Detailed Rationale

CRISIL Ratings has upgraded its ratings on the bank facilities of Godawari Power and Ispat Ltd (GPIL) to ‘CRISIL AA-/Stable/CRISIL A1+’ from ‘CRISIL A+/Positive/CRISIL A1’.

 

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

 

Operating income increased to Rs 5,792 crore in fiscal 2023 from Rs 5,399 crore in fiscal 2022 on account of better realisations and healthy steel demand. Earnings before interest, taxes, depreciation and amortisation (EBITDA) remained strong (despite expected moderation due to lower realisations) at Rs 1,173 crore (Rs 1,866 crore in the fiscal 2022) with operating margin above 20%, which was in line with expectation. For the first quarter of fiscal 2024, EBITDA was Rs 305 crore and EBITDA margin was at 23%.

 

Over the medium term, the overall earnings profile is expected to be supported by robust domestic steel demand (supporting utilization rates) as well as easing coal prices which along with captive iron ore souring should support robust EBITDA margins of more than 20-22%.

 

The operating performance is further expected to be supported by an increase in the capacity and operating efficiency after completion of the ongoing projects which includes capacity expansion capex for iron ore mining and beneficiation, implementation of new solar power plants and capacity addition for finished products, with a total outlay of ~Rs 1,000 crore over the medium term. In addition, the company recently announced greenfield capex of ~Rs 2,500 crore for an integrated steel plant (ISP), which is in preliminary stage and likely to be completed over the next three years.

 

The company is expected to fund the ongoing capex through operating cash accruals which should result in no material increase in leverage for the company. This is expected to support sustenance of existing capital structure (with net debt free position) and liquidity profile for the company over the medium term. However, any material decline in operating profitability against expectations or any major debt-funded capex plan or acquisition impacting financial risk profile will remain a key rating sensitivity factor.

 

*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’ for the 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 80% of the iron ore requirement and balance 20% is sourced from market. The company meets majority of its power requirement through its captive power capacity of 98 MW (waste heat recovery system [WHRS] 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. External dependence for power will be negligible after completion of the ongoing 55 MW captive power projects — 30 MW solar power plant for GPIL in Khairagarh and 25 MW solar power plant for subsidiary Hira Ferro AIIoys Ltd (HFAL) in Bemetara.

 

GPIL uses domestic as well as imported coal and has a fuel supply agreement with Coal India Ltd (‘CRISIL AAA/Stable/CRISIL A1+’). 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 in 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 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: The company remained net debt free as of August 2023 (net cash of Rs 300 crore as on June 30, 2023, against Rs 809 crore as on March 31, 2023). Debt protection metrics were strong, as reflected in interest coverage and net cash accrual to total debt (NCATD) ratios of 60.59 times and 2.53 times, respectively, in fiscal 2023, compared with 99.44 times and 2.63 times, respectively, in the previous fiscal. The credit metrics remained strong in the first quarter of fiscal 2024. Additionally, with expectation of healthy operating profitability supporting planned capex, along with no material inorganic growth plans, the debt coverage metrics are expected to remain healthy over the medium term. Interest coverage and NCATD ratios are expected to sustain at more than 50 times and 25 times, respectively, over fiscals 2024 and 2025. Any major debt-funded capex plan, acquisition or materially higher than expected cash outflow towards dividend/share buyback or inter-corporate deposits (ICDs), impacting the financial risk profile of the company, 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 its growth depends on the level of construction and infrastructure activities. Any downturn in the economic cycle adversely impacts demand, as was seen in fiscal 2016. Changes in government policy on import/export also affect the industry. In addition to demand risk, profitability is susceptible to volatility in raw material prices and realisations as prices are subject to global commodity prices. However, the risk is mitigated by integrated operations and flexibility to change the revenue mix between steel and steel intermediates. Any significant variation in demand and pricing impacting cash accrual will be monitorable.

 

Moderate capex plans: GPIL has announced new capex plans for increasing the captive iron ore mining and beneficiation capacity to 6 million tonne per annum (MTPA; existing mining capacity of 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 1 MTPA under the Blast Furnace – Basic Oxygen Furnace [BF-BOF] route). The total estimated outlay for all the projects is expected to be Rs 3,500 crore over the next three years. The company has been allotted land for the ISP by the Government of Chhattisgarh, however, lease of land in favour of the Company is under process. The management has articulated that the entire capex will be funded through internal accruals 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 equivalents were over Rs 300 crore as on June 30, 2023 (Rs 809 crore as on March 31, 2023). Fund-based bank limit utilisation averaged 17% and non-fund-based bank limit utilisation averaged 49% during the 12 months through July 2023. Further, liquidity is supported by unutilized fund-based bank limits of Rs 100 crore as of June 30, 2023. CRISIL Ratings has noted the management’s articulation to maintain liquidity (in the form of unencumbered cash and equivalents and unutilised fund-based limits) of more than Rs 450-500 crore on a sustainable basis.

Outlook: Stable

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

Rating Sensitivity Factors

Upward Factors

• Significantly higher than expected operating performance with significant increase in scale of operations with continued volume growth supporting high capacity utilisation
• Sustained increase in operating margin to over 23-25% resulting in materially higher than expected net cash accruals
• 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 weaker than expected demand and intense competition leading to fall in margin to below 20-22% on sustained basis, thereby materially reducing cash accruals
• 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 (3.05 MTPA), pellet plant (2.7 MTPA) and vertically integrated steel plant in Raipur. The steel plant manufactures sponge iron (capacity of 495,000 tonne per annum [TPA]), billets (400,000 TPA), MS rounds (400,000 TPA), HB wires (400,000 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 30 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 quarter of fiscal 2024, GPIL reported revenue of Rs 1,326 crore and profit after tax of Rs 231 crore, as against Rs 1,666 crore and Rs 327 crore, respectively, during the corresponding period of the previous fiscal.

Key Financial Indicators (Consolidated)*

As on / for the period ended March 31		2023	2022
Operating income	Rs crore	5,792	5,399
Adjusted profit after tax (PAT)	Rs crore	793	1,467
PAT margin	%	13.7	27.2
Adjusted debt/adjusted networth	Times	0.08	0.17
Adjusted interest coverage	Times	60.59	99.44

*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 level	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 AA-/Stable
NA	Cash credit**	NA	NA	NA	25	NA	CRISIL AA-/Stable
NA	Cash credit*	NA	NA	NA	54	NA	CRISIL AA-/Stable
NA	Export packing credit	NA	NA	NA	50	NA	CRISIL A1+
NA	Letter of credit	NA	NA	NA	40	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 AA-/Stable
NA	Proposed letter of credit	NA	NA	NA	195	NA	CRISIL A1+

*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

%LER 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	Full	Strong financial and business linkages
Hira Ferro AIIoys Ltd	Full
Alok Ferro Alloys Ltd (with effect from June 28, 2022)	Full
Ardent Steel Pvt Ltd	Equity method
Raipur Infrastructure Company Ltd	Equity method
Chhattisgarh Captive 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 7, 2022