Detailed Rationale

CRISIL Ratings has upgraded its ratings on the bank facilities of Nava Ltd (Nava) to ‘CRISIL A/Stable/CRISIL A1’ from ‘CRISIL A-/Stable/CRISIL A2+’.

 

The upgrade reflects the company’s better-than-expected operating performance in fiscal 2022, healthy financial risk profile, and expectation of robust operating performance over the medium term.

 

The company reported strong operating profitability in fiscal 2022, driven by significantly higher-than-expected realisations in the ferroalloys segment and high merchant power prices. Standalone revenue was Rs 1,678 crore (up ~63% on-year), and earnings before interest, tax, depreciation and amortisation (Ebitda) margin was 33.9% (24.2% in fiscal 2021). While commodity prices have reduced this fiscal and are expected to remain moderate, semi-integrated operations (for alloy segment) with linkages for coal procurement, and healthy outlook for merchant power should lead to robust accrual. Also, the company plans limited capital expenditure (capex), and should remain net cash positive (outstanding cash and equivalent higher than total outstanding debt).

 

Nava is converting its 75,000 tonne per annum (TPA) ferrochrome conversion plant in Odisha to a 55,000 TPA silico-manganese alloy manufacturing plant, post cessation of its agreement with Tata Steel Mining Ltd (TSML, announced in August 2022). CRISIL Ratings understands that the conversion will be complete by the fourth quarter of fiscal 2023 and will help improve profitability as compared to the conversion nature of earlier ferro chrome business. Expected ramp-up in the converted facility with healthy profitability will be a key monitorable.

 

The company remains susceptible to cyclicality in the alloy segment, fluctuations in power realisations and coal prices, and offtake risk in the merchant power segment given the absence of long-term power purchase agreements (PPAs). It has significant investments in group entities, particularly Maamba Collieries Ltd (MCL), which have not generated desirable returns over the past few years. CRISIL Ratings notes that Nava has articulated to not extend any financial support to MCL and the debt at MCL is non-recourse to Nava. Also, CRISIL Ratings understands MCL is in the process of resolving its receivables related issues with Zambia Electricity Supply Corporation Ltd (ZESCO, the state discom of Zambia) and is in talks with its lenders to restructure debt with longer tenure. However, any incremental investments in these entities or any recourse to Nava for their debt could have a significant bearing on Nava’s financial risk profile, and hence will remain key monitorable.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of Nava, Nava Bharat (Singapore) Pte Ltd (NBSPL), Nava Bharat Energy India Ltd (NBEIL), Nava Bharat Projects Ltd (NBPL), Nava Energy Pte Ltd (NEPL) and Nava Energy Zambia Ltd (NEZL), on account of strong operational, financial and managerial linkages.

 

CRISIL Ratings has not combined the business and financial risk profiles of other subsidiaries of Nava and NBSPL, as they are moderately integrated, and their project debt is non-recourse. In addition, the management has articulated that Nava 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, Kawambwa Sugar Ltd (Zambia), MCL, and Tiash Pte. Ltd. Any change in the management's policy of support to these companies will be a key rating sensitivity factor.

 

Please refer Annexure - List of a Consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

• Business risk profile supported by healthy demand outlook in both alloy and power segments

Healthy alloy demand and realisations (both alloy and merchant power) led to a strong performance by Nava in fiscal 2022. The alloy business (includes silico manganese and ferrochrome) saw blended realisations increase ~34% on-year with strong demand from the steel sector. In the power segment, plant load factors (PLFs) increased to 55% (from 26% in fiscal 2021) led by higher captive consumption as well as increased merchant sales. Merchant tariff rose ~29% driven by healthy demand. The first quarter of fiscal 2023, too, saw strong performance at the standalone level, with revenue growing ~77% on-year to Rs 524 crore and Ebitda margin at ~37% (24% in the corresponding period of the previous fiscal).

 

While silico-manganese prices are expected to moderate, margins should remain healthy, given the semi-integrated operations (for alloy segment) with linkages for coal procurement for captive use. Also, CRISIL Ratings understands Nava is looking to increase the share of exports (which fetch higher realisations) in its sales mix by expanding its geographical reach (the company currently exports mainly to Asian countries). This, along with the favourable outlook for merchant power tariffs, should result in healthy cash flow. However, any significant decline in exports owing to demand slowdown in the target geographies will be a monitorable.

 

• Semi-integrated ferroalloy operations

Nava's 125,000-TPA silico manganese manufacturing facility in Telangana is supported by a 114-MW captive power plant, and its 55,000 TPA silico-manganese capacity (post conversion from ferrochrome to silico-manganese) in Odisha is supported by a 90-MW captive power plant in the state. Both the power plants have linkages for coal and have the ability to sell excess power on the exchange after meeting captive norms. This insulates the company from fluctuations in the spot market for coal and ensures steady supply for its alloy operations.

 

• Healthy financial risk profile

The financial risk profile is supported by strong debt protection metrics and comfortable capital structure. At the standalone level, gearing and net cash accrual to debt ratio were 0.06 time and 1.97 times, respectively, as on March 31, 2022 (0.06 time and 0.86 time, respectively, a year earlier). Interest coverage was 54.34 times in fiscal 2022 (against 18.55 times in fiscal 2021). The debt protection metrics are expected to remain comfortable over the medium term, in the absence of any significant capex and backed by adequate cash accrual to meet debt obligation and planned capex. Significantly larger-than-expected capex or investment in other businesses resulting in increased debt or weakening of capital structure will remain a key monitorable.

 

Weakness:

• Susceptibility to cyclicality in the alloys segment

Silico manganese is used as an intermediate in the steel industry, which is inherently cyclical and highly sensitive to shifting business cycles, interest rates and seasonal changes in demand and supply conditions. Furthermore, the Indian ferroalloys industry is intensely competitive.

 

• Fluctuations in power realisations and coal prices for merchant power segment

While the captive power for the ferroalloy business provides stability to cash flow, the merchant power sales are exposed to PPA and offtake risks. Excess power generated in the captive units (204 MW at Telangana and Odisha) and merchant power (capacity of 210 MW; 150 MW under NBEIL in Telangana and 60 MW under Nava in Odisha) is sold through short-term PPAs and on the exchange market. The absence of long-term PPAs exposes the company to offtake risk and volatility in the exchange prices. Also, the group procures coal for these capacities through e-auctions. While the merchant power capacity can blend various grades of coal, thereby rationalising cost, input prices remain susceptible to vagaries in the coal spot market.

 

• Lower-than-expected returns from investments in foreign subsidiaries

Nava, 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, which has been operational since August 2017. The entity had debt of USD 413 million as on June 30, 2022. Moreover, through NBSPL, Nava has invested about Rs 1,500 crore as equity/loans in MCL.

 

MCL's operating performance has been satisfactory, reflected in average plant availability factor (PAF) of 66.0% for fiscal 2022 (72.1% in fiscal 2021) and 89.2% in first quarter of fiscal 2023. The project's cash flow, however, remains constrained by delays in payment by its counterparty ZESCO. As on March 31, 2022, gross receivables at MCL were USD 564 million (790 days). CRISIL Ratings understands that owing to the delayed payments from ZESCO, liquidity of MCL has been stretched with the company unable to pay the last six principal instalments to its lenders (the interest payments are informed to be timely). However, there is an on-going arbitration for receivables due from ZESCO, the next hearing of which is expected in December 2022. Also, MCL has renegotiated a lower tariff with ZESCO (effective May 2022) to resolve payment issues going forward. CRISIL Ratings understands MCL has been receiving timely payments for its monthly billings since May 2022. MCL is in talks with the existing lenders for restructuring its debt.

 

Given the non-recourse nature of debt for the project and the management's articulation of not providing support to MCL for debt servicing, CRISIL Ratings has not factored in any further cash outflow to MCL from Nava. Incremental investments in MCL or any recourse for its debt to Nava will have a significant bearing on the financial risk profile of the parent, and hence, is a key monitorable.

Liquidity : Strong

Nava has healthy liquidity reflected in cash and equivalent of Rs 584 crore as on August 31, 2022. Cash accrual is expected at Rs 210-250 crore in fiscals 2023 and 2024 each, against scheduled debt obligation of around Rs 30 crore per annum. The company does not plan any significant capex over the medium term except for regular maintenance. Liquidity is also supported by low fund-based bank limit utilisation of 4% (over the 12 months through June 2022). Internal accrual, cash and equivalent, and unutilised bank lines should be sufficient to meet debt obligation and incremental working capital requirement over the medium term.

Outlook: Stable

CRISIL Ratings believes Nava will maintain its comfortable financial risk profile and strong liquidity over the medium term, supported by healthy cash balance and sustenance of robust operating margin.

Rating Sensitivity factors

Upward Factors

• Improvement in business risk profile reflected by improved PLF in the power segment supported by long-term PPAs or healthy merchant sales
• Significantly better than expected operating performance with sustenance of operating margin over 20% resulting in material free cash to support debt servicing, and improved return on capital employed

 

Downward Factors

• Significantly weaker than expected operating performance with lower volume in the silico manganese business or lower-than-expected merchant power sales resulting in operating profitability declining below 14-16% on a sustained basis
• More-than-expected investment in other ventures/subsidiaries, resulting in increased debt

About the Company

Nava was incorporated in 1972 as Nava Bharat Ferro Alloys Ltd and was promoted by Dr D Subba Rao. It is now managed by his son, Mr D Ashok (chairman of the board), and son-in-law, Mr P Trivikrama Prasad (managing director). The company began operations in 1975 with a small ferrosilicon manufacturing unit at Paloncha in Telangana. 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. It now has installed alloy capacity of 180,000 TPA and power generation capacity of 264 MW (at standalone level).

 

NBSPL was incorporated in 2004 to trade Nava's ferroalloy products, and later became the holding company for the group's investment in MCL. NBSPL acquired 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 is a step-down subsidiary of Nava and operates a 150 MW thermal power plant (TPP) in Telangana. NBEIL has significant financial linkages with the parent, after Nava took over its term debt obligation in fiscal 2019 by borrowing a similar amount and extending an inter-company loan to the company. NBEIL sells power through short-term PPAs and on the exchange.

 

NBPL is wholly owned subsidiary of Nava providing technical and commercial services to the group companies and holds 74% stake in NBEIL

 

NEPL is wholly owned subsidiary of Nava and has strong financial linkages with the parent. Nava has extended performance guarantee on behalf of NEPL to MCL. Also, Nava regularly receives dividend income from NEPL.

 

NEZL is a wholly owned subsidiary of NEPL and receives operations and maintenance services related income from MCL.

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 A1
NA	Cash credit	NA	NA	NA	86.00	NA	CRISIL A/Stable
NA	Letter of credit*	NA	NA	NA	100.00	NA	CRISIL A1
NA	Rupee term loan	NA	NA	Mar-26	185.00	NA	CRISIL A/Stable
NA	Proposed long term bank loan facility	NA	NA	NA	15.50	NA	CRISIL A/Stable

*Interchangeable between letter of credit and bank guarantee