Rating Rationale
July 31, 2020 | Mumbai
L&T Special Steels and Heavy Forgings Private Limited
Ratings Reaffirmed
 
Rating Action
Total Bank Loan Facilities Rated Rs.800 Crore
Long Term Rating CRISIL A/Stable (Reaffirmed)
Short Term Rating CRISIL A1 (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has reaffirmed its 'CRISIL A/Stable/CRISIL A1' ratings on the bank facilities of L&T Special Steels and Heavy Forgings Private Limited (LTSSHF). CRISIL has also reaffirmed its 'CRISIL A/Stable' rating on the long-term loan of LTSSHF, given by Nuclear Power Corporation of India Ltd (NPCIL; 'CRISIL AAA/Stable').
 
The ratings continue to reflect the company's strong business linkages with its promoters Larsen and Toubro Ltd (L&T; 'CRISIL AAA/FAAA/Stable/CRISIL A1+') and NPCIL, and the strong financial support articulation from L&T for LTSSHF's bank facilities.
 
The nationwide lockdown to curb the spread of Covid-19 led to closure of LTSSHF's factory and impacted performance in the last quarter of fiscal 2020. Order inflow from the hydrocarbon segment is expected to be affected in fiscal 2021 due to the slowdown in the oil and gas exploration segment. However, this is unlikely to have a major impact in overall revenue, due to large order book, particularly in the nuclear segment.
 
The ratings are supported by the long-term demand prospects for heavy forgings in India, reflected in the company's heathy order book, and expectation of improving operating profit with higher scale. These strengths are partially offset by exposure to risks related to scaling up of operations and to intense competition in the forgings business, and weak financial risk profile because of continued losses at the profit after tax level and delays in conversion of promoter loans to preference shares. Conversion of the loans from the promoters will be a key rating monitorable.

Analytical Approach

For arriving at the ratings, CRISIL has applied its parent notch-up framework to factor in the extent of distress support available from L&T.

Key Rating Drivers & Detailed Description
Strengths
* Strong business linkages with parents L&T and NPCIL, and financial support from L&T
CRISIL believes LTSSHF will benefit from the strong business linkages with L&T and NPCIL. The partners are the largest customers of LTSSHF, accounting for more than 90% of orders. LTSSHF meets most of the requirement of heavy forgings of L&T and ensures a secured supply chain for forgings for 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 to support LTSSHF (Rs 1,637 crore as on March 31, 2020). Additionally, L&T had also 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.
 
LTSSHF has proposed another issuance of preference shares of Rs 1,338 crore, wherein secured loans of Rs 348 crore (including Rs 178 crore of accumulated interest) from NPCIL and loans of Rs 990 crore from L&T will be converted to preference shares. Post this transaction, the unsecured loans of L&T and secured loan of NPCIL are expected to be converted to convertible preference shares. However, the issuance is pending approval from NPCIL's board since 2018.
 
The loan from NPCIL has principal and accrued interest repayments beginning September 2022 and September 2023, respectively. CRISIL believes conversion of the NPCIL loan will be completed well before the repayment date of September 2022. Any delay in the conversion will be a key rating sensitivity factor.   
 
* Favourable long-term demand prospects for heavy forgings in India
The annual demand for heavy forgings is expected to remain healthy over the long term. The main sources of demand will be nuclear power and defence, with supplementary demand from the hydrocarbon sector. LTSSHF's order book of Rs 467 crore as on March 31, 2020, is dominated by the nuclear segment (89% of total order book). LTSSHF is the only capable indigenous supplier of high-strength naval plates and forgings. The company expects significant growth from nuclear submarines orders under the government's defence Make in India initiative.
 
Weaknesses
* Weak, albeit improving, operating performance
LTSSHF's operating performance has improved over the past few fiscals because of heathy order inflow and various cost reduction initiatives taken by the company. The company registered earnings before interest, tax, depreciation and amortisation (EBITDA) of Rs 26 crore in fiscal 2020, up from Rs 15 crore in fiscal 2019. The increase was led by significant order inflow and execution, with majority of the orders in the high-margin nuclear segment. In the past few fiscals, LTSSHF has undertaken measures to control staff, contract labour and power costs, resulting in operational profit. Continued improvement in the operating profit, along with robust order book, will remain a key rating monitorable.
 
* Exposure to risks related to scaling up of operations and to intense competition in the forgings business
LTSSHF began commercial operations in October 2012. It is scaling up operations, with EBITDA being positive in the past two fiscals. The ramp-up of operations is expected to be gradual and will stabilise only over the medium term. CRISIL believes the profitability of forgings manufacturers could come under pressure due to increased competition. The commissioning of LTSSHF's capacity coincided with increases in global capacities by large forging manufacturers. Given the non-linear nature of demand for forgings (due to inherent lumpiness in capex cycles), any large capacity addition will be absorbed only over a period of time. This could result in temporary reversals in the demand-supply gap. The company will likely improve revenue over the medium term. However, this will largely be linked to investments in the nuclear, defence and hydrocarbon industries.
Liquidity Adequate

LTSSHF's liquidity remains adequate backed by support from L&T. The parent has funded losses and interest obligations of LTSSHF through unsecured short-term loans, which stood at Rs 1,637 crore as on March 31, 2020. LTSSHF repaid all its term loans and external commercial borrowings in fiscal 2018, using Rs 475 crore of proceeds from the issuance of preference shares to L&T. The company has no obligation to external lenders.
 
LTSSHF has a sanctioned working capital limit of Rs 125 crore, which was utilised moderately at 65% on average over the 12 months through March 2020. CRISIL believes the parent will continue to meet the liquidity requirement of LTSSHF when required.

Outlook: Stable

CRISIL believes LTSSHF will continue to benefit from the strong linkages with its parents, over the medium term.

Rating sensitivity factors
Upward factors:
* Significantly more-than-expected improvement in operating performance, leading to breakeven at the PAT level
* Further infusion of equity leading to better financial flexibility
 
Downward factors:
* Downward revision in the credit rating of L&T
* Change in the stance of support from L&T, most likely due to weaker strategic importance of LTSSHF to the parent
* Delay in conversion of NPCIL loan before the repayment date of September 2022

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, 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.
 
In fiscal 2020, the company had a net loss of Rs 222 crore and operating income of Rs 227 crore, as against a net loss of Rs 214 crore and operating income of Rs 214 crore in fiscal 2019.

Key Financial Indicators
Particulars Unit 2020 2019
Operating Income Rs crore 227 212
Profit after tax (PAT) Rs crore -222 -214
PAT margin % -98 -101
Adjusted debt/adjusted networth Times -2.3 -2.7
Interest coverage Times 0.13 0.08

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments and are included (where applicable) in the Annexure -- Details of Instrument in this Rating Rationale. For more details on the CRISIL complexity levels, please visit www.crisil.com/complexity-levels.
Annexure - Details of Instrument(s)
ISIN Name of instrument Date of allotment Coupon rate (%) Maturity date Issue size
(Rs cr)		 Complexity Levels Rating assigned with outlook
NA Long-term loan^ NA NA Oct-27 400 NA CRISIL A/Stable
NA Cash credit NA NA NA 50 NA CRISIL A/Stable
NA Short term loan NA NA NA 75 NA CRISIL A1
NA Bank guarantee NA NA NA 125 NA CRISIL A1
NA Bank guarantee# NA NA NA 35 NA CRISIL A1
NA Bank guarantee## NA NA NA 90 NA CRISIL A1
NA Letter of credit NA NA NA 25 NA CRISIL A1
^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
##Working capital bank guarantee
Annexure - Rating History for last 3 Years
  Current 2020 (History) 2019  2018  2017  Start of 2017
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund-based Bank Facilities  LT/ST  525.00  CRISIL A/Stable/ CRISIL A1      25-04-19  CRISIL A/Stable      15-12-17  CRISIL A/Stable  CRISIL A+/Negative 
            29-03-19  CRISIL A/Stable      29-06-17  CRISIL A/Negative   
Non Fund-based Bank Facilities  LT/ST  275.00  CRISIL A1      25-04-19  CRISIL A1      15-12-17  CRISIL A1  CRISIL A1 
            29-03-19  CRISIL A1      29-06-17  CRISIL A2+   
All amounts are in Rs.Cr.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Bank Guarantee 125 CRISIL A1 Bank Guarantee 125 CRISIL A1
Bank Guarantee# 35 CRISIL A1 Bank Guarantee# 35 CRISIL A1
Bank Guarantee## 90 CRISIL A1 Bank Guarantee## 90 CRISIL A1
Cash Credit 50 CRISIL A/Stable Cash Credit 125 CRISIL A/Stable
Letter of Credit 25 CRISIL A1 Letter of Credit 25 CRISIL A1
Long Term Loan^ 400 CRISIL A/Stable Long Term Loan^ 400 CRISIL A/Stable
Short Term Loan 75 CRISIL A1 -- 0 --
Total 800 -- Total 800 --
^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
##Working capital bank guarantee
Links to related criteria
CRISILs Approach to Financial Ratios
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating criteria for manufaturing and service sector companies
Rating Criteria for Engineering Sector
Criteria for Notching up Stand Alone Ratings of Companies based on Parent Support

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