Rating Rationale
November 26, 2020 | Mumbai
Posco Maharashtra Steel Private Limited
Ratings Reaffirmed
 
Rating Action
Total Bank Loan Facilities Rated Rs.1043 Crore
Long Term Rating CRISIL AA/Stable (Reaffirmed)
Short Term Rating CRISIL A1+ (Reaffirmed)
 
Rs.800 Crore Commercial Paper CRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has reaffirmed its 'CRISIL AA/Stable/CRISIL A1+' ratings on the bank facilities of Posco Maharashtra Steel Private Limited (POSCO Maharashtra). The rating on the commercial paper has been reaffirmed at 'CRISIL A1+'.
 
The ratings continue to reflect POSCO Maharashtra's strong business and financial linkages with the parent, POSCO Korea (rated 'BBB+/Stable' by S&P Global Ratings [S&P]), and presence in the high-end products segment, comprising cold-rolled (CR) coils, galvanised and galvannealed coil, 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.
 
Operating income declined by 19% in fiscal 2020 due to fall in realisation and subdued demand from the end-user industry, especially automobiles. Operating margin declined to 2.5% in fiscal 2020 from 7.1% in fiscal 2019 because of increased raw material cost (hot-rolled coils). Due to subdued performance, the company reported loss of Rs 599 crore in fiscal 2020 against loss of Rs 94 crore in fiscal 2019. Accordingly, debt protection metrics weakened; interest coverage ratio reduced to below 1 time in fiscal 2020 from 2.56 times in fiscal 2019. The financial risk profile continue to be supported by strong liquidity available on account of the parent.
 
During the first seven months of fiscal 2021, operating performance declined due to disruption caused by Covid-19 and cyclone in June 2020 affecting electricity supply to the plant for 15 days. Operations ramped up gradually and reached pre-Covid levels from September 2020 onwards. Operating income was Rs 2,296 crore for the first seven months of fiscal 2021, against Rs 4,852 crore in the corresponding period of the previous fiscal. Operating performance is expected to rebound in the second half of fiscal 2021, as seen in utilisation of around 70% in the month of October 2020, supported by higher realisation of CR coils and improved demand from the end-user industry.

Analytical Approach

For arriving at the ratings, CRISIL continues to factor in the strong business and financial linkages with the parent due to the same business, common name, criticality of operations to the Indian market, and 100% ownership and management control. POSCO Korea has additionally 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 parent: The ratings continue to reflect the strong linkages with, and technological and financial support from, the parent. POSCO Maharashtra, will continue to be strategically important to its parent's growth plans in India. Although CRISIL does not envisage an integrated steel plant to come up in Odisha, by POSCO Korea, completion of the fourth processing unit in India in October 2016 reflects the parent's determination to target the rising auto manufacturing hub in the country.
 
* Presence in the high-end product segment and strong clientele: Revenue reported compound annual growth 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. 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 due to borrowings in foreign currency, which are unhedged leading to forex losses of 6-7% of operating income in the past. Forex losses reduced to less than 0.5% of operating income in fiscals 2017 and 2018. However, sharp rupee depreciation in fiscal 2019 led to forex loss of 2.2%. In fiscal 2020, forex loss was 1.4% of operating income.
 
* Exposure to cyclicality in the steel industry: The company remains vulnerable 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

Fund-based bank limit utilisation was 46% over the 12 months through October 2020. Further no major capital expenditure are planned in the medium term. The company also receives support in the form of unsecured loans from group entities. Internal accrual, unutilised bank limit, group's funding support through unsecured loans, and cash and equivalent will sufficiently cover debt obligation and incremental working capital requirement over the medium term. While external commercial borrowing are expected to be refinanced with support of parent.

Outlook: Stable

CRISIL believes POSCO Maharashtra will continue to benefit from the strong linkages with its parent, presence in high-end product segment and established clientele including automobile manufacturers. 

Rating Sensitivity factors
Upward factors:
* Improvement in operating performance, leading to debt-to-operating profit before depreciation, interest and tax (OPBDIT) reducing to below 0.5 time on a sustainable basis
* Upgrade in credit ratings of the parent by S&P coupled with an improvement in the operating profitability of POSCO Maharashtra to 10-11%, while maintaining healthy credit metrics
 
Downward factors:
* Weakening of the financial risk profile due to decline in profitability, forex losses, and/or stretch in the working capital intensity, leading to debt/OPBDIT exceeding 5-6 times on a sustainable basis
* Downgrade in credit ratings of the parent company by S&P, while the operating performance of the POSCO Maharashtra remains subdued
About the Company

POSCO Maharashtra, a fully owned subsidiary of POSCO Korea and commissioned in 2012, provides high-quality galvanised and galvannealed steel that are used in the construction, home appliance, and automotive industries. POSCO Maharashtra is focused on supplying 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 (POSCO ESI) merged with POSCO Maharashtra with effect from April 1, 2016.

Key Financial Indicators
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 complexity levels are assigned to various types of financial instruments and are included (where applicable) in the Annexure -- Details of Instrument in this Rating Rationale. For more details on the CRISIL complexity levels, please visit www.crisil.com/complexity-levels.
Annexure - Details of Instrument(s)
ISIN Name of instrument Date of allotment Coupon rate (%) Maturity
date		 Issue size (Rs crore) Complexity levels Rating assigned
with outlook
NA Cash Credit* NA NA NA 330.00 NA CRISIL AA/Stable
NA Short Term Loan^ NA NA NA 428.00 NA CRISIL A1+
NA Overdraft# NA NA NA 285.00 NA CRISIL A1+
NA Commercial Paper NA NA 7-365 days 800.00 Simple CRISIL A1+
*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
Annexure - Rating History for last 3 Years
  Current 2020 (History) 2019  2018  2017  Start of 2017
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Commercial Paper  ST  800.00  CRISIL A1+      18-11-19  CRISIL A1+  27-09-18  CRISIL A1+    --  -- 
            03-09-19  CRISIL A1+           
Fund-based Bank Facilities  LT/ST  1043.00  CRISIL AA/Stable/ CRISIL A1+      18-11-19  CRISIL AA/Stable/ CRISIL A1+  27-09-18  CRISIL AA/Stable  31-07-17  CRISIL AA-/Stable  -- 
            03-09-19  CRISIL AA/Stable  21-09-18  CRISIL AA/Stable       
                09-08-18  CRISIL AA/Stable       
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 CRISIL AA/Stable Cash Credit* 330 CRISIL AA/Stable
Overdraft# 285 CRISIL A1+ Overdraft# 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
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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