Rating Rationale
October 29, 2020 | Mumbai
The Sandur Manganese And Iron Ores Limited
Ratings Reaffirmed
 
Rating Action
Total Bank Loan Facilities Rated Rs.470 Crore
Long Term Rating CRISIL A-/Stable (Reaffirmed)
Short Term Rating CRISIL A2+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has reaffirmed its rating on bank facilities of The Sandur Manganese and Iron Ores Limited at 'CRISIL A-/Stable/CRISIL A2'.
 
The ratings continue to reflect a strong market position as the fifth-largest iron ore miner in Karnataka and the largest private miner of manganese ore in India, supported by a track record of more than six decades with large mining reserves and a long tenure of mining licences and strong financial risk profile. These strengths are offset by project risk related to large ongoing debt funded capital expenditure plan, susceptibility to heightened regulatory risks and vulnerability of operating margin to commodity prices.

Analytical Approach

CRISIL had earlier taken a consolidated view on the business and financial risk profiles of SMIORE and its subsidiary, Star Metallics and Power Private Limited (SMPPL). However, CRISIL is now taking a standalone view on the business and financial risk profiles of SMIORE due to amalgamation of SMPPL with SMIORE as on 1st April 2019.

Key Rating Drivers & Detailed Description
Strengths:
* Long track record and extensive mining reserves:
SMIORE was set up in 1954 when Mr Y R Ghorpade, the former Maharaja of Sandur, transferred the lease awarded to him in the company's name. Currently, it has two mining leases valid up to 2033, with estimated reserves of almost 118.5 million tonne of iron ore and around 14.7 million tonne of manganese with production capacity of 1.6 million tonne per annum (TPA) for the former and 0.289 million TPA for the later. The company is among the few entities with category 'A' iron ore mining leases with production capacity of more than 1 million TPA. The extensive reserves, long validity of the mining licence, and presence of more than six decades in the industry are expected to continue benefiting the group in the near term.
 
* Strong financial risk profile; likely to be maintained despite planned capex:
The group had a combined networth of more than Rs 838 crore as on March 31, 2020, on account of steady accretion to reserves over the years. Despite the planned debt-funded capex, the capital structure is expected to remain sound, with total outside liabilities to tangible networth ratio at less than 1 time in the next two fiscals. Interest outlay will increased sharply, owing to the term debt raised for funding the capex, in fiscal 2020. Nevertheless, the Sandur group's interest coverage and net cash accruals to total debt (NCATD) ratios are expected to remain in the range of 15 - 20 times, and 0.4 - 0.6 times respectively, over the next two fiscals.
 
Weaknesses:
* Exposure to project risk related to large ongoing debt funded capital expenditure plan:
The group has commenced a major debt-funded capex programme, budgeted at over Rs 650 crore. This is to be funded through term debt of Rs 400 crore and internal cash accrual parked mainly in debt mutual funds. The capex is multi-pronged, wherein the group plans to set up a 0.4 million TPA coke oven facility, a 30 megawatt (MW) waste heat recovery-based (WHRB) power plant, and also upgrade the existing ferroalloy plant apart from establishing additional evacuation infrastructure for its mines. The group would be adding another furnace and would be upgrading the existing furnace additionally. The WHRB power plant is expected to bring down power cost substantially. Reduced power cost is likely to result in major cost savings for the ferroalloy manufacturing business, operations of which are currently creating a lag on overall profitability. There are, however, sizeable risks relating to cost and time overruns for setting up the new facilities, apart from major offtake risks for the coke production. However the project progress has been delayed in FY 2020 and Q1 FY 2021 due to impact of ongoing pandemic, with expected commercialization by March 2021.  The progress of the capex shall remain a key monitorable over the medium term.
 
* Susceptibility to heightened regulatory risks:
Over the past few years, the mining industry has witnessed scams and irregularities (including illegal mining, over-mining, encroachment of forest areas, and underpayment of government royalties, and conflicts with the tribal population regarding land rights) in ore-rich states, especially Karnataka, Goa, and Odisha. This led the Supreme Court to impose a ban on mining. Furthermore, there are local agitations and issues in obtaining approvals in regions where mining is operational. The business risk profile should remain constrained by high regulatory risks.
 
* Vulnerability of operating margin to commodity prices:
Metal ore and ferroalloy prices typically exhibit considerable cyclicality, and are highly sensitive to global demand patterns and general macro-economic factors. Accordingly, like any other private miner or alloy producer, the group's operating margin will remain vulnerable to changes in commodity prices.
Liquidity Strong

Cash accrual was Rs 156 crore in fiscal 2020 against nil repayment obligation. Cash and cash equivalents were around Rs 189 crore as on March 31, 2020. Cash accrual is expected at Rs 150 - 170 crore per fiscal over medium term, against no repayment obligation in fiscal 2021 and repayments of Rs 57 crore from fiscal 2022 onwards. The company would also be creating a Debt Service Reserve Amount (DSRA) totalling to a quarter of principal and interest repayment by December 2020. The fund-based bank limit of Rs 10 crore was not utilised during the 12 months through August 2020. The current capex of over Rs 650 crore, expected to be completed by March 2021, is debt-funded to extent of 66%. The debt funding for the capex has a two-year moratorium period from the date of first disbursement (April 2019), which provides additional support to liquidity. The bank lines are expected to meet incremental working capital requirement, which is assessed to be minimal.

Outlook: Stable

CRISIL believes the Sandur group will continue to benefit from its strong market position in the mining industry.
 
Rating sensitivity factors:
Upgrade factors:
* Maintaining the operating margin at over 30%, leading to higher-than-expected net cash accrual
* Timely completion and commencement of the ongoing capex within the budgeted cost estimates
* Maintaining strong financial risk profile
 
Downward factors:
* Decline in the operating margin to below 20% due to volatility in prices or decline in revenue, leading to lower-the-expected net cash accrual
* Time or cost overrun in the ongoing capex, or if demand-side issues result in lower-than-expected offtake of the coke produce
* Deterioration in financial risk profile

About the Company

SMIORE mines low-phosphorous manganese and iron ore in the Hospet-Bellary region of Karnataka. It is the fifth-largest iron ore miner in Karnataka and the largest private miner of manganese ore, and is the flagship business of the royal family of Ghorpade.
 
SMIORE has a 36,000 TPA ferroalloy plant and a 32 MW coal-based captive power plant.

Key Financial Indicators
Particulars Unit 2020 2019
Revenue Rs crore 608.35 717.8
Profit after tax (PAT) Rs crore 147.39 142.42
PAT margin % 24.23 19.84
Adjusted debt/adjusted networth Times 0.48 0.00
Interest coverage Times 24.99 20.90

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 Cr)
Complexity Level Rating Assigned
with Outlook
NA Bank Guarantee NA NA NA 40 NA CRISIL A2+
NA Cash Credit NA NA NA 10 NA CRISIL A-/Stable
NA Letter of Credit NA NA NA 20 NA CRISIL A2+
NA Term Loan NA NA Mar-27 400 NA CRISIL A-/Stable
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
Fund-based Bank Facilities  LT/ST  410.00  CRISIL A-/Stable      29-08-19  CRISIL A-/Stable  31-05-18  CRISIL A-/Stable    --  -- 
Non Fund-based Bank Facilities  LT/ST  60.00  CRISIL A2+      29-08-19  CRISIL A2+  31-05-18  CRISIL A2+    --  -- 
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
Bank Guarantee 40 CRISIL A2+ Bank Guarantee 40 CRISIL A2+
Cash Credit 10 CRISIL A-/Stable Cash Credit & Working Capital demand loan 10 CRISIL A-/Stable
Letter of Credit 20 CRISIL A2+ Letter of Credit 20 CRISIL A2+
Term Loan 400 CRISIL A-/Stable Term Loan 400 CRISIL A-/Stable
Total 470 -- Total 470 --
Links to related criteria
CRISILs Approach to Financial Ratios
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating criteria for manufaturing and service sector companies
Rating Criteria for Mining Industry
CRISILs Approach to Recognising Default
CRISILs Bank Loan Ratings
CRISILs Criteria for Consolidation
The Rating Process
Understanding CRISILs Ratings and Rating Scales

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