Detailed Rationale

CRISIL Ratings has reaffirmed its ratings on the bank facilities of Nava Bharat Ventures Limited (NBVL) at ‘CRISIL A-/Stable/CRISIL A2+’.

 

Further, CRISIL Ratings has subsequently withdrawn the ratings on Rs 630 crore bank facilities, at the company’s request and on receipt of ‘No Dues Certificate’ from the lenders. The withdrawal is in line with CRISIL’s policy on withdrawal of bank loan ratings.

 

NVBL experienced recovery in operating performance of its ferro alloys division, on the back of improvement in both volume and realisations post first quarter of fiscal 2021. Additionally, renewal of the ferro chrome conversion license with Tata Steel Mining Ltd (subsidiary of Tata Steel Ltd) till fiscal 2025, provides stable cashflow visibility. However, offtake from external power, including 150 MW capacity at Nava Bharat Energy India Ltd (NBEIL), was lower than expected due to lower demand on account of the Novel Coronavirus (Covid-19) pandemic.

 

For fiscal 2022, CRISIL Ratings expects strong operating performance of its ferro alloys division, given the strong demand from steel sector coupled with high silico-manganese prices. The captive power capacity should continue to support profitability in the ferroalloy segment. However, offtake and renewal risks persist for external power sales. The company plans to enter into a group captive arrangement for the 150 MW capacity at NBEIL, which should help improve cash flow visibility. 

 

The ratings continue to be supported by NBVL's integrated business operations (with captive power) for its silico manganese alloys and ferrochrome conversion business. The financial risk profile is healthy, reflected in strong debt protection metrics, adequate liquidity, and comfortable capital structure. However, the ratings are constrained by susceptibility to cyclicality in the ferroalloys and to fluctuations in power realisations and coal prices in NBEIL, and the significant investment in group entities, particularly Maamba Collieries Ltd (MCL).

Analytical Approach

For arriving at its ratings, CRISIL Ratings has fully combined the business and financial risk profiles of NBVL, Nava Bharat (Singapore) Pte Ltd (NBSPL), and Nava Bharat Energy India Ltd (NBEIL).

 

NBSPL is wholly subsidiary of NBVL. NBSPL caters to the equity/investment requirements at MCL.

 

NBEIL is a step-down subsidiary of NBVL and operates a 150 MW thermal power plant (TPP) in Telangana. NBEIL has significant financial linkages with the parent, after NBVL took over its term debt obligation in fiscal 2019 by borrowing a similar amount and extending an inter-company loan to the company.

 

CRISIL Ratings has not combined the business and financial risk profiles of other subsidiaries of NBVL and NBSPL, as they are moderately integrated, and their project debt is of a non-recourse nature. In addition, the management has articulated that NBVL will not support these subsidiaries in debt servicing. CRISIL Ratings has, however, factored in equity investment in some subsidiaries/step-down subsidiaries, including Brahmani Infratech Pvt Ltd, Nava Bharat Projects Ltd, Kawambwa Sugar Ltd (Zambia), and MCL. Any change in the management's policy of support to these companies will be a key rating sensitivity factor.

 

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

• Healthy financial risk profile

NBVL has a comfortable financial risk profile, reflected in strong debt protection metrics and a comfortable capital structure. NBVL had a low gearing, estimated at 0.08 time as on March 31, 2021 (vs 0.15 time as on March 31, 2020), even after adjusting networth for investment in group entities (mainly MCL). Interest coverage and net cash accrual to total debt ratios are expected to remain comfortable over the medium term.

 

• Integrated ferro chrome operations

NBVL's 125,000-MTPA silico manganese manufacturing facility in Telangana is supported by a 114-MW captive power plant, while its 75,000 MTPA ferrochrome conversion facility in Orissa is supported by a 90-MW captive power plant. Both the power plants have e-auction/auction-linkages for coal, and sell excess power at the IEX exchange or under short-term PPAs.

 

NBVL's ferrochrome segment is a conversion business and is insulated from cyclicality to some extent. The contract with Tata Steel Mining Ltd has been extended till fiscal 2025, which provides cashflow visibility.

 

Further, NBVL is expected to receive steady operations and maintenance income from MCL’s 300 MW power plant in Zambia.

 

Weaknesses:

• Susceptibility to cyclicality in the ferroalloys segment, and to fluctuations in power realisations and coal prices in NBEIL  

The ferroalloys segment, which is the main driver of NBVL's profitability, is susceptible to cyclicality in the steel industry. Moreover, the domestic ferroalloys industry has many unorganised players.

 

While the captive power for the ferroalloy business provides stability to cash flow, the merchant power sales are exposed to PPA and offtake risks as witnessed in fiscal 2021.

 

The 150-MW IPP in NBEIL remains dependent on short-term PPAs and short-term energy markets for sale, in the absence of a long-term PPA. However, the company is looking to enter into a group captive arrangement which should improve visibility of cash flow. 

 

• Significant investment in MCL, which is yet to generate significant returns for NBVL

NBVL, through its step down subsidiary MCL, has set up a 300-MW (two units of 150 MW each) power project and a coal handling and processing plant (CHPP) in Zambia for which MCL had availed debt of USD 590 million (around Rs 4,150 crore). Moreover, through NBSPL, NBVL has invested about Rs 1,500 crore as equity/loans in MCL. The power project has been operational since August 2017.

 

MCL's operating performance has been satisfactory, reflected in average plant availability factor (PAF) of 77.7% for fiscal 2021 (76.7% in fiscal 2020). The project's cash flow, however, remains constrained by delays in payment by its counterparty ZESCO, a state-owned power distribution company in Zambia. As on March 31, 2021, gross receivables at MCL stood at $ 432 million (809 receivable days). Owing to the stuck receivables from ZESCO, MCL has not been repaying principal installments. Currently, MCL is under discussion with lenders for restructuring the loans post tariff renegotiations with ZESCO. Though NBVL has started receiving O&M income from MCL, company has not received any dividends from the investment in MCL so far.

 

Given the non-recourse nature of debt for the project and the management's articulation of not providing support for debt servicing, CRISIL Ratings has not factored any further cash outflow to MCL from NBVL. Incremental investments in these entities, or any recourse to NBVL for the debt raised at these entities could have a significant bearing on NBVL’s financial risk profile.

Liquidity: Adequate

The liquidity will be supported by expected cash accrual of about Rs 180 - 200 crore in fiscal 2022 and 2023, as against modest debt repayments of about Rs 30 crore and limited capex of Rs 25 crore, each year. NBVL’s liquidity is also supported by low fund based bank limit utilisation of 4% (from June 2020 to May 2021) and strong cash and cash equivalents of Rs 217 crore as on March 31, 2021. CRISIL ratings expects internal accrual, cash and cash equivalent, and unutilised bank lines to be sufficient to meet debt obligation and working capital requirement.

Outlook: Stable

CRISIL Ratings believes NBVL will maintain its comfortable financial risk profile with adequate liquidity over the medium term, supported by its cash balance and stable operating margin in the ferroalloys business.

Rating Sensitivity factors

Upward factors

• Improvement in business risk profile reflected by long-term PPAs in the power segment
• Sustained operating profitability of over 20% and improved return on capital employed

 

Downward factors

• Deterioration in operating profitability to below 16% and return on capital employed to below 12%, on a sustained basis
• More-than-expected investment in other ventures/subsidiaries, resulting in increased debt

About the Company

NBVL was incorporated in 1972 as Nava Bharat Ferro Alloys Ltd (Nava Bharat), which began operations in 1975 with a small ferrosilicon manufacturing unit in Paloncha, Andhra Pradesh. In 1997, it set up a second ferroalloy unit in Odisha. It diversified into coal-fired power generation in 1997 as backward integration for its highly power-intensive ferroalloy business, and later pursued the merchant power business for the surplus generation capacity. The company got its present name in 2006.

 

NBVL was promoted by Dr D Subba Rao and is managed by his son, Mr D Ashok, and son-in-law, Mr P Trivikrama Prasad. The company has two key business divisions: ferroalloys and power. It has installed ferroalloy capacity of 200,000 tonne per annum and power generation capacity of 422 MW. NBSPL was incorporated in 2004 to trade Nava Bharat's ferroalloy products, and later became the holding company for the group's overseas expansions. NBSPL acquired a 65% stake in MCL in Zambia. MCL set up a 300-MW coal-based power plant with 35% equity participation from an investment holding company of the Government of Zambia. Coal production commenced in fiscal 2013, and the power plant commenced operations in August 2017.

 

NBEIL, a step-down subsidiary of NBVL, operates a 150 MW merchant thermal power plant commissioned in February 2013 in Telangana.

Key Financial Indicators (Standalone)

As on / for the period ended March 31		2021	2020
Revenue	Rs crore	1027	1080
Profit after tax (PAT)	Rs crore	155	129
PAT margin	%	15.1	11.9
Adjusted debt/adjusted networth	Times	0.06	0.10
Interest coverage	Times	18.55	18.68

 

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	Bank Guarantee*	NA	NA	NA	68.00	NA	CRISIL A-/Stable
NA	Cash Credit	NA	NA	NA	86.00	NA	CRISIL A2+
NA	Letter of Comfort	NA	NA	NA	165.00	NA	Withdrawn
NA	Letter of Credit*	NA	NA	NA	100.00	NA	CRISIL A-/Stable
NA	Term Loan	NA	NA	Jul-20	465.00	NA	Withdrawn
NA	Rupee Term Loan	NA	NA	Mar-26	185.00	NA	CRISIL A-/Stable
NA	Rupee Term Loan	NA	NA	Mar-24	15.50	NA	CRISIL A-/Stable

*Interchangeable between letter of credit and bank guarantee

Annexure – List of entities consolidated

Entities consolidated	Extent of consolidation	Rationale for consolidation
Nava Bharat (Singapore) Pte Ltd	Full	Significant business and financial linkages, especially for funding the equity requirements at MCL.
Nava Bharat Energy (India) Ltd	Full	Similar business, and significant financial linkages, following NBVL's undertaking of the company's entire term debt obligation in fiscal 2019 by borrowing a similar amount and extending an inter-company loan to the company.