| L&T Special Steels and Heavy Forgings Private Limited | ||||||||
| Ratings Reaffirmed; Long Term Loan rating downgraded to 'CRISIL B+'; continues on 'Watch Negative' | ||||||||
| Rating Action | ||||||||
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| 1 crore = 10 million | ||||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has reaffirmed its ratings on the bank facilities of L&T Special Steels and Heavy Forgings Private Limited (LTSSHF) at ‘CRISIL A-/Stable/CRISIL A2+’.
The ratings continue to reflect the expectation that the company’s operating performance will remain modest over the medium term. While the order book has improved over the past six months on the back of strategic projects from Larsen and Toubro Limited (L&T; rated ‘CRISIL AAA/Stable/CRISIL A1+’) in the defence segment, the business prospects remain weak in nuclear power segment thereby limiting the growth potential of the company. CRISIL Ratings believes L&T will continue to support any cash flow mismatch towards the external loan facilities of LTSSHF.
CRISIL Ratings has downgraded its long-term rating on the loan facility extended to LTSSHF by Nuclear Power Corporation of India Ltd (NPCIL; ‘CRISIL AAA/Stable’) to ‘CRISIL B+’ from ‘CRISIL BB‘; it continues to remain on ‘Rating Watch with Negative Implications’ due to uncertainty regarding support from L&T towards this facility and continued delay in conversion of the loan by NPCIL.
The board of LTSSHF in 2018 had proposed issuance of preference shares of Rs 1,338 crore wherein the secured loan of Rs 348 crore (including Rs 178 crore of accumulated interest) from NPCIL and loan of Rs 990 crore from L&T were to be converted to convertible preference shares. This was necessitated by the continued weak operating performance of the company and inadequate cash flow to service the debt. However, the issuance has been pending approval from the NPCIL board. CRISIL Ratings will continue to engage with the management and monitor developments regarding conversion of the debt and issuance of the preference shares. Any delay in conversion of the NPCIL loan before its repayment starting in September 2022 may lead to a further rating downgrade.
The ratings continue to reflect the strong business linkages of LTSSHF with its leading promoters, L&T and NPCIL, the healthy long-term demand prospects for heavy forgings in India, especially from the defence segment and expectation of reduction in operating losses. These strengths are partially offset by exposure to risks related to scaling up of operations and intense competition in the forgings business and weak financial risk profile because of continued losses and delays in equity infusion by the parents. |
Analytical Approach CRISIL Ratings has applied its parent notch-up framework to factor in the extent of distress support available from L&T towards external bank loan facilities.
CRISIL Ratings has treated around 50% of the cumulative non-convertible preference shares of Rs 642 crore as equity and the rest as debt. This is because these are subscribed by the promoters, have maturities ranging from 7 to 9 years, have a lower interest than the market rate, and are subordinated to the external borrowings of LTSSHF. |
Key Rating Drivers & Detailed Description Strengths Strong business linkages with the parents L&T and NPCIL, and financial support from L&T CRISIL Ratings believes LTSSHF will benefit from strong business linkages with L&T and NPCIL, which are its largest customers, accounting for more than 90% of the company’s orders. LTSSHF caters to most of the heavy forgings requirement of L&T and ensures a secured supply chain for the forgings requirement of NPCIL. The company has demonstrated its capability in the heavy engineering, nuclear power and defence segments which are key growth areas for L&T. Over the years, L&T has extended unsecured loans totaling to Rs 1,872 crore (principal amount of Rs 1,730 crore and accrued interest of Rs 142 crore) to LTSSHF as on March 31, 2022. Support from NPCIL in the form of secured loans stood at Rs 454 crore (principal amount of Rs 170 crore and accrued interest of Rs 284 crore) as on March 31, 2022. L&T had infused Rs 475 crore in the form of non-convertible cumulative redeemable preference shares in fiscal 2018. NPCIL had also converted Rs 167 crore of secured loans to preference shares on December 7, 2017.
Favourable long-term demand prospects for heavy forgings in India The annual demand for heavy forgings is expected to improve over the long term, mainly coming from nuclear power and defence, with supplementary demand from the ship-building and hydrocarbon industries. LTSSHF had an order book of Rs 529 crore as of June 30, 2022, with 63% of the orders from L&T. The order book had improved in the last quarter of fiscal 2022 with two large orders from L&T’s Defence division.
The heavy forgings segment has very few specialist manufacturers and LTSSHF’s competitive advantages stem from the fact that it will have a shorter turnaround time and lower cost structure compared with imports. It is also the only player in the domestic market with heavy forging capability and is well positioned to benefit from the government’s Make in India thrust. Furthermore, the established market reputation of its promoters gives the company an edge over its competitors.
Weaknesses Weak operating performance and negative networth LTSSHF’s operating performance has remained weak in the past mainly on account of weak order inflow. The company has been making operating profits over the past four fiscals, backed by order inflows and tight control on operational costs. But it continues to report losses due to interest accrued on loans from the promoters.
Furthermore, due to delays in equity infusion by its parents, networth eroded to negative Rs 2,422 crore as on March 31, 2022, from Rs 364 crore as on March 31, 2013.
Exposure to risks related to scaling up of operations and intense competition in the forgings business LTSSHF began commercial operations in October 2012. Although the company has ramped up operations over the years to achieve operational profitability, it continues to be constrained by lack of scale resulting in limited operating leverage. Post the Fukushima disaster, new large-scale nuclear projects were either delayed or cancelled in India. The commissioning of LTSSHF’s capacity coincided with increases in global capacities by large forging manufacturers. Revenue growth is expected to improve over the medium term and will largely be linked to investments in the nuclear, defence and hydrocarbon industries. The company also faces intense competition from global players with better economies of scale |
Liquidity: Adequate LTSSHF’s liquidity remains adequate, backed by support from L&T. The parent has been funding the losses and interest obligations of LTSSHF through unsecured short-term loans (Rs 1,872 crore as on March 31, 2022). The company does not have any external long-term debt obligation. |
Outlook: Stable Outlook on the external debt facilities: Stable CRISIL Ratings believes LTSSHF will continue to benefit from financial support from L&T over the medium term. |
Rating Sensitivity factors Rating sensitivity factors on external debt facilities Upward factors:
Downward factors:
Rating sensitivity factors on the NPCIL loan Upward factors:
Downward factors:
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About the Company LTSSHF was incorporated in July 2009 and became a 74:26 joint venture between L&T and NPCIL in November 2009. The company has set up a fully integrated manufacturing facility at Hazira, near Surat, in Gujarat, for supply of heavy forgings mainly to the hydrocarbon and nuclear power sectors. The first phase of the project that entailed an investment of Rs 1,700 crore, with a press capability of 9,000 tonne per annum, commenced operations in October 2012. The second phase has been put on hold by the company. |
Key Financial Indicators (CRISIL Ratings-adjusted)
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Any other information: Not applicable |
| Note on complexity levels of the rated instrument: CRISIL Ratings' complexity levels are assigned to various types of financial instruments. The CRISIL Ratings' complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL Ratings' complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments. |
Annexure - Details of Instrument(s)
^Loan from co-promoter, NPCIL is secured by a charge on the assets of LTSSHF that ranks pari-passu with other lenders. The loan is being rated on the specific request of NPCIL #Project bank guarantee |
| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| All amounts are in Rs.Cr. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annexure - Details of Bank Lenders & Facilities | ||||||||||||||||||||||||
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^Loan from co-promoter, NPCIL is secured by a charge on the assets of LTSSHF that ranks pari-passu with other lenders. The loan is being rated on the specific request of NPCIL
#Project bank guarantee
Criteria Details
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