Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AAA/Stable/CRISIL A1+’ ratings on the bank facilities of Nmdc Limited (NMDC).

 

The ratings continue to factor in the strong business risk profile of NMDC as the largest iron ore producer in the country, high profitability owing to low cost of production, and its 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 company’s 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.

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 have common management and 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 average annual production capacity of 51.8 million tonne (MT). Annual production was 40.8 MT in fiscal 2023, against 42.2 MT in fiscal 2022, whereas annual sales volumes were 38.3 MT and 40.6 MT, respectively. In fiscal 2023, the company accounted for around 16% of total iron ore production in India.

 

NMDC has seven iron ore mining leases (five in Chhattisgarh and two in Karnataka) with total reserve of 1,697 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 67 MT by fiscal 2026.

 

• Healthy operating profitability

NMDC had healthy operating margin of 50-60% over fiscals 2018-2021, supported by its stable and low-cost mining operations. However, 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, earnings before interest, tax, depreciation and amortisation (Ebitda) margin moderated to around 49% in fiscal 2022 from 58% in fiscal 2021.

 

In fiscal 2023, the operating margin contracted to around 34%. On May 21, 2022, to increase domestic supply, GoI hiked the export duty on iron ore to 50% from 30%, and imposed export duty of 45% on iron pellets. Since the duty imposition, NMDC had reduced its iron ore prices (fines) by more than 40% owing to increase in domestic supply. Resultantly, operating margin contracted because of lower realisation. Nonetheless, NMDC continues to be the lowest cost producer globally with cost of production (COP, excluding statutory taxes and levies) of around Rs 1,000 per tonne. The company earns higher realisation on per tonne of iron ore, compared with industry average, owing to better ore quality with iron content of 63-65%, also among the highest grades. Thus, low cost of production and healthy realisation (Rs 4,565 per tonne in fiscal 2023 and Rs 6,298 per tonne in fiscal 2022) support high operating profitability (Ebitda of Rs 1,782 per tonne in fiscal 2023 and Rs 3,282 per tonne in fiscal 2022) and strong cash accrual.

 

• Majority ownership by, and significant strategic importance to, GoI, resulting in low regulatory risk

NMDC is majority held by GoI (60.79%) and under the administrative control of the Ministry of Steel. High strategic importance to GoI is 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 MMDR 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 strong networth, absence of 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 0.02 time (0.10 time in fiscal 2022) and 0.24 time (0.29 time), respectively, as on March 31, 2023, and are expected below 0.1 time and 0.3 time, respectively, over the medium term. Net cash accrual to total debt ratio was 11.64 times in fiscal 2023, against 3.01 times in fiscal 2022. Furthermore, while NMDC is in the process of increasing its capacity, CRISIL Ratings understands that the capital expenditure (capex) undertaken for the same will be funded through internal accrual. Resultantly, NMDC is expected to continue maintaining its strong financial risk profile over the medium term.

 

Weakness:

• 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 Arcelormittal Nippon Steel India Ltd (erstwhile Essar Steel Ltd; ‘CRISIL AA-/Stable/CRISIL A1+’). This makes the company vulnerable to decline in demand or realisation during a downturn in the steel industry and could impact the volume and operating cash flow. However, low cost of production and high ore quality offer some cushion against the offtake risk.

Liquidity: Superior

Liquidity is supported by healthy cash accrual (despite significant dividend payout and capex incurred over the years), low bank limit utilisation and no major term debt obligation. Cash accrual was around Rs 4,800 crore in fiscal 2023 (around Rs 4,300 crore in fiscal 2022) against negligible term debt obligation. Annual capex of around Rs 2,000 crore, earmarked for expanding iron ore capacity in fiscal 2024, will be funded through internal accrual. As on June 30, 2023, net cash balance stood at Rs 11,279 crore.

 

ESG profile

CRISIL Ratings believes the environment, social and governance (ESG) profile of NMDC supports its already strong credit risk profile.

 

The mining sector has 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, which 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:

• With the government’s green energy initiative focusing more on renewable energies, NMDC has set up solar power projects at its office premises. This includes a 30-kilowatt rooftop solar power generation unit at the head office, and 1 MW rooftop solar power generation at production units.
• NMDC is working towards zero-waste mining by maximising utilisation of various grades of iron ore (more than 45% of iron).
• All the permanent employees (100%) are members of their respective recognized employee associations
• As a result of the all-round measures being taken by the company, attrition from NMDC has been marginal despite the remote locations of its mines.
• NMDC research and development has implemented an integrated management system comprising ISO 9001: 2015 (Quality Management System), ISO 14001: 2015 (Environment Management System), OHSAS 18001: 2007 (Occupational Health and Safety Assessment System) and SA 8000: 2014 (Social Accountability).

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: 

• Significant decline in production or operating margin, leading to material deterioration in cash accrual
• Any major debt-funded capex weakening the capital structure
• Reduction in GoI holding to less than 51% resulting in diluted importance to the central government

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 the National Stock Exchange. Its market capitalisation stood at Rs 30,713 crore as on May 18, 2023.

Key financial indicators (Consolidated)*

Particulars	Unit	2023	2022
Operating income	Rs crore	17,607	25,815
Profit after tax (PAT)	Rs crore	5,603	9,427
PAT margin	%	31.8	36.5
Adjusted debt / adjusted networth	Times	0.02	0.10
Adjusted interest coverage	Times	91.58	341.16

* As per analytical adjustments made by CRISIL Ratings

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs crore)	Complexity level	Rating assigned with outlook
NA	Fund-Based Facilities	NA	NA	NA	6,150	NA	CRISIL AAA/Stable
NA	Non-Fund Based Limit	NA	NA	NA	2,850	NA	CRISIL A1+

 

Annexure – List of entities consolidated

Names of entities consolidated	Consolidation approach	Rationale for consolidation
J&K Mineral Development Corporation Ltd	Full consolidation	Significant managerial, operational and financial linkages
Karnataka Vijaynagar Steel Ltd	Full consolidation
NMDC CSR Foundation	Full consolidation
Bastar Railways Pvt Ltd	Equity method
NMDC CMDC Ltd	Equity method
Jharkhand Mineral Development Corporation Ltd	Equity method
International Coal Ventures (Pvt) Ltd	Equity method
Krishnapatnam7 Railway Company Ltd	Equity method
Chhattisgarh Mega Steel Ltd	Equity method