Detailed Rationale

CRISIL Ratings has upgraded its rating on the long term bank facilities and corporate credit rating (CCR) of Arcelormittal Nippon Steel India Limited (AMNSIL) to ‘CRISIL AA/Stable’ from 'CRISIL AA-/Stable'. CRISIL Ratings has also reaffirmed its ‘CRISIL A1+’ rating on the short term bank facilities and commercial paper programme of the company. 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.

 

The rating of the AMNSIL factors in AMNSIL’s high strategic importance to its ultimate parent company, ArcelorMittal SA (AMSA; ‘BBB-/Positive’ by S&P Global Ratings [S&P], which holds 60% stake in AMNSIL through AMNS Luxembourg Holding S.A. [AMNSL]) and expectation of continued operational, managerial, and financial support from the parent as well as Nippon Steel Corporation (NSC; ‘BBB+/Watch Negative’ by S&P, which holds the remaining 40% stake in AMNSIL through AMNSL).

 

The rating upgrade is driven by the revision in CRISIL Ratings’ framework for mapping global scale ratings on CRISIL Ratings’ scale. The upgrade in ratings is also supported by AMNSIL’s strong operational performance, established market position in the domestic steel industry, healthy financial profile, timely progress on the ongoing expansion projects and strong liquidity position supported by high cash balances, healthy accruals and staggered debt repayment schedule.

 

At a consolidated level, AMNSIL reported an operating income of Rs 54,605 crores (excluding gas hedging gains of Rs 4,983 crore ) and earnings before interest, taxes, depreciation, and amortization (Ebitda) per tonne of ~Rs 14,430/tonne during fiscal 2024 as compared to revenue of Rs 55,655 crores and EBITDA per tonne of Rs 12,344/tonne, during fiscal 2023. Operations were supported by healthy volume (~7.3 MT in FY2024, 6.6 MT in FY2023) on the back of improving operational efficiency and robust domestic demand. Further, reduction in input prices supported by moderation in logistical and energy costs along with steady realisations resulted in robust margins in fiscal year 2024.

 

During first half fiscal 2025, the operating income and EBITDA/tonne is likely to have been around Rs 24,000 crores and Rs 9,192/tonne respectively. The drop in EBITDA/tonne was largely attributable to the fall in domestic steel prices, mainly on account of reduced exports and increased steel imports in the country. Further, planned maintenance shutdown also impacted the operations for few days during the period of H1-fiscal 2025. However, AMNSIL’s operating margin is likely to improve to around Rs 10,000-11,000 per tonne from second half of the current fiscal, driven by expected improvement in realizations post monsoon season, higher volumes and savings in power cost due to AMNSIL’s increased usage of renewable energy. AMNSIL has signed a PPA with AM Green to meet a sizeable portion of its power requirements through renewable energy sourced from AM Green’s newly commissioned 250 MW plant. This is expected to result in power cost savings of Rs 500-600 crores annually and consequently support AMNSIL’s EBITDA over the medium term.

 

CRISIL Ratings has taken note of the ongoing brownfield capex at its existing Hazira plant to increase the capacity to 15 million tonnes per annum (MTPA) by fiscal 2026-27 along with higher forward and backward integration and debottlenecking. The said capex will support increasing the scale of operations along with healthy levels of operational integrations. CRISIL Ratings understands that the capex has been progressing in a timely manner with minimal cost overrun, with ~ 40% of the physical and financial progress achieved during the last two years. The company has also fully tied up the required financing requirements for the projects. Furthermore, rich experience of the parent entities – AMSA and NSC as being top global steel producers along with high resourcefulness of the parents provide comfort against the project execution risk. Timely progress without any material time and cost overruns will be key monitorable.

 

The capex is to be funded by a mix of debt and equity. The debt portion of the capex has already been tied up and the company is likely to generate sufficient cash accruals to meet the equity requirements. Further, the existing debt has a staggered repayment schedule with the large chunk of the repayments scheduled after fiscal 2027, that is, post the commissioning of the increased capacity. The low quantum of repayment obligation along with healthy cash accruals is likely to support AMNSIL’s liquidity profile over the medium term. Further, the increased capacity post the completion of ongoing capex would further result in an increase in operating cash accruals. CRISIL Ratings understands that, in case of any additional requirement, the parent support is expected to be provided to AMNSIL in a full and timely manner.

 

The ratings continue to factor in AMNSIL’s established market position in the domestic steel industry, vertically integrated operations, high raw material linkages, healthy financial risk profile and strong liquidity. 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.

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 along with all its subsidiaries and step-down subsidiaries. This is because all these entities have common promoters and considerable financial and operational linkages.

 

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 25,041 crores (post-merger with AMIPL) for working capital and ongoing capex requirement; and back-ended repayment structure, 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 (AMNSL; 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 8.8 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 15 MT, over the medium term, and to reach steel-making capacity of upto 40 MT over the long term, which will further strengthen its market position.

 

Vertically integrated operations and high 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 7.2 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 requirements till calendar year 2030 and the same has been fully hedged till calendar year 2026. The coal requirements are largely met through a long-term contract with Balta GMBH and other global players, while the power requirements are met through captive power plants (Bhander Power Ltd for 500 MW, Essar Power Odisha Ltd for 60 MW), power purchase agreements with other power generators and through energy exchanges. Additionally, the company acquired Essar Power Transmission Company Limited in 2024. 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, the assets from Essar group will improve the existing level of integration of AMNSIL’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

AMNSIL has comfortable capital structure and debt protection metrics. At a consolidated level, net debt-to-Ebitda ratio was 3.6 times as of March 2024. While the quantum of debt is sizeable for funding the capex, healthy EBITDA supports the same. The financial risk profile is also supported by debt, which is largely from the ultimate parent, AMNSL, with favourable repayment terms (principal moratorium available till fiscal 2026). AMNS India also has healthy liquidity with cash and equivalent of around Rs 7,745 crore as on September 30, 2024, which along with expected improvement in annual cash accrual, will be largely adequate for supporting equity requirement towards capex and working capital requirement for the next 2-3 years. CRISIL Ratings has noted that AMNSIL intends to keep minimum unencumbered liquidity in the form of cash, fixed deposit, liquid mutual funds of around USD 0.8-1 billion.

 

Weakness:

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 and acquisitions

AMNS India has capex plan of around Rs 45,000 – 50,000 crore over FY2024-27, for completion of ongoing projects, debottlenecking, 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 15 MTPA from 8.6 MTPA currently Additionally, the company also has long-term capex for setting up 20 MTPA greenfield steel manufacturing unit in the eastern coast of India. Notably, the capex funding required for expanding the capacity till 15 MTPA has been arranged already from domestic and international sources.

 

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, annual cash accrual and unutilized credit lines from the parent. However, 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 remain a monitorable.

Liquidity: Strong

Cash and equivalents were around Rs 7,745 crore as on September 30, 2024. Favourable terms of intercompany loans, such as moratorium till fiscal 2026 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 equity portion of capex and working capital needs and any deficit would be funded by the sponsors. Further, AMNSIL’s management has articulated to maintain liquidity in the form of cash, fixed deposits, and liquid mutual funds of around USD 0.8-1 billion at any point of time.

Outlook: Stable

AMNSIL will continue to benefit from its established market position and healthy operating efficiency. 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

• Upward revision in AMSA’s rating by S&P by one or more notches.
• Significant and sustained improvement in market share in the Indian steel industry along with sustenance of operating performance such that net debt/Ebitda remains below 2.5 times on a sustained basis.

 

Downward Factors

• Downward revision in AMSA’s rating by S&P or change in the support philosophy of the parent towards the company.
• Significant deterioration in the operating performance leading to net debt/Ebitda above 5 times on a sustained basis due to weaker-than-expected cash accrual and/or higher-than-expected debt-funded capex.
• Liquidity weakening on account of higher-than-expected debt-funded capex or crystallization of unforeseen liability resulting into large cash outflows.

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. Beneficiation and pellet plants are in the eastern region, while steel manufacturing is in the west. As on March 31, 2024, AMNSIL had beneficiation capacity of 20 MTPA (12 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 10.7k MTPA (Direct reduced iron of 6.8 MTPA, blast furnace of 2.4 MTPA and Corex of 1.5 MTPA), steel-making capacity of 8.8 MTPA (Electric arc furnace 4.9 MTPA and Conarc 3.9 MTPA) and rolling capacity of 8.6 MTPA.

 

AMNSIL (earlier known as Essar Steel India Ltd [ESIL]) is a 60:40 JV between AMSA and NSC, two of the world’s leading steel companies. It 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 creditors of ESIL to provide them complete exit and to take full control of the company. The sponsors had also infused around Rs 25,041 crore (post-merger with AMIPL) by way of equity for completing ongoing and planned capex along with working capital needs.

About the Sponsors

AMSA is one of the world's largest steel producers, with crude steel production of 58 MT in calendar year 2023. 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 2023, ArcelorMittal reported revenue of USD 68.3 billion and Ebitda of USD 7.6 billion.

 

NSC is Japan's leading domestic crude steel producer and amongst the top five producers in the world. For the year ending March 2024, NSC reported revenue of Yen 8,868 billion and Ebitda of Yen 1,233 billion.

Any other information: Not Applicable