Rating Rationale
July 19, 2021 | Mumbai
Posco Maharashtra Steel Private Limited
Rating Reaffirmed; CP Withdrawn
 
Rating Action
Total Bank Loan Facilities RatedRs.713 Crore (Reduced from Rs.1043 Crore)
Long Term RatingCRISIL AA/Stable (Withdrawn)
Short Term RatingCRISIL A1+ (Reaffirmed)
 
Rs.800 Crore Commercial PaperCRISIL A1+ (Withdrawn)
1 crore = 10 million
Refer to Annexure for Details of Instruments & Bank Facilities

Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL A1+’ rating on the bank facilities of POSCO Maharashtra Steel Pvt Ltd (POSCO Maharashtra). Subsequently, CRISIL Ratings has withdrawn its ‘CRISIL AA/Stable’ rating on the Rs 330 crore long-term bank loan facility based on the company’s request and a no-objection certificate provided by the lender. CRISIL Ratings has also withdrawn its rating on the Rs 800 crore commercial paper program based on independent confirmation and at the client’s request. The withdrawal is in line with CRISIL Ratings’ policy on withdrawal of its ratings.

 

On a provisional basis, operating income declined 27% in fiscal 2021 because of subdued demand in the end-user industries, especially automobiles, on account of the nationwide lockdown to contain the spread of Covid-19 pandemic during the first half of the fiscal. However, the margin improved to 11.4% in fiscal 2021 from 2.5% in fiscal 2020, driven by healthy recovery in steel demand and prices during the second half of fiscal 2021. Operating performance for fiscal 2022 is expected to be strong, supported by a healthy industry outlook.

 

The financial risk profile has improved significantly, driven by debt reduction (primarily working capital borrowings) supported by higher credit period from the parent. The company successfully refinanced external commercial borrowing of USD 182 million in December 2020, repayable in December 2023 as bullet payment. Because of healthy operating performance and improvement in the financial risk profile, the debt protection metrics have strengthened. The financial risk profile will sustain, supported by strong financial flexibility on account of the parent.

 

The ratings continue to reflect the strong business and financial linkages of POSCO Maharashtra with the parent, POSCO Korea (rated ‘BBB+/Positive’ by S&P Global Ratings [S&P]), and presence in the high-end products segment, comprising cold-rolled (CR) coils, galvanised and galvannealed coil and cold-rolled non-grain oriented (CRNGO) steel. These strengths are partially offset by exposure to risks related to fluctuations in foreign exchange (forex) rates and cyclicality in the steel industry

Analytical Approach

CRISIL Ratings has factored in the strong business and financial linkages of the company with the parent owing to the similar line of business, common name, and criticality of operations to the Indian market, with 100% ownership and management control. POSCO Korea has guaranteed the long-term debt of POSCO Maharashtra and extended a letter of comfort for the short-term debt. The parent has also infused capital every year over the five years through fiscal 2017. POSCO Asia Co Ltd, Hong Kong (a wholly owned subsidiary of the parent company), continues to provide unsecured loans to the company.

Key Rating Drivers & Detailed Description

Strengths:

  • Strong linkages with the parent: The ratings continue to reflect the strong linkages with, and technological and financial support from, the parent. POSCO Maharashtra procures 40-50% of its hot rolled coil (key raw material) requirement from parent and supports POSCO Maharashtra by providing flexible credit terms to support the liquidity. POSCO Maharashtra will continue to be strategically important to its parent’s growth plans in India.

 

  • Presence in the high-end product segment and strong clientele: Revenue registered compound annual growth rate of 26% over the five fiscals through 2020, driven by increase in demand for CR coils, galvanised coils and CRNGO. These products find application in manufacturing automobiles, white goods and consumer durables. The decline in fiscal 2021 is expected to be a one-off caused by the impact of the Covid-19 pandemic. Presence in the high-value products segment safeguards the company from intense competition and allows it to supply across large geographies at competitive rates.

 

Weaknesses

  • Susceptibility to volatility in forex rates: POSCO Maharashtra is susceptible to fluctuations in forex rates because of borrowings in foreign currency, which are unhedged, leading to forex losses of 6-7% of the operating income in the past. In recent years, forex losses for the company have reduced to 1-2%, and in fiscal 2021, the company was able to make foreign exchange profits.

 

  • Exposure to cyclicality in the steel industry: The company remains susceptible to cyclicality in the steel industry, as growth is strongly linked to domestic and global economies. The industry caters to sectors such as infrastructure, building and construction, capital goods and automobiles. Given that these sectors are some of the key contributors to the country’s gross domestic product, the steel industry is susceptible to economic downturns and, hence, is cyclical. Profitability is linked to the overall fortunes of the steel industry.

Liquidity Strong

Utilisation of the fund-based bank limit averaged 28% over the 12 months through May 2021 in the absence of any major capital expenditure. Cash and equivalents were Rs 152 crore as on May 31, 2021. The company receives support in the form of unsecured loans from group entities. Internal accrual, unutilised bank lines, fund support through unsecured loans and cash and equivalents will sufficiently cover the debt obligation and the incremental working capital requirement over the medium term.

Rating Sensitivity factors

Downward factors

  • Downgrade in credit ratings of the parent company by one or more notches by S&P, with the operating performance of POSCO Maharashtra remaining subdued
  • Weakening of the financial risk profile because of decline in profitability, forex losses and/or stretch in the working capital cycle on a sustained basis

About the Company

POSCO Maharashtra, a fully owned subsidiary of POSCO Korea commissioned in 2012, provides high-quality galvanised and galvannealed steel used in the construction, home appliance and automotive industries. The company supplies high-quality steel products to automotive customers, with capacity of 0.45 million tonne per annum (MTPA) for coated steel and 1.8 MTPA for CR steel.

 

POSCO Electrical Steel India Pvt Ltd merged with POSCO Maharashtra with effect from April 1, 2016.

Key Financial Indicators (CRISIL Ratings-adjusted numbers)

As on / for the period ended March 31

2020

2019

Operating income

Rs crore

8,387

10,311

Profit after tax (PAT)

Rs crore

(599)

(94)

PAT margin

%

(7.1)

(0.9)

Adjusted debt/Adjusted networth

Times

1.82

1.08

Interest coverage

Times

0.70

2.56

 

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL Ratings' complexity levels are assigned to various types of financial instruments. The CRISIL Ratings' complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL Ratings' 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 instruments and bank facilities

ISIN

Name of instrument

Date of allotment

Coupon rate (%)

Maturity date

Issue size (Rs crore)

Complexity levels

Rating assigned with outlook

NA

Short-term loan^

NA

NA

NA

428.00

NA

CRISIL A1+

NA

Overdraft#

NA

NA

NA

285.00

NA

CRISIL A1+
NA Cash credit* NA NA NA 330.00 NA Withdrawn
NA Commercial paper NA NA 7-365 days 800.00 NA Withdrawn

^INR equivalent of USD 60 million

# INR equivalent of USD 40 million

*interchangeable with working capital demand loan for Rs 330 crore, pre/post shipping export credit for USD 5 million (around Rs 32.17 crore), buyer’s credit for Rs 82.5 crore and import financing for Rs 330 crore

Annexure - Rating History for last 3 Years
  Current 2021 (History) 2020  2019  2018  Start of 2018
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund Based Facilities ST 1043.0 CRISIL A1+   -- 26-11-20 CRISIL A1+ / CRISIL AA/Stable 18-11-19 CRISIL A1+ / CRISIL AA/Stable 27-09-18 CRISIL AA/Stable CRISIL AA-/Stable
      --   --   -- 03-09-19 CRISIL AA/Stable 21-09-18 CRISIL AA/Stable --
      --   --   --   -- 09-08-18 CRISIL AA/Stable --
Commercial Paper ST 800.0 Withdrawn   -- 26-11-20 CRISIL A1+ 18-11-19 CRISIL A1+ 27-09-18 CRISIL A1+ --
      --   --   -- 03-09-19 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
Cash Credit* 330 Withdrawn Cash Credit* 330 CRISIL AA/Stable
Overdraft Facility# 285 CRISIL A1+ Overdraft Facility# 285 CRISIL A1+
Short Term Loan^ 428 CRISIL A1+ Short Term Loan^ 428 CRISIL A1+
Total 1043 - Total 1043 -

*interchangeable with working capital demand loan for Rs 330 crore, pre/post shipping export credit for USD 5 million (around Rs 32.17 crore), buyer's credit for Rs 82.5 crore and import financing for Rs 330 crore
^INR equivalent of USD 60 million
# INR equivalent of USD 40 million

Criteria Details
Links to related criteria
CRISILs Approach to Financial Ratios
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating Criteria for Steel Industry
CRISILs Criteria for rating short term debt
Criteria for Notching up Stand Alone Ratings of Companies based on Parent Support

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