have auction-linkages for coal, and sell excess power in the exchange, or via short term PPAs. Moreover, in fiscal 2018, NBVL also started  providing O&M support services to MCL's 300 MW power plant in Zambia, which will result in stable, additional revenues of about USD 8 mn per year, and add to its profitability.

The company's 4000 TCD sugar facility is also fully integrated with a capacity distillery and a cogeneration plant. The integrated nature of operations partly mitigate the impact of cyclicality of the businesses.

Healthy realizations and sales volumes for the company's silico manganese alloys segment, steady profitability in its ferrochrome conversion business and satisfactory power sales resulted in significant improvement in profitability with EBITDA at Rs. 234 crore in fiscal 2018 from Rs. 123 crore in fiscal 2017.  Going ahead, profitability is expected to remain healthy given demand conditions for ferroalloys, although profitability from its sugar segment is likely to be subdued.  Nonetheless, any large decline in operating margins would be a key rating sensitivity factor going forward.

Weaknesses   
* Significant business risks given the cyclicality in Ferro alloys and exposure to fluctuations in power realizations & coal prices for NBEIL  
The ferroalloys segment, which is the main driver for NBVL's profitability, operates in an industry is that is closely linked to cyclicality in the steel industry in terms of demand. Moreover, the domestic ferroalloys industry is replete with unorganised players which exacerbates the impact of cyclicality. While the company's ferrochrome segment is a conversion business and is thus insulated from the industry's cyclicality to an extent, the company's contract with Tata Steel is up to March 2020 only ' thus the company will be dependent on the prevailing demand-supply conditions at that time if it is unable to renew the contract. 

The sugar industry is also highly regulated with regulations 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, the export-import policy, and Government of India's (GoI's) sugar release mechanism. Also the sugar industry is cyclical and is governed by the cane cultivation pattern. Currently, subdued sugar prices has severely constrained this segment's profitability for the company. Nevertheless, this segment comprised less than 15% of the company's revenue in fiscal 2018.

NBVL's 150 MW IPP, NBEIL remains dependent on short-term PPAs and short term energy markets for off-take, in absence of a long term PPA. Moreover, the company does not have long term linkages and procures coal mainly via e-auctions, thus its fuel cost is subject to fluctuations in coal prices.   

* 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 as well as a coal handling and processing plant (CHPP) in Zambia for which MCL had availed USD 590 million (approximately Rs 4,150 crores) debt. Moreover, NBVL has invested about Rs 1500 Cr as equity/loans in MCL. The power project has been operational since August 2017. Despite satisfactory operational performance, the project's cashflows remain constrained by delays in release of payments from its counter-party ' ZESCO, a state owned power distribution company in Zambia. Hence NBVL has been able to generate any returns from the investment so far. Nonetheless, given the non-recourse nature of debt for the above 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 also investing in other projects via 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. Higher than anticipated investments in these entities, or any recourse to NBVL for the debt raised at these entities could have a significant bearing on its financial risk profile.
Outlook: Stable

CRISIL believes NBVL will maintain its comfortable financial risk profile with adequate liquidity over the medium term, supported by cash balance and stable operating margins from Ferro alloys. The outlook may be revised to 'Positive' in case of improvement in business profile of NBEIL by signing of a long term PPA and entering into a long term fuel supply agreement, or a  sizable reduction in debt levels. The outlook may be revised to 'Negative' if the company's profitability declines materially, or its financial risk profile weakens because of large debt-funded capital expenditure, or support provided to group companies.

Liquidity: Adequate
NBVL Ltd has adequate liquidity driven by expected cash accruals of more than Rs.180 crore per annum in FY19 and FY20 and cash and cash equivalents of about Rs. 50 crore as on March 31, 2018. NBVL also has access to largely unutilized fund based limits of Rs. 72 crore. The company has long term repayment obligations around Rs. 120 crore per year in FY19 and FY20, while capex and investments in group entities are expected to be about Rs. 80-90 crore/year in this period. CRISIL expects internal accruals, cash & cash equivalents and unutilized bank lines to be sufficient to meet its repayment obligations as well as incremental working capital requirements.

About the Company

NBVL was originally 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 a backward-integration strategy for its highly power-intensive ferroalloy business, and later pursued the merchant power business with the surplus generation capacity. The company's name was changed to NBVL in 2006.

NBVL was promoted by Dr D Subba Rao and is currently 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 megawatt (MW), and an integrated sugar business with a crushing capacity of 4000 tonne per day, 40 KLPD capacity Distillery and a 9-MW cogeneration facility. NBSPL was incorporated in 2004 to undertake trading of Nava Bharat's ferroalloy products, and later became the holding company for the group's overseas expansions. NBSPL had acquired a 65 per cent stake in MCL in Zambia. MCL setup a 300-MW coal-based power plant with 35% equity participation from an investment holding company of 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
Particulars Unit 2018 2017
Revenue Rs crore 1,313 949
Profit After Tax (PAT)  Rs crore 155 70
PAT Margins % 11.8% 7.3%
Adjusted debt/adjusted networth Times 0.26 0.36
Interest coverage Times 16.8 3.4

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.Cr)		 Rating assigned with outlook
NA Bank Guarantee* NA NA NA 78 CRISIL A1
NA Cash Credit NA NA NA 66 CRISIL A/Stable
NA Letter of Comfort NA NA NA 165 CRISIL A1
NA Letter of Credit* NA NA NA 110 CRISIL A1
NA Term Loan NA NA  Jul-2020 495 CRISIL A/Stable
NA Term Loan NA NA Mar-2026 155 CRISIL A/Stable
*Interchangeable between letter of credit and bank guarantee
 
Annexure - Details of Consolidation
Entities consolidated Extent of consolidation Rationale for consolidation
Nava Bharat (Singapore) Pte Ltd (NBSPL) Full Significant business linkages with NBVL, as it is used to route the bulk of its exports of ferroalloys. Moreover, there are significant financial linkages between the two companies, especially for funding the equity requirement of NBVL's overseas step-down subsidiaries, which are held by NBSPL.
Nava Bharat Energy (India) Ltd (NBEIL) Full Similar line of business, and significant financial linkages with its parent, following NBVL's undertaking of the company's entire term debt obligations in FY 2018-19 by borrowing a similar amount and extending an inter-company loan to the company.
Annexure - Rating History for last 3 Years
  Current 2018 (History) 2017  2016  2015  Start of 2015
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund-based Bank Facilities  LT/ST  716.00  CRISIL A/Stable  07-12-18  CRISIL A/Stable  31-10-17  CRISIL A+/Stable  18-07-16  CRISIL A+/Stable  05-11-15  CRISIL A+/Negative  CRISIL A+/Stable 
Non Fund-based Bank Facilities  LT/ST  353.00  CRISIL A1  07-12-18  CRISIL A1  31-10-17  CRISIL A1  18-07-16  CRISIL A1  05-11-15  CRISIL A1  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* 78 CRISIL A1 Bank Guarantee* 44 CRISIL A1
Cash Credit 66 CRISIL A/Stable Cash Credit 66 CRISIL A/Stable
Letter of Comfort 165 CRISIL A1 Letter of Comfort 165 CRISIL A1
Letter of Credit* 110 CRISIL A1 Letter of Credit* 110 CRISIL A1
Term Loan 650 CRISIL A/Stable Term Loan 495 CRISIL A/Stable
Total 1069 -- Total 880 --
*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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