| ESL Steel Limited | ||||||
| Ratings continues on 'Watch Developing' | ||||||
| Rating Action | ||||||
| ||||||
| 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 |
Detailed Rationale CRISIL Ratings has continued its ratings on the bank facilities of ESL Steel Ltd (ESL; a part of the Vedanta group) on ‘Rating Watch with Developing Implications’.
The continuation of rating watch in ESL is in line with the continuation in rating watch for the bank facilities and debt instruments of the parent company, Vedanta Ltd (Vedanta). 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 2-3 quarters for completion.
The ratings of ESL reflect the strong support expected from Vedanta and ESL’s strategic importance to the parent. Any adverse change in the credit risk profile of Vedanta is a key rating sensitivity factor for ESL.
While steel prices moderated during current fiscal, they remained healthy. However, input costs witnessed higher-than-expected volatility during the current fiscal; this resulted in operating profitability remaining lower than expected. 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 the support from the parent, Vedanta.
CRISIL Ratings understands that the parent (Vedanta) is evaluating strategic review of some of its assets, including the steel business in ESL. However, Vedanta will extend any need-based support to ESL in the interim; this has been factored in the parent notch-up support to the rating of ESL. |
Key Rating Drivers & Detailed Description Strengths:
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
While steel prices moderated during current fiscal, they remained healthy. However, input costs were high due to higher-than-expected volatility in coking coal and iron ore; this resulted in reduced operating profitability in the current fiscal. 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:
|
Liquidity: Strong Cash and equivalent stood at Rs 382 crore as on March 31, 2024. Any shortfall in cash accrual against debt obligation is expected to be met through cash and equivalent. Further, expected support from Vedanta, which has healthy liquidity, provides comfort to liquidity of ESL. |
Rating Sensitivity factors Upward factors:
Downward factors:
|
About the Company ESL was incorporated in December 2006 at Ranchi, Jharkhand. 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 National Company Law Tribunal, VSL 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 63.9% 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
** Includes non-cash expense of Rs 118.8 crore towards deferred tax in fiscal 2022 ESL reported revenue of Rs 8,300 crore and Ebitda of Rs 225 crore in fiscal 2024. |
Any other information: Not applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
*Cash credit has sub limit with non-fund-based facilities of Rs 30 crore ** Includes sublimit of Rs 20 crore cash credit ***Includes sublimit of Rs 180 crore for standby letter of credit for buyer's credit and bank guarantee of Rs 50 crore ^Export credit - pre and post shipment. Also, includes sublimit of letter of credit/standby letter of credit for buyer's credit of Rs 75 crore ^^^ Includes Rs 25 crore derivative limits ^^ Letter of credit facility with SBLC limit of Rs 100 crore and cash credit limit of Rs 20 crore as sub limit of the facility && Letter of credit facility with SBLC limit of Rs 200 crore, cash credit limit of Rs 50 crore, bank guarantee of Rs 50 crore and export packing credit of Rs 200 crore as sub limit of the facility; working capital demand loan limit (WCDL) of Rs 100 crore as sub limit of cash credit facility |
| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| All amounts are in Rs.Cr. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annexure - Details of Bank Lenders & Facilities | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Criteria Details
|