Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AAA/Stable/CRISIL A1+’ ratings on the fund-based and non-fund-based facilities of Nmdc Limited (NMDC), whereas rating on the rupee term loan (RTL) has been downgraded to ‘CRISIL AA’ from ‘CRISIL AAA’ while continues to be on ‘Rating Watch with Negative Implications’.

 

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 stemming from low cost of production (COP), 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 mirrored 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, the business remains susceptible to inherent cyclicality in the steel industry.

 

The RTL facility has been extended for the steel plant, which is being transferred to the new demerged entity, namely NMDC Steel Ltd (NSL). The rating on the RTL has been downgraded as the demerger of the steel plant to the new entity has received all the requisite approvals and has become effective from October 13, 2022. NSL will mirror the shareholding structure of NMDC, and according to the Scheme of Arrangement, all assets and liabilities related to the steel plant (including the RTL) stands to be transferred to NSL, without any linkages to NMDC. While the process of transferring all assets and liabilities related to the steel plant to NSL is underway, NMDC has deconsolidated the said assets from its balance-sheet as per latest financials from September 30, 2022. Also, CRISIL Ratings understands that the process of transferring the RTL facility from NMDC to NSL, by the concerned bank, is underway.

 

The rating on the RTL is to be driven by the standalone credit risk profile of the new entity (NSL), along with any potential support from GoI. CRISIL Ratings believes the credit risk profile of the new entity will be weaker than that of NMDC as the steel plant is yet to commission (expected to commission by March 2023) and will take time to ramp-up and stabilise operations, which could lead to losses in the initial stages. Also, the intent of GoI to divest its majority stake in the new entity to a strategic partner, could dilute its importance to GoI.

 

The rating on the RTL remains on ‘Watch with Negative Implications’, as CRISIL Ratings is in the process of evaluating the strength of linkages of NSL with GoI along with clarity on the extent of need-based support to be provided by GoI to NSL. Clarity on the said aspects is critical for resolution of the watch and is awaited.

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 (61%).

 

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 42 MT in fiscal 2022, against 32-35 MT recorded over the four fiscals through March 2021, after operations resumed at the Donimalai mine. 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. The company has environment clearances for all the mines, and long-term validity of licenses (till 2035-38) for six of the seven mines. The license for the Kumaraswamy mine in Karnataka, was recently renewed and is valid till October 2042. NMDC plans to increase its production and evacuation capacity to around 67 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 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 COP 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 2,643 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 49% in fiscal 2022, from 57% in fiscal 2021, yet remained 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 34% in the first half of fiscal 2023 (EBITDA per tonne of Rs 1,683). Though, the prices are expected to remain lower in fiscal 2023 over previous fiscal on the back of expectation of healthy domestic supply, the prices have witnessed some stabilisation since July 2022 with improved domestic demand. Further, on November 19, 2022, GoI reversed the export duty on iron ore and pellets to levels prior to May 21, 2022, which could result in increased demand for iron ore and support realisation and thus will be a key monitorable. That said, realisations are likely to remain healthy. Expected growth in volume by NMDC will also support cash accrual. Hence, accrual is likely 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 strong networth, absence of any significant long-term debt and moderate operating cash accrual and cash balance, resulting in net cash position over the years. Gearing and total outside liabilities to tangible networth ratios were 0.10 (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 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 the previous fiscal.

 

Weaknesses:

• Susceptibility to inherent cyclicality in the steel sector

Iron ore is the key raw material for steel production, 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-/CCR AA-/Stable/CRISIL 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 COP 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 13, 2022

NMDC is setting up a greenfield steel plant with annual capacity of 3 MT in Chhattisgarh, which is to be commissioned by the end of fiscal 2023. While the project is being funded primarily through internal accrual with debt of only Rs 5000 crore (Rs 2,073 crore of project debt remains unutilised as on November 17, 2022), 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 profile than the mining business, as besides project risk, the plant will take time to ramp-up and stabilise operations post 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.

The steel plant is to be demerged into a separate company called NSL and as per the Scheme of Arrangement, the RTL and all the other all assets and liabilities related to the steel plant are deemed to be transferred to NSL. The same is expected to be completed by December 2022, post which NSL will be listed on the stock exchange. The plant is expected to be commissioned by the end of fiscal 2023 and operations are slated to commence from fiscal 2024. Timely commissioning of the steel plant and clarity on the extent of need-based support to be provided by GoI to NSL will be key monitorables.

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 projected at Rs 3000-3200 crore in fiscal 2023 (around Rs 4300 crore in fiscal 2022), against negligible term debt. Annual capex of Rs 1,500-2,000 crore (excluding for the steel plant) earmarked for expanding iron ore capacity in fiscal 2023, is expected to be funded through internal accrual. As on November 17, 2022, total cash and bank balance stood at Rs 8,062 crore, with net cash at Rs 2,788 crore.

Outlook for fund-based and non-fund-based facilities: Stable

CRISIL Ratings believes NMDC will maintain its leading market position in the domestic iron industry and continue to benefit from its low COP, resulting in healthy cash accrual.

Rating Sensitivity factors

Downward factors for fund- and non-fund-based facilities

• 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

 

Upward factors for RTL facility

• Commissioning of the steel plant without any material cost overruns or any material delay beyond end of fiscal 2023, under the new demerged entity, NSL
• Timely ramp up and stabilisation of operations of the steel plant with healthy utilisation rates and operating margins supporting high free cash generation and strong capital structure
• Strong support philosophy of the parent towards the new demerged entity, NSL, along with shareholding of not less than 51%

 

Downward factors for RTL facility

• Reduction in GoI holding to less than 51% in the demerged entity
• Delay in the commissioning of the steel plant
• Change in the support philosophy of GoI towards the new demerged entity, NSL

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 35,856 crore as on August 30, 2022.

Key Financial Indicators (Consolidated)

Particulars	Unit	2022	2021
Operating income	Rs crore	25,882	15,370
Profit after tax (PAT)	Rs crore	9,391	6,247
PAT margin	%	36.3	40.6
Adjusted debt/adjusted networth	Times	0.10	0.07
Interest coverage	Times	322	522.89

 

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	3300	NA	CRISIL AAA/Stable
NA	Non-Fund Based Limit	NA	NA	NA	2700	NA	CRISIL A1+
NA	Rupee Term Loan	NA	MCLR-6M +0.15%	Mar-30	4500	NA	CRISIL AA/Watch Negative

 

Annexure – List of entities consolidated

Names of entities consolidated	Consolidation approach	Rationale for consolidation
NMDC Power Ltd	Full	Significant managerial, operational and financial linkages
J&K Mineral Development Corporation Ltd	Full
Karnataka Vijaynagar Steel Ltd	Full
Jharkhand Kolhan Steel Ltd	Full
NMDC CSR Foundation	Full
Bastar Railways Pvt Ltd	Equity method
NMDC SAIL 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
Neelanchal Ispat Nigam Ltd	Equity method