Detailed Rationale

Crisil Ratings has reaffirmed its ‘Crisil AA-/Stable/Crisil A1+’ ratings on the bank loan facilities and commercial paper programme of Mishra Dhatu Nigam Ltd (MIDHANI).

 

The ratings continue to reflect the strategic importance of MIDHANI to the Government of India (GoI) and the support provided by the government. The ratings also factor in the established market position of the company in the super alloys segment and its strong financial risk profile. The company has a strong order book of Rs 1,937 crore (as in January 2025), to be executed over a period of 15-18 months, which provides healthy revenue visibility. These strengths are partially offset by the exposure of profitability to volatility in raw material prices, changes in product mix, foreign exchange (forex) rates and large working capital requirement.

 

Revenue of MIDHANI grew 2.5% on-year in the first half of fiscal 2025 after growing by 21% year on year in fiscal 2024. For the company, first half of the fiscal is generally slower and more than 60% of the revenue is generated in the second half of the fiscal. Revenue is expected to grow 10-12% year-on-year in fiscal 2025 as the company ramps up deliveries in the second half of the fiscal. Orders from defence continue to dominate the order book with more than 80% of the orders being from the defence sector. Operating margin stood at 17.3% in the first half of fiscal 2025. It declined to 19% in fiscal 2024, from 31.6% in fiscal 2023, due to changes in the product mix with share of lower margins products, viz super alloys, increasing in the overall product mix. Operating profit margin is expected to remain stable at 18.5-19% in fiscal 2025 as the share of revenue from higher margin titanium alloy business is expected to increase in the second half of fiscal 2025. Operating margin may improve to 20-21% over the medium term, with improving operating leverage and stable product mix.

 

Financial risk profile remains strong, driven by strong liquidity, with rangebound debt levels of Rs 324 crore in the first half of fiscal 2025, and nominal debt repayment obligations. The company is expected to incur capital expenditure (capex) of Rs 100 crore over the medium term, which would be largely funded through a prudent mix of internal cash accrual and moderate debt. The financial risk profile will remain strong and total debt is expected to remain rangebound at Rs 320-350 crore for the near to medium term as the company is not expected to add any significant debt for its capex. Liquidity is expected to remain strong, with net cash accrual (post dividend) expected to remain above Rs 100 crore in the near to medium term, which will be sufficient for the annual debt repayment obligation of Rs 20 crore through fiscal 2026.

 

Gross current assets (GCAs) remain high, though reduced to 600 days in fiscal 2024 from over 700 days in the years. The improvement is led by a reduction in the inventory levels due to rationalisation of value of production, which has been reducing and aligned to the revenue of the company. Sustained reduction in GCAs going ahead will remain a key monitorable.

Analytical Approach

Crisil Ratings has considered the criteria for notching up standalone ratings of entities, based on government support. The joint venture, Utkarsha Aluminium Dhatu Nigam Ltd, has been moderately consolidated as MIDHANI is likely to infuse equity to support the project over the medium term.

 

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:

• High strategic importance to, and support from, the government: GoI set up MIDHANI mainly to achieve self-reliance in manufacturing special metals and super alloys critical to growth of the defence, space and atomic energy segments. The government has complete control over the board and can also appoint its members. The Miniratna status given by GoI provides the company greater autonomy in operations and discretion to set up projects. Strong funding support from the government is likely to continue at times of need, though timeliness and extent of support, in case of any exigency, remains a rating sensitivity factor.

 

• Established market position in manufacturing super alloys for strategic sectors: Over the past four decades, the company has established its position as a leading supplier of a wide range of super alloys to sectors such as defence, space and atomic energy. It has the capability to manufacture a wide range of advanced products across the value chain, which includes melting, forging, rolling, wire drawing, investment casting, machining and quality testing segments. Longstanding presence and strong capabilities have led to healthy customer relationships and patronage from key clients in the defence and space research sectors. Government initiatives such as the Atmanirbhar Bharat and import embargo on many defence items should boost manufacturing of defence and other heavy equipment in India and thus, benefit the company. The company also intends to cater to sectors, such as oil and gas, mining, power and railways. Demand from the defence sector remained strong and MIDHANI remains one of the primary suppliers for most crucial projects of ministry of defence such as its Mark-2 project for development of Tejas fighter jets and the space program of Indian Space Research Organisation. Demand from the defence sector will remain strong, which has more than 80% share in the total order book of the company as of January 2025.

 

• Strong financial risk profile: The financial risk profile is marked by healthy networth of above Rs 1,300 crore and low gearing of 0.25 time as on March 31, 2024. Financial risk profile has remained strong historically due to its low dependence on external debt despite higher working capital requirement. Gearing has averaged below 0.2 time over the past five years, aided by stable cash accrual. Large customer advances and grants kept the total outside liabilities to tangible networth ratio moderate at 1.21 times as on March 31, 2024 (1.23 times a year ago). Debt protection metrics were healthy, with net cash accrual to total debt and interest coverage ratios at 26% and ~6 times, respectively, for fiscal 2024 (38% and 10.77 times respectively in fiscal 2023). The financial risk profile will remain strong, in the absence of any large, debt-funded capex and stable working capital debt through improving working capital management. With growing operating profits in absolute terms, interest coverage is expected to remain above 6 times in the medium term. Gearing will continue at less than 0.3 time in the near to medium term and total outside liabilities to tangible networth ratio at 1.2-1.3 times in the near to medium term as working capital is supported by the customer advances.

 

Weaknesses:

• Susceptibility of operating margin to volatility in raw material prices and forex rates: The company imports 50-60% of raw materials, such as nickel, cobalt, molybdenum, pure iron and titanium, the prices of which are volatile. Owing to a change in the product mix since fiscal 2024, the company has been executing orders which required higher proportion of raw materials such as nickel and molybdenum. Sharp rise in prices of these raw materials impacted profitability adversely during the fiscal 2024. However, during the first six months of fiscal 2025 the price of raw materials remained stable and hence the operating profitability have remained stable during the duration. However, profitability remains susceptible to fluctuations in raw material prices and forex rates.

 

• Large working capital requirement: The operations of MIDHANI are highly working capital intensive due to higher gestation period of the inventory which keeps the inventory days higher. GCAs remained higher than 650 days on average in the past fiscals. However, with significant efforts from the company it has been under 600 days in fiscal 2024 (709 days in fiscal 2023). The company has been aligning its value of production with revenue, which resulted in reduction in inventory days to ~550 days which helped reduce the overall GCAs in fiscal 2024. The company will further improve its GCAs through continuous monitoring of its value of production which will be kept in line with the revenue. GCAs are expected to remain under 600 days in the near to medium term with inventory remaining stable at 520-550 days. This will keep the working capital requirement stable for the near to medium term and any incremental working capital requirement can be managed through internal resources. Sustenance of GCAs below 600 days will be a key monitorable for the medium term.

Liquidity: Strong

Liquidity is supported by healthy net cash accrual, low debt obligation and strong funding support from the government. Cash accrual is expected at Rs 100-150 crore per annum in the near to medium term, which will be sufficient to meet the yearly debt obligation of Rs 20 crore through fiscal 2026. The company is expected to incur annual capex of Rs 100 crore over the medium term, which would be funded through a prudent mix of cash accrual and moderate debt. Cash and bank balance stood around Rs 51 crore as on September 30, 2024. The fund-based working capital limit of Rs 350 crore was utilised at 78% for the 12 months through December 2024.

Outlook: Stable

MIDHANI will maintain its strong market position as a key manufacturer of super alloys and will continue to benefit from the government’s focus on strategic sectors such as defence and space program. MIDHANI will continue to enjoy the patronage of key customers.

Rating sensitivity factors

Upward factors:

• Sustained healthy revenue growth and operating profitability (over 25%), leading to a healthy cash generation
• Steep reduction in working capital levels, especially inventory (GCAs below 550-600 days), and prudent capex spending

 

Downward factors:

• Sluggish business performance and moderation in operating profitability, impacting cash generation
• Material increases in debt levels due to higher capex, increase in funding support to associate, and sustained high working capital intensity (GCAs over 700 days)
• Change in stance of support from the government or steep decline in shareholding by GoI

About the Company

MIDHANI is majority owned by GoI. The company manufactures a variety of super alloys, titanium and titanium alloys, special-purpose steels, controlled-expansion alloys, soft magnetic alloys, electrical-resistance alloys, molybdenum products, and other special products made as per customer specifications. The company also offers metallurgical testing, evaluation and consultancy services. Its quality control is recognised by the National Accreditation Board of Laboratories. MIDHANI is under the administrative control of the Ministry of Defence's Department of Defence Production.

 

Utkarsha Aluminium Dhatu Nigam Ltd, incorporated in 2019, is a 50:50 joint venture between MIDHANI and National Aluminium Company Ltd. The company was to set up a 60,000 tonne per annum high-end aluminium alloy production plant in the Nellore district of Andhra Pradesh. This is to meet requirement of high-end aluminium alloy products in defence, aerospace and other critical sectors.

 

In the first six months of fiscal 2025, the company reported profit after tax (PAT) of Rs 29 crore (Rs 33 crore in corresponding quarter of fiscal 2024), on net revenue of Rs 426 crore (Rs 415 crore).

Any other information: Not Applicable