Detailed Rationale

CRISIL Ratings has reaffirmed its ratings on the bank facilities of Godawari Power and Ispat Ltd (GPIL) at ‘CRISIL AA-/Stable/CRISIL A1+’.

 

The ratings continue to reflect the healthy business risk profile on account of sustained operating efficiency driven by integrated operations, along with a strong market position. The financial risk profile is robust too, supported by sustenance of net-debt free status*, healthy debt coverage ratios and a strong liquidity.

 

Operating income declined marginally to Rs 5,455 crore in fiscal 2024 from Rs 5,753 crore in fiscal 2023 on account of fall in realisations, while demand remained stable. Earnings before interest, taxes, depreciation and amortisation (Ebitda) remained strong (despite expected moderation due to lower realisations) at Rs 1,328 crore (Rs 1,164 crore in fiscal 2023) with operating margin above 24%, which was in line with expectation. Though steel prices have moderated this fiscal owing to an influx of imports from China as well as limited exports, the impact on long steel prices has been relatively lower. Resultantly, performance in the first half of fiscal 2025 remains stable on-year, with revenue and Ebitda of Rs 2,610 crore and Rs 654 crore, respectively, against Rs 2,617 crore and Rs 668 crore, respectively, in the first half previous fiscal. The Ebitda margin was also stable at 25% (26% in the first-half of fiscal 2024). Also, since majority of the company’s iron ore requirement (80-85%) is met through the captive mining route, it lends support to the margin. 

 

Over the medium term, the overall earnings profile is expected to be supported by healthy domestic steel demand (supporting utilisation rates) as well as stable coal prices which, along with captive iron ore sourcing, should support robust Ebitda margin of more than 20-22%.

 

Furthermore, the company is incurring capital expenditure (capex) of Rs 6,000 crore towards setting up a greenfield integrated steel plant (ISP) (subject to necessary approvals), brownfield capex to the tune of Rs 1,000 crore (of which Rs 500 crores has been incurred upto November-24) towards capacity expansion to increase mining capacity to 6 million tonne per annum (MTPA) from 2.35 MTPA currently, and pellet plant to 4.7 MTPA from 2.7 MTPA; likely to be completed over the next 6-9 months. The company has also announced inorganic growth plans and is acquiring 51% stake in Jammu pigments for a consideration of Rs 255 crore, of which 49% is already acquired. Completion of these growth plans is expected to strengthen the overall business risk profile and profitability owing to increase in scale of operations as well as enhanced nature of integrated business operations. However, CRISIL Ratings understands that the capex for the integrated steel plant will be done after improvement in financial risk profile post-commissioning of the brownfield projects over the next three fiscals and funded mainly through internal accrual without material impacting leverage position. Any deviation from this understanding, resulting in significantly debt-funded growth plans or substantial time and/or cost overruns impacting the overall profile, will be monitorable.           

 

*Net debt = total debt less cash and equivalent

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: GPIL is present across the steel value chain. Operations are backward integrated with two captive iron ore mines that meet ~85% of the iron ore requirement while the balance ~15% is sourced from the market. The company meets majority of its power requirement through its captive power capacity of 98 megawatt (MW); waste heat recovery system of 42 MW, biomass of 20 MW and coal powered plant of 36 MW). GPIL also has solar power plants of 70 MW and 30 MW capacities that have been operational since August 2022 and March 2023, respectively. The company is also setting up incremental capacity of 70 MW, in line with incremental pellet capacity, resulting in higher power requirement.

 

GPIL uses domestic as well as imported coal and has a fuel supply agreement with Coal India Ltd. Forward integration has led to diversified products (wire rods, hard bright [HB] wires) and revenue streams, allowing the company the flexibility to sell products based on realisations. Furthermore, presence of iron ore beneficiation plant (improvement in iron content and thus, realisation) and hot rolling mill on the same premises reduces transportation cost and reheating requirement, thereby supporting operating efficiency and profitability sustainably. The company also has plans to come up with an additional beneficiation plant at one of its mines, which can lead to savings in transportation and royalty.

 

• Established market position: Presence of more than two decades in the steel business and strong expertise of the promoter will continue to support operations. 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.

 

• Improved financial risk profile: The company remained net debt-free as on December 13, 2024 (net cash of Rs 998 crore as on September 30, 2024, against Rs 1056 crore as on March 31, 2024). Debt protection metrics were strong, as reflected in interest coverage and net cash accrual to total debt (NCATD) ratios of 24.08 times and 19.53 times, respectively, in fiscal 2024, compared with 60.59 times and 2.53 times, respectively, previous fiscal. Additionally, with expectation of healthy operating profitability supporting planned capex, along with no incremental material inorganic growth plans, the debt coverage metrics are expected to remain healthy over the medium term. Both interest coverage and NCATD ratios are expected to sustain at more than 25 times and 20 times, respectively, over fiscals 2025-2026. Any major debt-funded capex plan, significant time or cost overrun, acquisition or higher-than-expected cash outflow towards dividend/share buyback or inter-corporate deposits impacting the financial risk profile will remain monitorable.

 

Weaknesses:

• Exposure to cyclicality in the steel industry: The steel industry is inherently tied to the performance of both the domestic and global economies, with its growth trajectory closely linked to the level of construction and infrastructure activities. As a result, the industry is susceptible to downturns in the economic cycle, which can lead to decreased demand, as witnessed in fiscal 2016. Changes in government policies related to imports and exports can also have a significant impact on the industry. In addition to demand risks, the industry's profitability is also exposed to volatility in raw material prices and realisations, which are influenced by global commodity prices. However, the company's integrated operations and ability to adapt its revenue mix between steel and steel intermediates serve to mitigate these risks. Thus, any significant fluctuations in demand and pricing that may impact cash flows will be monitorable.

 

• Moderate capex plans: GPIL is undertaking capex for increasing the captive iron ore mining and beneficiation capacity to 6 MTPA from the current 2.35 MTPA at one of the mines, thereby increasing the manufacturing capacity for pellets and billets, construction and commissioning of new solar power plants, as well as a plan to set up an ISP (capacity of 2 MTPA under the blast furnace-basic oxygen furnace route). The total estimated outlay for all the projects is expected to be Rs 6,000 crore over the next three fiscals. The company has been allotted land for the ISP by the Government of Chhattisgarh, though leasing of land in favour of the company is under process. The management has articulated that the entire capex will be funded through internal accrual and the company will 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 equivalent were over Rs 998 crore as on September 30, 2024 (Rs 1056 crore as on March 31, 2024). Fund-based bank limit utilisation averaged 20% and non-fund-based bank limit utilisation averaged 31% during the 12 months through October 2024. Furthermore, liquidity is supported by unutilised fund-based limit of Rs 100 crore as on November 30, 2024. CRISIL Ratings has noted the management’s articulation to maintain liquidity (in the form of unencumbered cash and equivalent and unutilised fund-based limit) of more than Rs 450-500 crore on a sustainable basis.

Outlook: Stable

CRISIL Ratings believes GPIL will continue to benefit from its integrated nature of operations, leading to high efficiency and sustenance of strong financial risk profile.

Rating sensitivity factors

Upward factors:

• Higher-than-expected operating performance and significant ramp up in operations with continued volume growth supporting high capacity utilisation
• Sustained increase in operating margin to over 23-25% resulting in higher-than-expected net cash accrual
• Sustenance of strong financial risk profile (currently net debt-free) with no material debt-funded capex or acquisition, while maintaining strong liquidity

 

Downward factors:

• Material deterioration in operating performance due to significantly weak demand and intense competition leading to fall in margin to below 20-22% on sustained basis, thereby materially reducing cash accrual
• Larger-than-expected capex or acquisition resulting in material increase in leverage (net debt/Ebitda), thereby weakening  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 (3.05 MTPA), pellet plant (2.7 MTPA) and vertically integrated steel plant in Raipur. The steel plant manufactures sponge iron (capacity of 594,000 TPA), billets (525,000 TPA), MS rounds (400,000 TPA), HB wires (100,000 TPA), ferro alloys (16,500 TPA) and pre-fab structures (110,000 TPA).

 

The two main operational subsidiaries of GPIL are Alok Ferro Alloys Ltd (AFAL) and HFAL. HFAL manufactures ferroalloys (60,500 TPA) and has 30 MW power capacity (20 MW thermal, 8.5 MW biomass and 1.5 MW windmill) and a 52 MW solar power plant. AFAL also has a ferro alloy manufacturing plant with capacity of 14,500 TPA and a captive power plant of 8 MW.

 

For the first half of fiscal 2025, GPIL reported revenue of Rs 2,610 crore and earnings before interest tax depreciation and amortisation (EBIDTA) of Rs 654 crore, against Rs 2,617 crore and Rs 668 crore, respectively, during the corresponding period previous fiscal.

Key Financial Indicators (consolidated)*

As on / for the period ended March 31		2024	2023
Operating income	Rs crore	5,456	5,753
Adjusted PAT	Rs crore	936	793
PAT margin	%	17.1	13.7
Adjusted debt/adjusted networth*	Times	0.01	0.08
Adjusted interest coverage*	Times	24.08	60.59

* As per analytical adjustments made by CRISIL Ratings

Any other information: Not Applicable