Rating Rationale
October 31, 2017 | Mumbai
Nava Bharat Ventures Limited
Ratings Reaffirmed
 
Rating Action
Total Bank Loan Facilities Rated 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 rating on the bank facilities of Nava Bharat Ventures Limited (NBVL) at 'CRISIL A+/Stable/CRISIL A1'.

The ratings reflect healthy financial risk profile with moderate debt protection metrics and adequate liquidity as well as diverse revenue profile of NBVL. CRISIL expects substantial debt reduction in NBVL from Rs.478 crores in fiscal 2017 to under Rs.200 crores in fiscal 2018 with cash received from step down subsidiary Maamba Collieries Limited (MCL) being utilized for debt reduction. The company does not have any major capital expenditure or investment plans over the medium term. The liquidity of the company is expected to remain healthy with adequate cash and bank balances and low bank limit utilization. The cash accruals are also expected to be benefited from inflow of substantial dividends from MCL in fiscal 2019.
 
The diversified business profile - comprising ferroalloys, sugar, and power businesses ' has helped mitigate the impact of cyclicality, to an extent, in any particular division. The operating performance of the company has improved on the back of rise in profitability of the ferro alloy segment and high sugar realizations although the performance of the power segment declined in fiscal 2017. The operating margins were at 13% in fiscal 2017 as compared to 10.5% in fiscal 2016 and with improvement in ferro alloy profitability, the margins are expected to remain around 12% in fiscal 2018. Although the performance of the power segment is expected to remain subdued over the medium term due to low offtake and realizations, the company is expected to reduce losses by increasing power usage for captive consumption. Sugar realizations are expected to remain firm over the medium term leading to sustained profitability in fiscal 2018 as well. Sustenance of margins will be a key rating sensitivity factor over the medium term.
 
The above strengths are partially offset by volatility in the company's ferroalloy and sugar businesses as well as possible deterioration in liquidity of the company due to support extended to other companies in the group thereby straining the financial risk profile of NBVL.

Analytical Approach

For arriving at its ratings, CRISIL has combined the business and financial risk profiles of NBVL and NBSPL. This is because NBVL used to route the bulk of its exports through NBSPL. Moreover, there are significant business and financial linkages between the two companies, especially for funding the equity requirement of step-down subsidiaries. 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 the project debt is non-recourse in nature. In addition, the management stated that it will not extend support to these subsidiaries for meeting their debt repayment obligations. CRISIL has, however, factored in NBVL's support for funding only the equity component of the investment in these step-down subsidiaries, in addition to support for funding cost overruns. These subsidiaries/step-down subsidiaries include Brahmani Infratech Pvt Ltd, Nava Bharat Projects Ltd, Nava Bharat Energy India Ltd, and MCL. Any change in the management's policy of support to these companies will be a key rating sensitivity factor.

Key Rating Drivers & Detailed Description
Strengths
* Healthy financial risk profile
NBVL has a comfortable financial risk profile, because of moderate debt protection metrics, adequate liquidity and a comfortable capital structure. NBVL had a net worth of Rs1,336 crores (after adjusting for investments and loans and advances of Rs1,466 crores) and low gearing of 0.36 times as on March 31, 2017. Debt protection metrics such as interest coverage and Net cash accruals to total debt (NCATD) are expected to improve in fiscal 2018 with decline in debt and conversion of rupee term loan to foreign currency term loan in H1FY18. The interest coverage ratio is expected to be around 4 times in fiscal 2018. Also the company is expected to maintain healthy liquidity in the form of cash and bank balances over the medium term. The accruals and cash balances in fiscal 2019 are expected to be high due to significant dividend cash flow of above Rs.100 crores to be received from MCL. The company is also in talks to divest stake in the overseas subsidiary, Nava Bharat Singapore by bringing a strategic investor and is also planning to sell the 60 MW power units in Odisha. The proceeds if any from these events are expected to be used to reduce debt going forward.
 
* Diversified revenue profile 
NBVL had an operating income of Rs949 crores in fiscal 2017 as against Rs992 crores in fiscal 2016. The decline was due to lower operating income from power segment which declined from Rs604 crores in fiscal 2016 to Rs494 crores in fiscal 2017 due to low offtake leading to lower power generation. With the company's Power Purchase Agreements (PPAs) expiring in May 2017, the profitability of this segment is expected to decline in fiscal 2018 due to lower realization from sale to power exchanges. This is expected to be mitigated to some extent by increase in captive usage for ferro alloy production.
 
The ferro alloys division consists of silico manganese production and conversion of ferro chrome. The revenue from ferro alloy division improved to Rs631 crores in fiscal 2017 from Rs495 crores in fiscal 2016 due to increased production and higher realizations in silico manganese. Due to increase in realizations in silico manganese, the company is expected to further increase ferro alloy production in fiscal 2018. The production of the silico manganese is expected to be around 90,000 tons in fiscal 2018 as compared to 71,676 tons in fiscal 2017. This will help mitigate low realizations in power segment. The profitability and stability of the division was also improved post signing the ferro chrome conversion contract with TATA Steel in fiscal 2016 which is expected to be a steady contributor in terms of revenue and profitability.
 
Due to high sugar realizations NBVL's sugar division is expected to sustain profitability going forward. The division reported revenues of Rs.167 crores in fiscal 2017 against Rs142 crores in fiscal 2016. The segment reported Profit before Interest and Tax (PBIT) of Rs.31 crores in fiscal 2017 as against Rs.2 crores in fiscal 2016.
 
NBVL's operating performance is expected to sustain over the medium term due to high realizations of silico manganese and sugar. Any large decline in operating margins would be a key rating sensitivity factor going forward.
 
Weakness
* Exposure to cyclicality and regulatory risks  
The domestic ferroalloys industry is replete with unorganised players. In the past, the industry has displayed cyclical trends, mainly because of the demand-supply gap created by the unorganised players. Presence of the unorganised sector and the commoditised nature of products constrain the pricing power of players in the ferro alloys segment. Moreover, the ferro alloy industry is closely linked to cyclicality in the steel industry, in terms of demand.   
 
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.  
 
NBVL will remain exposed over the medium term to the cyclical and regulated nature of the industries it operates in.
 
* Support to group companies
NBVL through its step down subsidiary MCL setup a coal handling and processing plant (CHPP) as well as a 300-MW (two units of 150 MW each) power project in Zambia for which MCL had availed USD 590 million (approximately Rs.3,800 crores) debt. The cost of the project is around USD 840 million (approximately Rs.5,500 crores) funded at a debt-equity mix of 70:30. Given, the non-recourse nature of debt-funding for the above projects, CRISIL has not factored the debt to be raised for these projects in the financial risk profile of NBVL. Also the debt to be serviced by subsidiary Nava Bharat Energy India Ltd (NBEIL), operating the 150 MW thermal power plant, is also expected to be serviced from cash flows of NBEIL itself.
 
CRISIL believes that 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 and sugar segment. The outlook may be revised to 'Positive' in case of substantial and sustained improvement in operating margins. The outlook may be revised to 'Negative' if the financial risk profile weakens because of large debt-funded capital expenditure or if the liquidity of NBVL is weakened by sizeable support provided to other group companies or if there is a decline in operating margins or lower than expected dividends from MCL leading to lower cash accruals.

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 the current one 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 fiscal 2018.

NBVL, on standalone basis, had a profit after tax (PAT) of Rs83 crores on net sales of Rs 948 crores in fiscal 2017, against a PAT of Rs 111 crores on net sales of Rs990 crores in fiscal 2016. On a consolidated basis, NBVL had a PAT of Rs 70 crores on net sales of Rs 949 crores in fiscal 2017, as against a PAT of Rs 106 crores on net sales of Rs 992 crores in fiscal 2016.

Key Financial Indicators
Particulars Unit 2017 2016
Revenue Rs crore 949 992
Profit After Tax (PAT)  Rs crore 70 106
PAT Margins % 7.3 10.7
Adjusted debt/adjusted net worth Times 0.36 0.46
Interest coverage Times 2.1 1.84

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 44 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-20 495 CRISIL A+/Stable
 *Interchangeable between letter of credit and bank guarantee
Annexure - Rating History for last 3 Years
  Current 2017 (History) 2016  2015  2014  Start of 2014
Instrument Type Quantum Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund-based Bank Facilities  LT/ST  561  CRISIL A+/Stable    No Rating Change  18-07-16  CRISIL A+/Stable  05-11-15  CRISIL A+/Negative    No Rating Change  CRISIL A+/Stable 
Non Fund-based Bank Facilities  LT/ST  319  CRISIL A1    No Rating Change    No Rating Change    No Rating Change  07-08-14  CRISIL A1  CRISIL A1+ 
Table reflects instances where rating is changed or freshly assigned. 'No Rating Change' implies that there was no rating change under the release.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Bank Guarantee* 44 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 495 CRISIL A+/Stable Term Loan 495 CRISIL A+/Stable
Total 880 -- 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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