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Detailed Rationale CRISIL Ratings has downgraded its rating on the rupee term loan (RTL) of NMDC Ltd (NMDC) to ‘CRISIL A/Watch Developing’ from ‘CRISIL AA/Watch Negative’ and subsequently withdrawn the rating based on client request and the requisite supporting documents from the lender. This is in line with the CRISIL Ratings withdrawal policy; the ratings on the fund-based and non-fund-based facilities has been reaffirmed at ‘CRISIL AAA/Stable/CRISIL A1+’.
The ratings for fund-based and non-fund-based facilities of NMDC continue to factor in the strong business risk profile of NMDC as the largest iron ore producer in the country, high profitability due to low cost of production, and the strong financial risk and liquidity profiles. The ratings also reflect the strategic importance of the company to the Government of India (GoI), also reflected in the majority holding by GoI and the Navratna status. This also provides the company preferential treatment under the amended Mines and Mineral (Development & Regulation) (MMDR) Act. However, business remains susceptible to inherent cyclicality in the steel industry.
The RTL facility has been extended for the steel plant, which has been transferred* to the resulting entity, NMDC Steel Ltd (NSL). The rating on the RTL has been downgraded to ‘CRISIL A/Watch Developing’ from ‘CRISIL AA/Watch with Negative Implication’ and factors in the extent of GoI support available to NSL through NMDC, though limited to the time till NSL is divested by GoI. The RTL rating also factors in the project risk as the steel plant is yet to be commissioned, though execution risk is limited as the plant is in advanced stages of completion while stabilisation risk for the steel plant continues.
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% will be transferred to NMDC. However, CRISIL Ratings understands that the Ministry of Steel, 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 has 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 for the company, hence the outlook on the RTL has been revised to ‘Watch developing’.
* According to the scheme of arrangement, all assets and liabilities related to the steel plant (including the RTL) stands to be transferred to NSL from the appointed date of demerger, which is April 01, 2021. Furthermore, NSL alone shall be liable to perform all obligations in respect of the liabilities, which have been transferred to it in terms of the demerger scheme without any linkages to NMDC. Based on the approval of the scheme of arrangement by the Ministry of Corporate Affairs, the companies NMDC and NSL have signed a joint deed of confirmation dated February 28, 2023, in favour of the State Bank of India. CRISIL Ratings has received a letter from the lender confirming the acceptance of the deed of confirmation and transfer of RTL from NMDC Ltd to NMDC Steel Ltd. The transfer in core banking system is under process. |
Analytical Approach CRISIL Ratings has combined the business and financial risk profiles of NMDC and its subsidiaries, associates and joint ventures. This is because all the entities are under a common management with strong business and financial linkages.
CRISIL Ratings has also applied its criteria for notching up standalone ratings of entities based on government support. CRISIL Ratings believes NMDC will receive support from GoI in case of any exigency, considering its strategic importance and the majority ownership (60.79%).
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: Strong business risk profile as the largest iron ore producer in the country NMDC is the largest iron ore producer in India, with an average annual production capacity of 51.8 million tonne (MT). Annual production was 38 MT in fiscal 2023 against 42 MT in fiscal 2022, whereas annual sales volume were 41 MT and 42 MT, respectively. In fiscal 2022, the company accounted for around 18% of total iron ore production in India. NMDC has seven iron ore mining leases (five in Chhattisgarh and two in Karnataka) with total reserves of 1,776 MT, providing high revenue visibility with mining life of over three decades. It has environment clearances for all the mines, and long-term validity of licences (till 2035-2038) for six of the seven mines. The licence for the Kumaraswamy mine in Karnataka was renewed in fiscal 2023 and is valid till October 2042. NMDC plans to increase its production and evacuation capacity to around 65 MT by fiscal 2025.
Healthy operating profitability NMDC has reported a healthy operating margin of 50-60% over fiscals 2018-2021, supported by its stable and low-cost mining operations. It is among the lowest cost producers globally with cost of production (COP, excluding statutory taxes and levies) of around Rs 1,000 per tonne. The company earns a higher realisation on per tonne of iron ore as compared with industry average due to better ore quality with iron content of 63-65%, also among the highest grades. Thus, low cost of production and healthy realisations (Rs 6,298 per tonne in fiscal 2022 and Rs 4,581 per tonne in fiscal 2021) support the high operating profitability (earnings before interest, tax, depreciation and amortisation {Ebitda} of Rs 3,102 per tonne in fiscal 2022 and Rs 2,637 per tonne in fiscal 2021) and strong cash accrual. That said, as per the amended MMDR Act, 2021, NMDC has been paying a premium of 22.5% of the average selling price (in addition to existing iron ore royalty payout of 15%) on all its mines from fiscal 2022. Hence, Ebitda margin moderated to around 50% in fiscal 2022 from 58% in fiscal 2021, yet being healthy.
Subsequently, on May 21, 2022, to increase domestic supply, GoI hiked the export duty on iron ore to 50% from 30% earlier, and imposed an export duty of 45% on iron pellets. Since the duty imposition, NMDC has reduced its iron ore prices (fines) by more than 40%, mainly due to increase in domestic supply. Operating margin contracted to 40% in the first quarter of fiscal 2023 (Ebitda per tonne of Rs 2,475). Going forward, the operating margin could witness some moderation along with lower prices. Though, the prices are expected to remain lower in fiscal 2023 than last fiscal on the back of expectation of healthy domestic supply, the prices have witnessed some stabilisation since July 2022 with improved domestic demand. That said, realisations are likely to remain healthy. Expected growth in volume by NMDC will also support cash accrual. Hence, accruals are expected to remain robust going forward.
Majority ownership by and significant strategic importance to GoI, resulting in low regulatory risk NMDC is majority held by GoI (61%) and under the administrative control of the Ministry of Steel. High strategic importance to GoI is also reflected in the Navratna status and leading position of the company in the domestic iron ore industry, as iron ore is a key raw material for steel production. Being a public sector enterprise (PSE), NMDC receives preferential treatment under the amended MMRD Act, 2021. The Act permits special powers to the government to allocate mines and renew mining licences of PSEs.
Strong financial risk profile supported by net cash position Capital structure and debt protection metrics are healthy, aided by a strong networth, absence of any significant long-term debt and healthy operating cash accrual and cash balance, resulting in net cash position over the years. Gearing and total outside liabilities to tangible networth ratio were 0.10 time (0.07 time in fiscal 2021) and 0.29 time (0.24 time), respectively, as on March 31, 2022, and are likely to be below 0.1 time and 0.3 time, respectively, in the medium term. Net cash accrual to total debt ratio was 1.54 times for fiscal 2022, against 2.11 times in fiscal 2021.
Weaknesses: Susceptibility to inherent cyclicality in the steel sector Iron ore is the key raw material for production of steel, which is an inherently cyclical industry. NMDC sells around 70% of its iron ore to three counterparties: Rashtriya Ispat Nigam Ltd, JSW Steel Ltd and Arcelor Mittal Nippon Steel India Ltd (erstwhile Essar Steel Ltd) (CRISIL AA-/Stable/A1+). This makes NMDC vulnerable to decline in demand or realisations during a downturn in the steel industry, and could in turn impact the volume and operating cash flow. However, low cost of production and high ore quality offer some cushion against the offtake risk.
Credit profile of steel business under NSL to be weaker than mining; demerger effective from October 2022 NMDC has set up a greenfield steel plant (final approvals yet to be received for achieving date of commencement of commercial operations [DCCO]) with annual capacity of 3 MT in Chhattisgarh, which is to be commissioned by June 2023 (against the earlier expected DCCO of March 2023). While the project has been funded through internal accrual and debt of only Rs 5,000 crore (Rs 900 crore of project debt remains unutilised as on April 30, 2023), time and cost overruns have resulted in higher per tonne project cost vis-à-vis the industry average. The steel business may have a weaker credit risk profile than the mining business, as besides project risk, the plant will take time to ramp-up and stabilise operations after commissioning. Also, the steel business may witness lower profitability than the iron ore mining business, and lower returns on account of higher-than-expected per tonne capital employed, though per tonne debt will be low compared to industry peers.
Thus, rating on the RTL availed of for the steel plant also factors in the project risk, though limited, as the steel plant is yet to achieve commercial operations. |
Liquidity: Superior Liquidity is supported by healthy cash accrual (despite significant dividend payout and capital expenditure [capex] incurred over the years), low bank limit utilisation and no major term debt. Cash accrual is expected at Rs 3,000-3,200 crore in fiscal 2023 (around Rs 4,300 crore in fiscal 2022) against negligible term debt. Annual capex of around Rs 2,000 crore (excluding for the steel plant), earmarked for expanding iron ore capacity in fiscal 2024, is expected to be funded through internal accrual. As on May 12, 2023, total cash and bank balance stood at Rs 9,285 crore, with net cash at Rs 7,454 crore.
ESG profile CRISIL Ratings believes that NMDC Ltd’s environment, social, and governance (ESG) profile supports its already strong credit risk profile.
The mining sector has a significant impact on the environment owing to higher emissions, waste generation and water consumption. This is because of the energy-intensive mining process and conversion of iron ore into pellets. It has high dependance on natural resources such as coking coal and iron ore (key inputs). The sector’s social impact includes the nature of its operations affecting the local community and the health hazards involved.
Key ESG highlights:
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Outlook: Stable CRISIL Ratings believes NMDC will maintain its leading market position in the domestic iron industry and continue to benefit from its low cost of production, resulting in healthy cash accrual. |
Rating Sensitivity factors Downward factors for fund-and non-fund-based facilities
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About the Company NMDC, incorporated in 1958, is a Navaratna PSE, primarily involved in iron ore mining. It is under the administrative control of the Ministry of Steel, GoI. It has seven operational iron ore mining leases: five in Chhattisgarh and two in Karnataka. NMDC is listed on the Bombay Stock Exchange and National Stock Exchange. Its market capitalisation stood at Rs 30,713 crore as on May 18, 2023. |
Key Financial Indicators (consolidated)*
* As per analytical adjustments made by CRISIL Ratings |
Any other information: Not applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
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Annexure - List of Entities Consolidated
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| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Annexure - Details of Bank Lenders & Facilities | ||||||||||||||||||||||||||||||||||||||||||||
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This Annexure has been updated on 26-May-23 in line with the lender-wise facility details as on 25-Oct-21 received from the rated entity.
Criteria Details
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