Detailed Rationale

CRISIL Ratings has upgraded its rating on the long-term bank facilities of ESL Steel Ltd (ESL; a part of the Vedanta group), to ‘CRISIL AA’ from ‘CRISIL AA-‘ while revising the watch to ‘Rating Watch with Developing Implications’ from ‘Rating Watch with Positive Implications’. Furthermore, CRISIL Ratings has reaffirmed its rating on the short-term bank facilities at ‘CRISIL A1+’.

 

The rating upgrade and change in rating watch is in line with the rating upgrade and change in rating watch for the bank facilities and debt instruments of the parent company, Vedanta Ltd (Vedanta), on account of the expected material improvement in the consolidated operating profitability (earnings before interest, tax, depreciation and amortisation [Ebitda]), along with improved capital structure with reduction in debt and leverage to below rating thresholds. Furthermore, the rating upgrade factors the improvement in the overall credit profile of Vedanta with better financial flexibility by increasing operating cash accrual and reducing debt, especially at Vedanta Resources Ltd (VRL; rated ‘B-/Positive‘ by S&P Global Ratings). The parent’s ratings are on watch as reorganisation-cum-demerger exercise is still underway and will need requisite approvals, including from shareholders and lenders, through the NCLT (National Company Law Tribunal) process, and could take a few quarters for completion.

 

The ratings reflect the strong support expected from Vedanta and strategic importance of ESL to its parent. Any adverse change in the credit risk profile of Vedanta is a key rating sensitivity factor for ESL.

 

While steel prices moderated during fiscal 2024, they remained healthy. However, input costs witnessed higher-than-expected volatility and this resulted in operating profitability remaining lower than expected. The operating performance has improved in the first half of fiscal 2025, wherein the company has achieved EBITDA of Rs. 225 crore (as against Rs. 225 crore during full fiscal 2024). Further improvement in operating profitability supported by expected moderation in input costs over the medium term along with healthy domestic steel demand and realization will be a key monitorable.

Analytical Approach

CRISIL Ratings has applied the parent notch-up framework to factor in support from the parent, Vedanta. CRISIL Ratings understands that the parent (Vedanta) is undertaking a strategic review of some of its assets, including the steel business in ESL. However, need-based support from Vedanta has been factored into the parent notch-up support.

Key Rating Drivers & Detailed Description

Strengths:

• Strong support from Vedanta: Long-term loans are backed by a corporate guarantee while most of the working capital facilities are backed by a letter of comfort from Vedanta. Furthermore, Vedanta Star Ltd (VSL; erstwhile holding company of ESL) had extended an unsecured loan to ESL, funded through bank loans raised by it. These loans (now transferred to ESL) were supported by a guarantee from Vedanta, covering the entire principal and interest obligation. Following the merger of ESL and VSL, the guarantee was extended to ESL on similar terms. While the loan agreement provides for the guarantee to potentially fall off three years after the date of first utilisation of the term loan, it remains subject to ESL meeting certain financial covenants.

 

Given Vedanta’s focus on deleveraging its balance sheet, the parent is exploring divestment of some of its assets including its shareholding in ESL. However, no such option has been finalised and is yet in the evaluation stage. Also, according to Vedanta’s management, it is committed to extend any need-based support to ESL in the interim. Any change in Vedanta’s support philosophy towards ESL will be a key rating sensitivity factor

 

• Improved operating efficiency post takeover by Vedanta; moderation witnessed this fiscal albeit expected to improve going ahead: Since the takeover, Vedanta has improved the operating efficiency of ESL, primarily by increasing plant utilisation 82% during fiscal 2024 (85% in fiscal 2023) from less than 70% in fiscal 2018 (pre-acquisition). Profitability had witnessed moderation due to volatility in commodity prices, as reflected in lower-than-expected earnings before interest, taxes, depreciation, and amortisation (Ebitda) and margin (USD 19 per tonne during fiscal 2024 vis-à-vis USD 32 per tonne during fiscal 2023). However, the margin has improved in H1 of fiscal 2025 to USD 41 per tonne in (declined from USD 84 per tonne in Q1 of fiscal 2025) and is expected to remain healthy during the current fiscal.

 

While steel prices moderated during fiscal 2024, they remained healthy. On the contrary, the operating performance has improved in H1 of fiscal 2025, wherein the company has already achieved Rs. 225 crore (as against Rs. 225 crore during full fiscal 2024). Further improvement in operating profitability supported by expected moderation in input costs over the medium term along with healthy domestic steel demand and realization will be a key monitorable. Additionally, the company is set to increase operational capacity from 1.5 million tonne per annum (MTPA) to 3.0 MTPA over the medium term, including downstream capacity, which should also improve profitability.

 

Weaknesses:

• Susceptibility to demand and price risk: Demand for long steel products depends on construction and infrastructure activities and remains sensitive to economic cycles. Furthermore, the steel industry is susceptible to volatility in global steel prices. Moderation in demand and steel prices affected revenue and profitability of ESL in fiscal 2024.

 

• Average financial risk profile, expected to improve over the medium term: While moderation in operating margin led to increased net leverage (ratio of net debt to Ebitda) to around 14 times in fiscal 2024, from around 10 times in fiscal 2023, gross debt was stable. Further, interest coverage ratio moderated to 0.4 time in fiscal 2024, from 0.8 time in fiscal 2023. That said, with better operating performance and moderately low capital expenditure, debt protection metrics may improve over the medium term.

Liquidity: Strong

Cash and equivalents stood at Rs 315 crore as on September 30, 2024. Any shortfall in cash accrual against debt obligation is likely to be met via cash and equivalent. Further, expected support from Vedanta, which has healthy liquidity, provides comfort to ESL.

Rating sensitivity factors

Upward factors:

• Change in the credit risk profile of the parent, resulting in an upgrade in its rating by one notch
• Higher than expected Ebitda on account of strong ramp-up in volume, healthy realisation and significant reduction in cost of production, supporting significant improvement in capital structure

 

Downward factors:

• Weakening in the credit risk profile of the parent, resulting in a downgrade in its rating by one notch
• Lower-than-expected operating profitability, resulting in sustained high leverage
• Change in ownership and support philosophy of Vedanta towards ESL

About the Company

ESL was incorporated at Ranchi, Jharkhand in December 2006. It was India’s first Chinese technology-based greenfield integrated steel manufacturing facility near Bokaro, Jharkhand. Vedanta, through its wholly owned subsidiary - VSL, acquired 90% stake in ESL, under the Insolvency and Bankruptcy Code, 2016, for Rs 5,320 crore on June 4, 2018. ESL was delisted and VSL acquired additional shares as buy back under the Securities and Exchange Board of India’s order for exit offer and guidelines. Effective March 25, 2020, as per the scheme of amalgamation approved by the NCLT, VSL was merged with ESL. Post the merger, Vedanta holds 95.5% shares of ESL. From the effective date, VSL ceased to exist as an entity and all its assets, liabilities, debts, borrowings now stand transferred to the books of ESL. ESL has operational capacity of 1.5 MTPA and is evaluating a proposal to increase its capacity to 3 MTPA over the medium term.

About the parent

Vedanta is a diversified metals, mining, power, and oil and gas company. London-based Vedanta Resources Ltd holds 56.3% stake in the company. Vedanta’s operations include copper, iron ore and aluminium assets at Jharsuguda and Lanjigarh in Odisha and power (2,400-megawatt [MW] and 1,215-MW captive power plants for the aluminium business). The company also has aluminium operations through its subsidiary, Bharat Aluminium Company Ltd. Further, a part of the power business (1,980 MW) is conducted through the wholly owned subsidiary, Talwandi Sabo Power Ltd. The oil and gas business has now been merged with Vedanta and the group operates its zinc business through Hindustan Zinc Ltd and Zinc International in South Africa and Namibia. Vedanta holds 95.5% share in ESL.

Key Financial Indicators

Particulars	Unit	FY24	FY23
Operating income	Rs crore	8,519	8002
Profit after tax (PAT)	Rs crore	-968	-558
PAT margin	%	-11.0	-7.0
Adjusted debt/adjusted networth	Times	0.7	0.7
Interest coverage	Times	0.5	0.8

ESL reported revenue of Rs 3,901 crore in the first half of fiscal 2025.

Any other information: Not Applicable