Detailed Rationale

CRISIL Ratings has revised its rating outlook on the long-term bank facilities of Godawari Power and Ispat Limited (GPIL) to 'Positive' from 'Stable', while reaffirming the rating at 'CRISIL A+'; the short-term rating has been reaffirmed at 'CRISIL A1'.

 

The positive outlook reflects expectation of continuation of healthy financial risk profile along with improvement in business risk profile over the medium term. The company is expected to remain net-debt* free while business risk profile is likely to strengthen through ramp-up of the recently commissioned capacities, and ongoing and upcoming capital expenditure (capex) increasing scale of operations and operating efficiency.

 

Operating performance improved in fiscal 2022 due to better realisation following the strong  upcycle in steel industry, along with existing integrated operations of the company. The earnings before interest, taxes, depreciation, and amortisation (Ebitda) had increased to Rs 1,866 crore (operating margin was 34.6%) in the fiscal 2022 from Rs 1,229 crore (30.2%) in fiscal 2021. However, the current fiscal has witnessed moderation in realization for iron ore, pellets and steel products along with reduced export sales, amid lower global prices and imposition of export duty by GoI. This has resulted in Ebitda lowering to Rs 691 crore (operating margin ~23%) in the first-half of fiscal 2023 as well. However, the earnings have still remained robust and is expected to witness support from the recent rollback of the export duty by GoI, going forward. The operating performance is also expected to be supported by increase in the capacity and operating efficiency after completion of the ongoing projects which includes capacity expansion capex of iron ore beneficiation, solar power plants and other debottlenecking projects. In addition, the company has a greenfield capex of ~ Rs 2,000 crore which is currently at a preliminary stage and is likely to be completed over the next 3-5 years. Any materially lower than expected realizations or slower than expected capex execution impacting the business profile will remain a key monitorable.

 

That said, increased operating cash accruals and monetization of assets (divestment of stake in Godawari Green Energy Ltd) resulted in healthy improvement in financial risk profile of the company during the last fiscal, with company turning net debt-free as of March 2022. The company is expected to fund the ongoing capex mainly through internal accrual and is likely to remain net debt-free over the medium term. GPIL is also simplifying the group structure through acquisition of additional shares in some of the subsidiaries and associates, including Hira Ferro Alloys Ltd (HFAL) and Alok Ferro Alloys Ltd (AFAL). Any major debt-funded capex plan or acquisition impacting financial risk profile will remain a key rating sensitivity factor. 

 

The ratings continue to reflect the healthy business risk profile of GPIL, driven by integrated operations, established market position in the domestic steel industry and improved financial risk profile. These strengths are partially offset by exposure to cyclicality in the steel industry and greenfield capex planned over the medium term.

 

*Net debt = total debt less cash and equivalents

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of GPIL and its subsidiaries, associates and joint ventures

 

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:

• Integrated operations: The company is present across the steel value chain. Operations are backward integrated with two captive iron ore mines that meet 100% of the total iron ore requirement. The company meets majority of its power requirement through its captive power capacity of 73 megawatt (MW; WHRS 42 MW, biomass 20 MW and coal 11 MW), an additional 25 MW from its recently acquired plant from Jagdamba Power & Alloys Ltd (associate company) and a solar power plant of 70 MW capacity that has been operational since August 2022. External dependence for power will be negligible after completion of the ongoing 85 MW captive power projects. The company uses domestic as well as imported coal, and has fuel supply agreement with Coal India Ltd (rated CRISIL AAA/Stable/CRISIL A1+). Forward integration has led to diversified product (wire rods, HB wires and pre-fab structures) and revenue profiles, allowing the company the flexibility to sell products based on realisations. Furthermore, presence of iron ore beneficiation plant (improves iron content and thus realisation) and hot rolling mill in the same premises reduces transportation cost and reheating requirement, thereby supporting operating efficiency and profitability sustainably.

 

• Established market position: Presence of more than two decades in the steel business and strong expertise of the promoter will continue to support the business. GPIL manufactures multiple products across the steel value chain such as iron ore pellets, sponge iron, steel billets, mild steel (MS) rounds, HB wires and ferro alloys from its plant in Raipur, Chhattisgarh.

 

• Improved financial risk profile: Deleveraging by divestment of GGEL during fiscal 2022 has significantly improved financial risk profile. The company stands as net debt free as on September 2022. Debt to Ebitda ratio improved to 0.29 time as on March 31, 2022, from 0.73 time in the previous fiscal. Debt protection metrics were robust, as reflected in interest coverage and net cash accrual to total debt ratios of 99.44 times and 2.63 times, respectively, in fiscal 2022, compared with 8.2 times and 0.86 time, respectively, in the previous fiscal. The metrics remained strong during the first-half of the current fiscal as well and are expected to sustain with moderate capex over the medium term. Any major debt-funded capex plan or acquisition impacting financial risk profile will remain a key rating sensitivity factor. 

 

Weaknesses:

• Exposure to cyclicality in the steel industry: The steel industry is closely linked to the domestic and global economies as growth depends on the level of construction and infrastructure activities. Any downturn in the economic cycle adversely impacts demand, as seen in fiscal 2016. Changes in government policy on import/export also affects the industry. In addition to demand risk, profitability is susceptible to volatility in raw material prices and realisations. Prices are largely subject to global commodity prices. However, the risk of volatility is mitigated by integrated operations and the flexibility in changing the revenue mix between steel and steel intermediates. Any significant variation in demand and pricing scenario impacting cash accrual will be sensitive to ratings.

 

• Moderate capex plans: In addition to the ongoing capex plans of increasing the iron ore beneficiation capacity, implementation of solar power plants, and other operating efficiency improvement and debottlenecking projects, the company plans to set up a greenfield integrated steel plant with an estimated capital outlay of around Rs 2,000 crore over the next 3-5 years. It has initiated the process for land acquisition and other regulatory clearances for setting up the project. Land acquisition expenses are expected to be close to Rs 150 crore. Given the initial stage of the project, the structure, including the funding mix and other modalities is not yet finalised. However, management intends to remain net debt free over the medium term. Any major debt-funded capex/acquisition will be a key rating sensitivity factor.

Liquidity: Strong

Cash and equivalents were over Rs 500 crore as of September 2022. Fund-based bank limit utilisation averaged 26% during the 12 months through August 2022. Annual accrual of over Rs 600 crore should comfortably cover debt obligation, moderate capex plans and incremental working capital requirement over the medium term.

Outlook: Positive

Business risk profile should strengthen with completion of ongoing capex plans while financial risk profile should remain comfortable over the medium term with integrated operations.

Rating Sensitivity factors

Upward factors:

• Timely commissioning of ongoing projects resulting in significant improvement in operating efficiency and scale of operations
• Sustenance of operating performance with healthy utilisation levels and operating margins sustaining above 20-22%, leading to robust cash accruals
• Maintaining healthy financial risk profile with strong capital structure supported by  continued net debt-free position on a sustained basis

 

Downward factors:

• Significant deterioration in operating performance due to weakened demand impacting utilization levels, and lower than expected realisations  leading to fall in operating margin to below 18-20% on sustained basis, thereby materially reducing cash accrual
• Larger-than-expected capex or acquisition resulting in material increase in leverage (net debt/ EBITDA) and thereby weakening of financial risk profile, on a sustained basis
• Stretched working capital cycle weakening liquidity

About the Company

GPIL was established as Ispat Godawari Ltd in 1999 by Mr B L Agrawal and got its current name in 2001. The company has two captive iron ore mines (3 MTPA), pellet plant (2.7 MTPA) and vertically integrated steel plant in Raipur. The steel plant manufactures sponge iron (495,000 tonnes), billets (400,000 tonne), MS rounds (400,000 tonne), HB wires (400,000 tonne), ferro alloys (16,500 tonne) and pre-fab structures (110,000 tonne).

 

The two main operational subsidiaries of GPIL are AFAL and HFAL. HFAL manufactures ferro alloy (60,500 tonne) and has 30 MW power capacity (20 MW thermal, 8.5 MW biomass and 1.5 MW windmill). AFAL also has a ferro alloy manufacturing plant with capacity of 14,500 tonnes and a captive power plant of 8 MW.

Key Financial Indicators (consolidated)*

As on / for the period ended March 31		2022	2021
Operating Income	Rs crore	5,399	4072
Adjusted profit after tax (PAT)	Rs crore	1,467	655
PAT margin	%	27.2	16.1
Adjusted debt/adjusted networth	Times	0.17	0.44
Adjusted Interest coverage	Times	99.44	8.20

*As per analytical adjustments made by CRISIL Ratings

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs crore)	Complexity levels	Rating assigned with outlook
NA	Bank Guarantee	NA	NA	NA	75	NA	CRISIL A1
NA	Bank Guarantee	NA	NA	NA	110	NA	CRISIL A1
NA	Bank Guarantee	NA	NA	NA	15	NA	CRISIL A1
NA	Bill Purchase-Discounting Facility	NA	NA	NA	40	NA	CRISIL A1
NA	Cash Credit&	NA	NA	NA	21	NA	CRISIL A+/Positive
NA	Cash Credit**	NA	NA	NA	25	NA	CRISIL A+/Positive
NA	Cash Credit*	NA	NA	NA	54	NA	CRISIL A+/Positive
NA	Export Packing Credit	NA	NA	NA	50	NA	CRISIL A1
NA	Letter of Credit	NA	NA	NA	60	NA	CRISIL A1
NA	Letter of Credit	NA	NA	NA	40	NA	CRISIL A1
NA	Letter of Credit	NA	NA	NA	135	NA	CRISIL A1
NA	Letter of Credit&&%	NA	NA	NA	98	NA	CRISIL A1
NA	Letter of Credit^#	NA	NA	NA	55	NA	CRISIL A1
NA	Letter of Credit^^##	NA	NA	NA	205	NA	CRISIL A1
NA	Letter of Credit^#	NA	NA	NA	167	NA	CRISIL A1
NA	Loan Equivalent Risk Limits	NA	NA	NA	15	NA	CRISIL A1
NA	Proposed Long Term Bank Loan Facility	NA	NA	NA	43	NA	CRISIL A+/Positive

*EPC/PCFC/FBD/EBR limit of Rs 54.00 crore sublimit of CC

^Buyers Credit limit of Rs 150.00 crore sublimit of LC

#CEL limit of Rs 30.00 crore sublimit of LC

** EPC/PCFC/PSC/PSCFC/EBRD/FBP/FDB limit of Rs 25.0 crore sublimit of CC

^^Bank Guarantee limit of Rs 45.0 crore sublimit of LC

## Buyers Credit limit of Rs 145.00 crore sublimit of LC

& EPC/PCFC/PSC/PSCFC/EBRD/FBP/FDB limit of Rs 21.0 crore sublimit of CC

&& Bank Guarantee limit of Rs 1.76 crore sublimit of LC

% limit of Rs 1.60 crore sublimit of LC

Annexure - List of entities consolidated

Names of entities consolidated	Extent of consolidation	Rationale for consolidation
Godawari Energy Ltd	Fully consolidated	Strong financial and business linkages
Hira Ferro AIIoys Ltd	Fully consolidated
Alok Ferro Alloys Ltd (w.e.f. June 28, 2022)	Fully consolidated
Ardent Steel Pvt Ltd	Equity method
Raipur Infrastructure Company Ltd	Equity method
Chhattisgarh Capitive Coal Mining Pvt Ltd	Equity method
Chhattisgarh Ispat Bhoomi Ltd	Equity method
Jagdamba Power and Alloys Ltd*	Equity method

*Acquired completely by GPIL on June 07, 2022