Detailed Rationale

CRISIL Ratings has downgraded its rating on the long-term bank facility of NMDC Steel Limited (NSL) to ‘CRISIL A-’ from ‘CRISIL A’ while continuing the rating on 'Rating Watch with Developing Implications'.

 

The downgrade reflects slower-than-expected ramp up of operations, which had resulted in operating losses for fiscal 2024. That said, the operations have witnessed sequential improvement with operating rates reaching ~ 40% in March 2024, from ~20% in the third quarter of fiscal 2024. This has helped in reducing operating losses during the past few months. Going forward, utilisation rates are expected to improve further and turn earnings before interest, tax, depreciation and amortisation (EBITDA) breakeven during the first half of the current fiscal. This will support operating cash accrual and debt servicing. Furthermore, the rating continues to factor in the support NSL is receiving from being a Government of India (GoI) entity, through NMDC Ltd (NMDC), though limited till the time divestment is completed* (GoI, at present holds 60.79% stake in NSL).

 

CRISIL Ratings notes that the government is in the process of divesting majority of its stake (50.79% out of 60.79%) in NSL while the remaining 10% stake will be transferred to NMDC. However, CRISIL Ratings understands that the Ministry of Steel has mandated NMDC to provide necessary support to NSL till it is divested by the government. CRISIL Ratings understands that the ongoing divestment is yet to be completed, wherein expressions of interest (EOI) have been received and financial bids are expected to commence soon. Since this results in uncertainty around the long-term ownership structure and future plans for NSL, the ratings continue to be on developing watch. Future developments regarding the divestment will be a key monitorable.

 

The Ministry of Steel has mandated NMDC to handhold NSL till the divestment is completed. Accordingly, even after the transfer of assets and liabilities to the new entity -- NSL, NMDC has been providing operational and administrative support to NSL which is expected to continue in the future till it is divested. Any change in the support philosophy will be a key rating sensitivity factor.

 

The ratings also factor in the risk of susceptibility to cyclicality associated with the steel industry, availability of key raw materials and exposure to risks related to stabilisation of operations.

 

* The government of India is in the process of divesting its stake in NSL. EOI for this divestment was floated on December 01, 2022, and the government has received multiple bids for the same. However, official bidding is yet to commence.

Analytical Approach

CRISIL Ratings has considered the standalone business and financial risk profiles of NSL.

 

CRISIL Ratings has also applied its criteria for notching up standalone ratings of entities based on government support. CRISIL Ratings believes that till the time divestment is completed, NSL will receive support from the government (through NMDC), considering its strategic importance and majority ownership (60.79%).

Key Rating Drivers & Detailed Description

Strengths:

• Government support to continue till the time divestment is completed

The government plans to divest its stake in NSL, wherein 50.79% stake will be sold to a private sector entity and the remaining 10% will be held by NMDC. CRISIL Ratings understands that currently only EoI has been received and financial bids are yet to commence However, CRISIL Ratings understands that till the time divestment is completed, GoI, through NMDC, will continue to provide operational/administrative and need-based support in case of any exigency. Accordingly, even after the transfer of assets and liabilities of the steel plant to the new entity -- NSL, NMDC has been providing operational and administrative support to it. However, further developments in the process of divestment, including announcement of the final bidder and impact of the proposed acquisition of NSL on the credit risk profile of the bidder, will be monitorable. Additionally, any change in the support philosophy of the government towards NSL will be a key rating sensitivity factor.

 

• Business and financial risk profiles expected to improve going forward, supported by robust industry outlook, raw material security and low project debt over the medium term

With the steel plant successfully commencing production of hot-rolled products from August 2023, the company has declared August 31, 2023, as date of commencement of commercial operations. However, ramp up of operations have been slower than expected. The upstream facilities such as sinter and blast furnace have witnessed ramp up to above 50% utilisation levels until March 2024, compared to the finished steel mill which is still at around 40% utilisation levels. This resulted in lower absorption of fixed costs as well as higher reliance on sale of semi-finished goods, such as pig iron, which have lower realisation value, resulting in operating losses in fiscal 2024. That said, operating rates have been continuously improving and the company is expected to break-even at EBITDA level within the first half of fiscal 2025 and improve thereafter. CRISIL Ratings understands that the business and financial risk profiles of NSL are also expected to be supported by healthy domestic demand outlook, robust realisations despite moderations over the past fiscals, raw material security and low project debt.

 

NSL has entered a nine-year contract with NMDC for iron ore procurement (transactions will be done on arm’s length basis). Furthermore, iron ore will be procured from Bailadila mines, Chhattisgarh, which is near the steel plant in Nagarnar, Chhattisgarh (distance of around 130 kilometre) thereby providing raw material linkage. Also, with most of the capex of the steel plant being funded through equity, existing external project debt is low (total debt of ~ Rs 5,000 crore against total project cost of Rs 24,000-25,000 crore) thereby resulting in low finance cost and supporting capital structure over the medium term. While interest servicing has been monthly, quarterly principal repayments for NSL’s outstanding debt has commenced from March 2024 and has been serviced in a timely manner. Furthermore, CRISIL Ratings has taken note of adequate liquidity profile of the company, supported by unencumbered cash balance of ~ Rs 175 crore and unutilised fund-based limits of ~ Rs 650 crore as on March 31, 2024. 

 

Continued improvement in operating rates and operating profitability along with timely debt servicing (principal as well as interest) will remain monitorable.

 

Weaknesses:

• Susceptibility to cyclicality associated with the steel industry and availability of key raw materials

The inherent cyclicality in the steel industry exposes steelmakers to a high degree of volatility in operating margin and, in turn, to debt protection metrics. Demand for steel is sensitive to trends in key end-user industries, such as automobiles, infrastructure, construction and consumer durables. However, raw material security, by way of long-term contract with NMDC for procurement of iron ore, mitigates the risk to an extent.

 

• Exposure to risks related to stabilisation of operations which resulted in operating losses in fiscal 2024

NSL has faced significant delay in ramp up and stabilisation of operations against expectations, resulting in operational losses in fiscal 2024. Going forward, the company is expected to witness improvement in utilisation rates and turn EBITDA breakeven during the first half of the current fiscal and improve thereafter. This will support the operating performance, cash accrual and debt servicing.

Liquidity: Adequate

Liquidity is supported by unencumbered cash and equivalent of ~Rs 175 crore and unutilised fund-based limit of ~Rs 650 crore as on March 31, 2024, against ~Rs 530 crore principal debt repayment in fiscal 2025 and monthly interest obligation of ~Rs 50 crore. Furthermore, liquidity will be supported by the company achieving EBITDA break-even in the first half of fiscal 2025 and materially improve thereafter. Also, till the time divestment is completed, NSL is expected to receive government support in case of any exigency.

Rating Sensitivity factors

Upward factors

• Timely ramp up and stabilisation of operations with plant utilisation rates significantly more than 50%
• Healthy operating profitability and robust free cash generation while maintaining strong capital structure

 

Downward factors

• Slower-than-expected ramp up and stabilisation of operations of the steel plant with utilisation rates significantly lower than 40-50% on sustained basis, resulting in lower-than-expected profitability and cash accrual
• Change in support philosophy by the parent towards NSL

About the Company

NMDC has set up a 3 million tonne per annum steel plant at Nagarnar (Naganar Iron & Steel Plant [NISP]) under greenfield expansion. During most of the development and construction phase, the plant was constructed within NMDC, rather than being constructed in a separate special purpose vehicle. Subsequently it was decided to demerge NISP into a separate entity -- NSL -- followed by divestment by the government of India.

Key Financial Indicators

Particulars	Unit	2023	2022
Operating income	Rs crore	NM	NM
Profit after tax (PAT)	Rs crore	NM	NM
PAT margin	%	NM	NM
Adjusted debt/adjusted networth	Times	NM	NM
Interest coverage	Times	NM	NM

NM: Not meaningful

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs crore)	Complexity level	Rating assigned with outlook
NA	Term Loan	NA	7.1%	30-Sep-2031	4500	NA	CRISIL A-/Watch Developing