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 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. These strengths are partially offset by the susceptibility of profitability to volatility in raw material prices and foreign exchange (forex) rates, and the large working capital requirement.

 

For the nine months ended December 31, 2023, the company achieved an operating income of Rs 667 crore, registering year-on-year (y-o-y) growth of around 27%. Operating margin has declined significantly to around 17%, as compared to around 30% over the same period. Change in the product mix, leading to increase in sales of lower-margin super alloys and special steel, along with rise in raw material prices exerted downward pressure on the margin. The company is expected to record a compound annual growth rate of 10% in the next three fiscals, with operating margins sustaining at 22-24%, amid softening of material prices and better inventory rationalisation. Orders worth Rs 1,762 crore as on January 01, 2024, to be executed over the next one year, offer healthy revenue visibility. Space and defense together contribute to 70-75% of total orders.

 

Gross current assets remain high, led by large inventory, given the prolonged production cycle. MIDHANI is working towards bringing down its inventory and some moderation is expected by March 2024, as bulk of revenue is booked in the last quarter, due to higher order execution. Expected reduction in the GCA days going ahead will remain a key monitorable. The financial risk profile is strong, driven by adequate liquidity and low long-term debt. Capital expenditure (capex) of Rs 300-400 crore, planned over the medium term, would be funded through internal accrual.  

Analytical Approach

To arrive at the ratings, 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: The government 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 provides the company greater autonomy in operations and discretion to set up projects. Strong funding support from the government is likely to continue, 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 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.

 

• Strong financial risk profile: The financial risk profile is marked by a healthy networth and low gearing of Rs 1,282 crore and 0.30 time, respectively, as on March 31, 2023. Gearing has averaged below 0.5 time over the past five years, aided by low dependence on external debt, stable cash accrual and government funding for any major capex. Large customer advances and grants kept the total outside liabilities to tangible networth ratio moderate at 1.23 times as on March 31, 2023. Debt protection metrics were healthy, with net cash accrual to total debt and interest coverage ratios at 0.38 time and 10.77 times, respectively, for fiscal 2023.

 

Weaknesses:

• Susceptibility of operating margin to volatility in raw material prices and forex rates: The company imports all major raw materials, such as nickel, cobalt, molybdenum, pure iron and titanium, the prices of which are highly volatile. Owing to a change in the product mix in fiscal 2024, the company executed 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 first nine months of the fiscal. Hence, profitability remains susceptible to fluctuations in raw material prices and forex rates.

 

• Working capital-intensive operations: GCAs were high at 709 days as on March 31, 2023, mainly on account of large work-in-progress and stocking up of raw materials, given the prolonged production cycle. During the current fiscal, order book witnessed an increasing proportion of product segment where due to high prices of raw materials, inventory levels were higher. Additionally, with the shift happening towards execution of product segments which require higher proportion of raw materials, thus leading to higher scrap inventory. Going forward this is expected to normalize when the company can recycle these scraps in future production processes. Improvement in inventory days remains a key monitorable over the medium term.

Liquidity: Strong

Liquidity is supported by healthy net cash accrual, low debt obligation and strong funding support from the government. Cash and bank balance was around Rs 1 crore as on September 30, 2023. Working capital is largely funded through internal accrual, customer advances and the rest by external debt. High bank limit utilisation remains monitorable.

Outlook: Stable

CRISIL Ratings believes MIDHANI will maintain its market position as a key manufacturer of super alloys and continue to benefit from the government’s focus on strategic sectors and patronage of its 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 (GCA below 550-600 days), and prudent capex spend also benefiting financial risk profile

 

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 (gross current assets over 700 days) leading to moderation in financial risk profile
• Change in stance of support from Government or steep decline in shareholding by Govt of India.

About the Company

MIDHANI is majority owned by the government of India. 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.

Any other information: Not Applicable

Annexure - Details of Instrument(s)

ISIN	Name of the instrument	Date of Allotment	Coupon Rate (%)	Maturity Date	Issue size (Rs. Crore)	Complexity Level	Rating assigned with outlook
NA	Cash credit$	NA	NA	NA	250	NA	CRISIL AA-/Stable
NA	Letter of Credit&	NA	NA	NA	108	NA	CRISIL A1+
NA	Bank Guarantee&	NA	NA	NA	92	NA	CRISIL A1+
NA	Proposed Non Fund based limits	NA	NA	NA	40	NA	CRISIL A1+
NA	Term loan	NA	NA	Jun-2028	100	NA	CRISIL AA-/Stable
NA	Working Capital Fund-Based Limits$	NA	NA	NA	100	NA	CRISIL AA-/Stable
NA	Commercial paper	NA	NA	7-365 days	150	Simple	CRISIL A1+

&Interchangeable with other banks within overall non-fund based limit of Rs.200 crore

$Company may avail these limits in the form of Cash Credit, Working Capital Demand Loan, Short-term Loan, with any Scheduled Commercial Bank within the overall fund-based limits of Rs.350 crore