Detailed Rationale

CRISIL Ratings has revised its outlook on the long-term bank facilities of MGM Minerals Ltd (MGM) to ‘Positive’ from ‘Stable' while reaffirming the rating at 'CRISIL A-’.

 
The revision in outlook factors in expectation of improvement in the business risk profile of the MGM group, supported by the acquisition of Patnaik Steels and Alloys Ltd (PSAL; ‘CRISIL BB+/Stable/CRISIL A4+; Issuer not cooperating’) in December 2022 for a cash consideration of Rs 225 crore, which was funded by internal accrual. Also, the company expects timely commissioning of the ongoing brownfield expansion for increasing its sponge iron capacity by March 2024.

 

This will support the already healthy business risk profile of MGM, as indicated by its established presence in the iron ore mining and sponge iron manufacturing business. The rating also benefits from healthy operating efficiency supported by the integrated nature of operations, longstanding experience of the promoters in the steel sector. The company's comfortable financial risk profile backed by healthy debt protection metrics, as well as good liquidity. These strengths are partially offset by exposure to regulatory risks in the iron ore mining sector inherent cyclicality in the steel industry, as well as risks related to the proposed large brownfield expansion and the company’s plan to invest in non-related businesses (hospitality and biofuel plant), which will require some funding support over the medium term.

 

The acquisition of PSAL has provided access to incremental sponge iron capacity of 105,000 tonne per annum (TPA), steel metal shop capacity of 100,000 TPA, access to captive power plant with installed capacity of 15 megawatt (MW; 8 MW through waste heat recovery and 7 MW through fluidised bed combustion), along with a 100-acre land parcel.

 

In fiscal 2023, MGM on a consolidated level posted revenue of Rs 1,210 crore, which was 18% higher than the previous fiscal (due to the consolidation of the financials of PSAL), while the operating profitability remained healthy at 24%. Iron ore and steel prices are expected to be rangebound. CRISIL Ratings expects operating income and profitability to witness stable growth, over the medium term, as MGM leverages the synergies of the acquisition.

 

Continuing healthy cash generation has led to minimal need for debt addition in the recent past, Hence, the company’s financial risk profile at consolidated level remains strong, with debt of Rs 94 crore on the balance sheet as on March 31, 2023, and healthy liquid surplus of over Rs 400 crore as on March 31, 2023 (post cash payout for the acquisition).

 

The company is carrying out a brownfield expansion into value-added products, such as billets, thermo-mechanically treated (TMT) steel bars, and wire rods as well as a power plant. The project cost of Rs 855 crore will be funded through Rs 500 crore of debt and remaining through internal accrual. The project construction commenced in October 2021 and commercial operations are expected to start in the first quarter of fiscal 2025. Annual cash accrual is expected to be Rs 240-260 crore over the medium term. Current cash surplus will be sufficient to meet the incremental working capital needs, besides partly funding the project.

 

The company is also planning to set up a 120 bed 5-star hotel with Hyatt Regency in Puri, Odisha, at a cost of Rs 180 crore and a 200 kilo litres per day (klpd) ethanol plant at a cost of Rs 240 crore through wholly owned subsidiaries, MGM Resorts Pvt Ltd and MGM Biofuels Pvt Ltd, respectively.

 

Given the sizeable debt funding for the various projects, the company’s ratio of debt to earnings before interest, taxes, depreciation and amortisation (EBITDA) ratio is expected to peak in fiscal 2026 when the project debt is drawn down fully and will gradually reduce after that.

Analytical Approach

For arriving at the ratings, CRISIL Ratings has revised its analytical approach and combined the business and financial risk profiles of MGM Minerals Ltd, Wildlotus Fashions Pvt Ltd, MGM Resorts Pvt Ltd, Pinklotus Health care Pvt Ltd, Wildlotus Textile Pvt Ltd, MGM Biofuels Pvt Ltd and PSAL (post its acquisition). Despite unrelated businesses (except in the case of PSAL), these entities have common management and promoters.

 

Furthermore, CRISIL Ratings has amortised the goodwill arising from the acquisition of 100% stake in PSAL over a period of five years starting fiscal 2023.

 

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:

Established presence in the iron ore mining and sponge iron manufacturing business; acquisition of PSAL to strengthen business risk profile through forward integration

The promoters have presence of more than three decades in the iron ore mining industry, which has enabled them to establish healthy relationships with customers and logistical service providers. The company ventured into the steel industry in fiscal 2013 post commissioning of its sponge iron plant. MGM owns an iron ore mine in the Sundergarh district in Odisha, which has reserve capacity of around 1.0 crore tonne, with a 50-year license expiring in 2056, apart from the 0.105 million tonne per annum (MTPA) sponge iron plant. The company is planning to set up a billet/TMT manufacturing plant over the medium term, which will further enhance its business risk profile with forward integration. The acquisition of PSAL in December 2022, will provide MGM access to incremental sponge iron capacity of 105,000 TPA, steel metal shop capacity of 100,000 TPA and its captive power plant. This is expected to further strengthen its backward and forward integrated operations

 

On a standalone level, MGM’s operating income has increased from Rs 190 crore in fiscal 2017 to Rs 787 crore in fiscal 2023 (Rs 1,025 crore in fiscal 2022), backed by increase in volumes as well as realisations. The promoters have been associated with the steel industry for over three decades and have established forward as well as backward integrated operations. The customer base is also fairly diversified with most of the customers contributing to less than 8% to the revenue. The extensive reserves, long validity of the mining license and presence of more than three decades in the industry are expected to continue to benefit the company in the near term.

 

Healthy operating efficiencies, driven by integrated operations and prudent working capital management

MGM has integrated operations with presence in the steel value chain from iron ore mines to sponge iron. With the proposed expansion in long steel products, the company plans to be present in the entire value chain. It provides the company flexibility to sell iron ore as well as use it for captive consumption for sponge iron manufacturing. The facilities are also supported by captive power plants, resulting in cost efficiencies.

 

Additionally, the working capital management has also been prudent. Debtors are low at less than 25 days and inventory is maintained for 40-80 days. The company’s operating margin is expected to remain higher compared to a non-integrated steel manufacturer because of its presence in captive iron ore mines.

 

Healthy financial risk profile

The consolidated balance sheet continues to be robust, driven by strong CRISIL adjusted networth of Rs 1,134 crore as on March 31, 2023, and low debt (Rs 94 crore) resulting in strong debt protection metrics. Healthy cash-generating ability and good working capital management have led to low dependence on external borrowings. The ratio of total outside liabilities to tangible networth (TOL/TNW) ratio was comfortable at 0.27 time as on March 31, 2023.

 

As on fiscal 2023, the company has invested (in the form of equity infusion and issue of debentures)a total of Rs 136 crore to its wholly owned subsidiaries, primarily to Wild Lotus Fashions Pvt Ltd (Rs 40 crore) and MGM Resorts Pvt Ltd (Rs 40 crore). Gearing and debt to EBITDA ratio are maintained within 0.1 time and 0.3 time, respectively. Higher than expected debt-funded capital expenditure (capex) or acquisition as well as substantial reduction in liquidity levels, which will impact these metrics, will remain rating sensitivity factors.

 

Weaknesses:

Exposure to regulatory risks and inherent cyclicality and competitive intensity in the sector

In the past decade, the mining industry has witnessed scams and irregularities (including illegal mining, over-mining, encroachment of forest areas and underpayment of government royalties, and conflicts with the tribal population regarding land rights) in ore-rich states, especially Karnataka, Goa and Odisha, which has also led to the Supreme Court imposing a ban on mining. Furthermore, there have been local agitations and issues in obtaining approvals in mining regions. The business risk profile should remain constrained by high regulatory risks.

 

The company's performance remains vulnerable to cyclicality in the steel sector given the close linkage between the demand for steel products and the domestic and global economies. End-user segments such as real estate, civil construction and engineering also display cyclicality. While there has been a significant push by the government on steel-intensive sectors such as infrastructure, any sustained downturn in demand will adversely impact the performance of steel companies.

 

The competitive intensity in the Indian steel sector is significant because of the presence of large steel companies such as Tata Steel Ltd, JSW Steel Ltd and Jindal Steel and Power Ltd. Also, steel imports from other countries, mainly China, add to the competition. Additionally, the domestic steel sector is capital intensive. In order to maintain/improve market share, industry participants to routinely carry out capacity expansion and debottlenecking activities.

 

Susceptibility to project risk

MGM has planned brownfield expansion into value-added products, including billets, TMT steel bars and wire rods as well as a power plant with total capex of Rs 855 crore, which is to be funded through Rs 500 crore of debt and remaining out of internal accrual and existing cash balance. The construction period is over three years and commercial operations will start in Q1 of fiscal 2025. Considering MGM’s cost advantage over non-integrated peers due to captive iron ore mines as well as expected healthy market conditions, the demand risk is expected to be low. Nevertheless, since the project is large relative to the size of the company and of a long tenure, the company remains exposed to project implementation and stabilisation risks.

 

Investment in non-steel-related businesses

The promoters are diversifying into non-steel-related sectors such as textiles, hospitality, healthcare and biofuels through its wholly owned subsidiaries. The company has increased its investments to Rs 136 crore in fiscal 2023 (against Rs 109 crore in fiscal 2022 and Rs 44 crore in fiscal 2021). These investments are primarily into Wildlotus Fashions Pvt Ltd (Rs 40 crore) and MGM Resorts Pvt Ltd (Rs 40 crore).

 

One of its subsidiaries, MGM Resorts Pvt. Ltd. has plans of setting up a 120-bed 5-star hotel in Puri (Odisha) and has tied up with Hyatt Regency. It will be undertaking a Rs 180 crore capex over the next three years which will be funded through bank debt of Rs 140 crore. Additionally, under its wholly owned subsidiary MGM Biofuels, it will be setting up a 200 klpd ethanol plant at a total cost of Rs 240 crore over the next three years which will be funded through bank debt of Rs 180 crore.

Liquidity: Strong

The group's liquidity is supported by healthy annual cash accrual, existing liquidity surplus greater than Rs 400 crore and absence of any immediate major debt repayment. The company has planned large capex over the medium term. However, annual cash accrual is expected to suffice to fund the equity portion of the capex requirement.

Outlook: Positive

CRISIL Ratings believes the ongoing brownfield capex and the acquisition of PSAL will improve the business risk profile of MGM. The financial risk profile is likely to remain healthy, despite the large capex, supported by strong cash generation and the management’s commitment to maintain financial prudence, even while making investments in non-related businesses.

Rating Sensitivity Factors

Upward factors

• Sustained healthy revenue growth and maintenance of robust operating margin resulting in strong annual cash accruals of upwards of Rs. 270 crore.
• Prudent working capital management and capex, along with healthy annual cash generation, resulting in comfortable debt protection metrics
• Timely execution and commissioning of the ongoing brownfield capex within expected cost

 

Downward factors

• Material deterioration in business performance or weakening of the operating margin, resulting in annual cash accrual lower than Rs 200 crore on a sustained basis
• Significant delay in execution of the ongoing capex resulting in time and cost overruns
• Significant debt-funded acquisition resulting in weakening of debt protection metrics

About the Company

Incorporated in1996 in Odisha by the Mohanty family, MGM owns an iron ore mine in the Sundergarh district. It is primarily engaged in the mining and trading of iron ore and manufacture of sponge iron in Odisha. The mine has a reserve capacity of around 1.0 crore tonne, with a 50-year licence expiring in 2056. The company also manufactures sponge iron and has a captive power plant of 8 MW. MGM sources iron ore from its own mines for the steel division.

 

MGM acquired Odisha-based sponge iron (110,000 tpa capacity) and billets (100,000 tpa capacity) manufacturer, PSAL, in December 2022 for a cash consideration of Rs 225 crore.

The company is carrying out brownfield expansion in value-added products and is planning to set up an additional 0.125 MTPA sponge iron capacity, 0.25 MTPA billet facility, 0.25 MTPA rolling mill and a 40 MW power plant.  

 

MGM set up a garment manufacturing division through its subsidiary, Wild Lotus Fashion Pvt Ltd, in the second half of fiscal 2022. Over the next three years, MGM, through its subsidiaries, would be setting up a 5-star hotel at a total cost of Rs 180 crore, a 200 klpd ethanol plant at a total cost of Rs 240 crore, both projects funded largely through bank debt. Additionally, it has plans to set up a manmade fibre business and enter the healthcare segment through its subsidiaries.

Any other information: Not applicable