Detailed Rationale

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

 

The rating action is driven by the slower than expected operational ramp up and continued losses at the EBITDA level. NSL’s operation was adversely impacted by factors such as operational issues in its machinery in Q2FY25 and lower availability of rakes from railways in Q1FY25. Additionally, NSL also witnessed below average market realization. As a result, NSL recorded a EBITDA loss of Rs 842 crores in H1FY25. While operational ramp up is expected to improve in H2-FY25 and thereafter, Crisil Ratings understands that the same will be gradual in manner and the company is still likely to report operating losses in fiscal 2025. However, currently the operations are benefitting from extended credit period received by the company from NMDC Ltd against iron ore supplies and available liquidity in the form of cash & bank balance and unutilized working capital limits.

 

Further, the ratings currently factor expected improvement in H2-FY25 over H1-FY25 and continued momentum into next fiscal with expectation of company turning EBITDA positive in H1-FY26. Progress on the same along with liquidity levels will be a critical monitorable going forward.

 

The rating continues to factor in the support it is receiving as a Government of India (GoI) entity, through NMDC Ltd (NMDC), though limited till the time divestment is completed* (GoI currently holds 60.79% stake in NSL).

 

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 rating also factors in the susceptibility of NSL to cyclicality in the steel industry, and to risks related to availability of key raw materials and 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 1, 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 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 risk profile expected to improve, supported by raw material security

With the steel plant successfully commencing production of hot-rolled products from August 2023, NSL has declared August 31, 2023, as the date of commencement of commercial operations. Though slower than earlier expectation, the operations have posted sequential improvement, with operating rate reaching 48% in September 2024, up from ~38% in the last quarter of fiscal 2024. Crisil Ratings understand that the company is in the process of stabilizing different grades of the finished product in the market along with focus on reduction in the cost of production. Improving utilisation rates and sales volume, are expected to support improvement in operational efficiency going forward.

 

Further, 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.

 

Crisil Ratings understand that the company is expected to be Ebitda positive in the second quarter of fiscal 2025 and improve thereafter, in line with earlier expectation, supporting debt servicing. Any deviation against the said understanding will be a key rating sensitivity factor and the rating could be downgraded if the operating losses continue.

.

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 loss in H1FY25

NSL has faced significant delay in ramp-up and stabilisation of operations against expectations, resulting in operational losses in H1 of fiscal 2025. However, going forward, the company is expected to witness improvement in utilisation rates and improved integration. This will support the operating performance, cash accrual and debt servicing.

 

Moderation in financial risk profile due to continued operating losses

Owing to the slower than expected ramp up and operational hindrances, NSL has continued to incur operating losses in H1FY25. While operations are expected to ramp up further from Q3FY25 without the hindrances of H1FY25, NSL is likely to achieve breakeven profitability at the EBITDA level only in H1FY26, significantly later than the earlier expected timeline. This has resulted in the weakening of its financial risk profile.

 

However, 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.

 

That being said, achievement of operating profitability will be a key monitorable and any deviation against the expected timeline will be a key rating sensitivity factor.

Liquidity: Adequate

Liquidity is supported by unencumbered cash and equivalents of ~Rs 472 crore and unutilised fund-based limit of ~Rs 419 crore as on December 31, 2024, against ~Rs 224 crore principal debt obligation and interest obligation of ~Rs 312 crore in H1 of fiscal 2025. Liquidity will also be supported by the company getting extended credit from NMDC Ltd for iron ore purchases. Also, till the time divestment is completed, NSL is expected to receive government support in case of any exigency.

Rating Sensitivity Factors

Upward factors

• Strong improvement and stabilisation of operations with significant increase in plant utilisation rates from current levels of 50-60% resulting in improved and positive operating margins
• Healthy operating profitability along with robust and positive free cash generation while maintaining strong capital structure

 

Downward factors

• Slower-than-expected ramp up of operations of the steel plant with utilisation rates significantly lower than 50% on sustained basis, resulting in continued operating losses and lower-than-expected cash accrual in H1 FY2026 and thereafter
• Material dilution in liquidity profile of the company in case of operating losses for elongated period
• 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 — Nagarnar Iron & Steel Plant (NISP) — under greenfield expansion. During most of the development and construction phase, the plant was constructed under NMDC, rather than in a 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	2024	2023
Operating income	Rs.Crore	3,049	NM
Profit after tax (PAT)	Rs.Crore	(1,560)	NM
PAT margin	%	(49.2)	NM
Adjusted debt/adjusted networth	Times	0.4	NM
Interest coverage	Times	(4.0)	NM

NM: Not meaningful

Any other information: Not Applicable