| Arcelormittal Nippon Steel India Limited | ||||||
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| Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings. | ||||||
| 1 crore = 10 million | ||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
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| This Rating Rationale is published solely to update the bank-wise facility details as provided by the rated entity; other sections are same as the previous Rating Rationale dated October 27, 2022. |
Detailed Rationale CRISIL Ratings’ ratings on the corporate credit rating* (CCR), bank facilities and commercial paper of Arcelormittal Nippon Steel India Limited (AMNSIL, earlier known as Essar Steel India Ltd [ESIL]) continue to factor in AMNSIL’s established market position in the domestic steel industry, vertically integrated operations, improving raw material linkages, healthy financial risk profile and strong liquidity. The ratings also factor in AMNSIL’s strategic importance to its ultimate parent company, ArcelorMittal SA (AMSA; ‘BBB-/Stable’ by S&P Global Ratings [S&P], which holds 60% stake in AMNSIL through AMNS Luxembourg Holding S.A. [ALHSA]) and expectation of continued operational, managerial, and financial support from the parent as well as Nippon Steel Corporation (NSC; ‘BBB/Stable’ by S&P, which holds the remaining 40% stake in AMNSIL through ALHSA). These strengths are partially offset by exposure to risks related to large capital expenditure (capex), susceptibility to volatility in key product prices and cyclicality associated with the steel industry.
AMNSIL is in process of acquiring certain port, power, logistics and infrastructure assets located in India from the Essar group for a net value of approximately USD 2.4 billion. Company is in advanced stage to acquire some of these assets (mainly the power and port assets close to its Hazira steel plant) in October-November 2022. Of the total value of the deal, company is expected to acquire te assets worth ~USD 2.2 billion in fiscal 2023 and the rest in fiscal 2024. These assets are either for captive use or allied to AMNSIL’s steel operations. Once acquired, the assets will strengthen the existing level of integration of AMNSIL’s steel plant operations and will also support ongoing planned capacity expansion. Further, the assets are operational and are expected to result in synergy gains of USD 250-300 million per annum for AMNSIL. CRISIL Ratings understands that the announced acquisition will be funded through a mix of existing liquidity available with AMNSIL and support from the parent. While the acquisition along with ongoing capacity expansion is likely to result in increased leverage over the medium term, however, the liquidity profile and expected gains in operating efficiency provide comfort. Further, in case of any additional requirement, the parent support is expected to be provided to AMNSIL in a timely manner. However, the acquisition is subject to requisite government/legal approvals and the same would be closely monitored.
AMNSIL (earlier known as ESIL) was acquired by the sponsors (AMSA and NSC) under the National Company Law Tribunal (NCLT) route on December 16, 2019, after the acquisition was cleared by a ruling of the Hon’ble Supreme Court of India. Sponsors had paid around Rs 42,000 crore to the lenders of ESIL to provide them complete exit and to take full control of the company. The sponsors had also infused around Rs 9,222 crore by way of equity for completing ongoing and planned capex along with working capital needs.
The company has adopted various initiatives over the last two years to improve as well as stabilise the operating performance. It acquired the assets of Bhander Power Ltd (500 megawatt [MW] natural gas-based thermal power plant), Odisha Slurry Pipeline Infrastructure Ltd (OSPIL) and the assets of Essar Power Odisha Ltd (60 MW coal-based thermal power plant). Moreover, AMNSIL started operating the Thakurani iron ore mines of 5.5 million tonne per annum (MTPA) from July 2020. The company also contracted long-term tie-ups for coal and natural gas and undertook various de-bottlenecking projects, resulting in an increase in the steel production capacity.
At a consolidated level, (including AMNSIL, its parent ArcelorMittal India Pvt Ltd [AMIPL] and its subsidiaries), reported an operating income of Rs 58,441 crore and earnings before interest, taxes, depreciation, and amortisation (Ebitda) margin of ~26% during fiscal 2022 as compared to Rs 33,721 crore and ~ 20%, respectively, during fiscal 2021. This was mainly due to higher realisations. Going forward, with correction in steel prices coupled with relatively higher raw material cost, operating margin is expected to moderate from the levels of fiscal 2022. However, cash accruals are still expected to be robust as the operating performance will be supported by commissioning (in September 2021) of pellet plant in Odisha (6 MTPA), Sagasahi iron ore mine (7.16 MTPA) and various other ongoing operating efficiency improvement and de-bottlenecking projects. Improvement in production to optimum capacity of 8.6 MTPA, while operating profitability remains at healthy levels, over the medium term, will be a key monitorable.
*CRISIL Ratings’ CCR is a rating of an issuer and indicates the degree of strength of the issuer with regards to honouring its debt obligation |
Analytical Approach CRISIL Ratings has applied its parent notch-up framework to factor in AMNSIL’s strategic importance to AMSA (majority joint venture [JV] partner) and its ongoing support. CRISIL Ratings believes the parent will support the company in growth as well as in case of exigencies considering the ownership and shared name.
Furthermore, CRISIL Ratings has also combined the business and financial risk profiles of AMNSIL and AMIPL (holding company of AMNSIL) along with all its subsidiaries and step-down subsidiaries. This is because all these entities have common promoters and considerable financial and operational linkages. Also, AMNSIL and AMIPL are expected to be merged and the merger application has been filed before the NCLT. The combined entity has been referred to as AMNS India.
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: Strategic importance of AMNSIL to its sponsors The acquisition has provided the sponsors (world’s leading steel manufacturers) direct access to the Indian steel industry, where they had limited presence earlier. Strategic importance is also highlighted by the top management of the sponsors forming part of AMNSIL’s board of directors, upfront equity infusion of around Rs 9,222 crore for working capital and ongoing capex requirement; and back-ended repayment structure along with flexibility in servicing its intercompany debt, which will ensure adequate liquidity. Apart from the financial support extended, AMNSIL also benefits from both the sponsors on operations management, raw material procurement, and technical know-how amongst other aspects. AMNSIL’s strategic importance underlines strong probability of support from its sponsors in future, if needed. Furthermore, CRISIL Ratings also takes comfort from the external debt raised by the holding company (ALHSA; a 60:40 JV of AMSA and NSC) for acquisition of AMNSIL being guaranteed by the sponsors in proportion to their holding in the JV. Any change in the support philosophy of the sponsors will be a key rating sensitivity factor.
Established market position in the domestic steel industry AMNSIL is the fourth largest domestic flat steel manufacturer with installed crude steelmaking capacity of 9.6 MTPA, after Steel Authority of India Ltd (SAIL), Tata Steel Ltd (TSL) and JSW Steel Ltd (JSW). AMNSIL also has a full range of downstream products capacities at Hazira (Gujarat) and Pune (Maharashtra), catering to customers across automobile, white goods, construction, energy, and other sectors. AMNSIL’s steel plant is strategically located in the western region in proximity to key demand centres. Furthermore, the company plans to increase Hazira’s steelmaking capacity to 14 MT, over the medium term, and to reach steel-making capacity of around 30 MT over the long term, which will further strengthen its market position.
Vertically integrated operations and improving raw material linkages The company has strong backward integration through captive sources and long-term contracts in all key raw materials, such as iron ore, natural gas, coal, and power. The iron ore requirements are met through captive operating mines of 12.7 MTPA (Thakurani with 5.5 MTPA and Sagasahi with 7.16 MTPA) and long-term agreement with NMDC Ltd (rated CRISIL AAA/Stable/CRISIL A1+) for 8 MTPA. Similarly, for gas, the company has long-term contracts with GAIL India Ltd, Reliance Industries Ltd (rated CRISIL AAA/Stable/CRISIL A1+) and other globally renowned suppliers for meeting the entire requirement till calendar year 2030 and the same has been fully hedged till calendar year 2026. The coal requirements are largely met through the parent’s global procurement team and a long-term contract with Balta GMBH, while the power requirements are met through captive power plants (Bhander Power Ltd for 500 MW, Essar Power Odisha Ltd for 60 MW and with AM Green Energy Pvt Ltd for 250 MW of renewable energy from December 2023), power purchase agreements with generators and through energy exchanges. The company is working towards further strengthening its raw material security through projects, acquisition of mines, and long-term contracts with key players. This will provide more stability in production as well as reduce the volatility in the cost of production. Also, once acquired, the assets from Essar group will improve the existing level of integration of AMSIL’s operations and will also support its ongoing capacity expansion. However, with upcoming capacities and increasing scale of operation, availability of adequate raw material linkages will remain a key monitorable.
Healthy financial risk profile and ample liquidity AMNS India has strong capital structure and debt protection metrics. At a consolidated level, debt-to-equity and net debt-to-Ebitda ratios were 0.75 and 0.87 times, respectively, as of March 2022. The financial risk profile is also supported by debt, which is largely from the ultimate parent, ALHSA, with favourable repayment terms (moratorium available till fiscal 2024 and flexibility for servicing of interest). AMNS India also has healthy liquidity with cash and equivalent of more than Rs 22,400 crore as on October 1, 2022, which along with annual cash accrual, will be largely adequate for capex and working capital requirement for the next 2-3 years. Over the medium term, AMNSIL intends to keep minimum unencumbered liquidity in the form of cash, fixed deposit, liquid mutual funds of around USD 1 billion. That said, Net debt-to-Ebitda is expected to rise past 4 times over the medium term, with the ongoing acquisition of certain Essar group’s assets along with sizeable planned organic growth capex. However, post completion of the acquisition and current capacity expansion (scheduled till fiscal 2026), net debt-to-Ebitda is expected to sustain below 3 times and will be a key monitorable.
Weaknesses Susceptibility to volatility in key raw material prices and cyclicality associated with the steel industry The inherent cyclicality in the steel industry exposes steelmakers to a high degree of volatility in operating margin and, in turn, to debt protection metrics. Demand for steel is sensitive to trends in key end-user industries, such as automobiles, infrastructure, construction, and consumer durables. However, AMNSIL’s backward integration in raw materials and integrated operations is likely to offset the sharp volatility in profitability. Any significant variation in demand and pricing scenario will remain a key monitorable. AMNSIL is also exposed to regulatory risk given its presence in the highly regulated iron ore mining.
Exposure to risks related to large capex AMNS India has capex plan of around Rs 45,000 crore for completion of ongoing projects, debottlenecking, reconfiguration of assets, and expansion of upstream and downstream facility along with acquisition of ancillary assets. The major capex will be towards increasing the steel manufacturing capacity in Hazira upto 14 MTPA from 8.6 MTPA currently Additionally, the company also has long-term capex for setting up 12 MTPA greenfield steel manufacturing unit in Odisha. Further, renewable energy projects are being carried out over the medium term. Also, it is acquiring certain Essar group assets at a cost of USD 2.4 billion and Uttam Galva Steel’s cold rolling mill capacity under NCLT process with an expected net cash outflow of ~Rs 800 crore during the current fiscal.
These large capex plans entail project execution risks and are exposed to time, and cost overrun since the projects are of long gestation period. However, this is offset by the extensive experience, strong technical expertise and past track record of project execution by the sponsors in the steel industry. The capex is expected to be funded largely from existing liquidity and annual cash accrual, while the deficit (if any) is likely to be funded by long-term debt through sponsors in an efficient manner. Any delay or cost overruns in the capex would hinder the expected improvement in scale of operation and will remain a key monitorable. Also, for the acquired assets, while synergy benefits are expected to accrue, the extent and sustainability of the same will be a monitorable. |
Liquidity: Strong Cash and equivalents were more than Rs 22,400 crore as on October 1, 2022. Favourable terms of intercompany loans, such as moratorium till fiscal 2024 and flexible interest payment as per requirement, adds further cushion to liquidity of the company. CRISIL Ratings believes internal accrual along with existing cash balance would be adequate for the next 2-3 years for capex and working capital needs and any deficit would be funded by the sponsors. While the cash balance is expected to reduce over the medium term with outflow towards capex and acquisition of certain Essar group’s asset, AMNSIL intends to maintain unencumbered liquidity in the form of cash, fixed deposits, and liquid mutual funds of around USD 1 billion at any point of time. |
Outlook: Stable AMNSIL will continue to benefit from its established market position and healthy operating efficiency. The rating outlook on AMNSIL is driven by S&P’s rating outlook on ArcelorMittal SA (majority JV partner). CRISIL Ratings believes AMNSIL will be strategically important to its sponsors, more specifically to AMSA, and will benefit from the support extended by them. CRISIL Ratings will continue to closely monitor any development that can significantly alter the extent of support by the sponsors. |
Rating Sensitivity Factors Upward Factors
Downward Factors
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About the Company AMNSIL is an integrated flat steel manufacturer in India with presence in multiple segments, including iron ore mining, steelmaking, and downstream products. Iron ore processing plants are in the eastern region, while steel manufacturing is in the west. As on December 31, 2021, AMNSIL had beneficiation capacity of 16 MTPA (8 MTPA at Dabuna and 8 MTPA at Kirandul), pellet capacity of 20 MTPA (12 MTPA at Paradip and 8 MTPA at Vizag), iron-making capacity of 10.29 MTPA (Direct reduced iron of 6.8 MTPA, blast furnace of 1.75 MTPA and Corex of 1.74 MTPA), steel-making capacity of 9.6 MTPA (Electric arc furnace 4.6 MTPA and Conarc 5.0 MTPA) and rolling capacity of 8.6 MTPA.
AMNSIL is a 60:40 JV between AMSA and NSC, two of the world’s leading steel companies. AMSA and NSC acquired the erstwhile ESIL under NCLT in December 2019 and renamed it as AMNSIL. |
About the Sponsors AMSA is one of the world's largest steel producers, with crude steel production of 69.1 MT in calendar year 2021. Steelmaking operations are geographically diversified across 17 countries in four continents, of which three-quarters are integrated steelmaking facilities and the rest are mini-mill facilities. During calendar year 2021, ArcelorMittal reported revenue of USD 76.6 billion and Ebitda of USD 19.4 billion.
NSC is Japan's leading domestic crude steel producer and amongst the top five producers in the world. For the year ending March 2022, NSC reported revenue of Yen 6,809 billion and Ebitda of Yen 1,290 billion. |
Key Financial Indicators– AMNS India – Consolidated – CRISIL Ratings adjusted
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Any other information: Not applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
*Includes sublimit of overdraft facility (of Rs 0.8 crore) ^Includes LC (of Rs 1500 cr), BG (of Rs 500 cr), SBLC of Rs 1500 cr (sublimit of LC ) %Includes sublimit of SBLC (of Rs 1,000 crore), BG (of Rs 1,000 crore), Capex LC (of Rs 100 crore), LCBD (of Rs 100 crore) and Vendor Financing of Rs 150 cr $Includes sublimit of LC (of Rs 850 crore), PBG (of Rs 450 crore), BG (of Rs 450 crore), Overdraft (of Rs 20 crore), STL (of Rs 60 crore) #Includes sublimit of LC (of Rs 885 crore), BG (of Rs 885 crore), SBLC (of Rs 885 crore), fund-based limits of Rs 15 crore, Vendor Finance Rs. 50 crore @Includes sublimit of Purchase Invoice Discounting (of Rs 950 crore), SBLC (of Rs 950 crore), Financial SBLC (of Rs 600 crore), BG (of Rs 950 crore), LC (of Rs 950 crore), Short Term Loan(of Rs 75 crore), OD (of Rs 30 crore) !Includes sublimit of Import documentary credit facility (of Rs 798 crore), Capex LC (of Rs 798 cr), Export documentary credit facility (of USD 10 million), SBDC (of Rs 798 crore) ~Includes sublimit of LC (of Rs 800 crore), Capex LC (of Rs 100 crore), BG/SBLC (of Rs 100 crore), Gift City SBLC (of Rs 800 crore), Overdraft (of Rs 100 crore), WCDL (of Rs 100 crore) <Includes sublimit of overdraft (of Rs 670 crore), WCDL Rs. 1,675 crore, letter of credit (of Rs 1,675 crore), LC Capex (of Rs 975 crore), letter of guarantee (of Rs 300 crore) and stanby letter of credit (of Rs 1,675 crore) facilities >Includes sublimit of Opex LC (of Rs 750 crore), Capex LC (Rs. 250 crore) Import bill financing facility (of Rs 200 crore), SBLC (of Rs 750 crore), Cash credit (of Rs 100 crore), Performance SBLC/BG (of Rs 400 crore), Financial guarantee (of Rs 400 crore), WCDL (of Rs 150 crore) |
Annexure - List of Entities Consolidated
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| Annexure - Details of Bank Lenders & Facilities | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Criteria Details
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