Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AAA/Stable/CRISIL A1+’ ratings on the fund-based and non-fund-based facilities of Nmdc Limited (NMDC), whereas its rating on the rupee term loan (RTL) continues to be on ‘Rating Watch with Negative Implications’.

 

The ratings continue to factor in the strong business risk profile of NMDC as the largest iron ore producer in the country, its high profitability stemming from low cost of production, and strong financial risk profile and liquidity. The ratings also reflect the strategic importance of the company to the Government of India (GoI), also reflected in the majority holding by GoI and the Navratna status. This also provides the company preferential treatment under the amended Mines and Mineral (Development & Regulation) (MMDR) Act. However, the business remains susceptible to inherent cyclicality in the steel industry.

 

The RTL facility has been extended for the steel plant, which has been recently transferred to the new demerged entity, namely NMDC Steel Ltd (NSL). The demerger of the steel plant to the new entity has been completed and is effective from October 13, 2022. NSL will mirror the shareholding structure of NMDC, and according to the Scheme of Arrangement, all assets and liabilities related to the steel plant (including RTL) stand to be transferred to NSL, without any linkages to NMDC. CRISIL Ratings understands that the transfer of all assets and liabilities (except RTL, pending execution of certain transfer deeds) related to the steel plant to NSL has been completed, CRISIL Ratings understands that the process of transferring the RTL facility from NMDC to NSL, by the concerned bank, is underway and expected to be completed soon.

 

Post completion of the above-mentioned transfer procedure of RTL facility, the rating on the RTL will be driven by the standalone credit risk profile of the new entity, along with any potential support from GoI. CRISIL Ratings believes the credit risk profile of the new entity will be much weaker than that of NMDC as it will take time to ramp up and stabilise operations, and this could lead to losses in the initial stages. Also, the intent of GoI to divest its majority stake in the new entity to a strategic partner, could dilute its strategic importance to GoI. The rating of the RTL, once resolved, could therefore be multiple notches lower than the current rating. Accordingly, the rating on the RTL remains on ‘Watch with Negative Implications’, as CRISIL Ratings is in the process of evaluating the strength of linkages of NSL with GoI along with clarity on the extent of need-based support to be provided by GoI to NSL. Clarity on the said aspects is critical for the resolution of the watch and is awaited.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of NMDC and its subsidiaries, associates and joint ventures. This is because all the entities are under a common management with strong business and financial linkages.

 

CRISIL Ratings has also applied its criteria for notching up standalone ratings of entities based on government support. CRISIL Ratings believes NMDC will receive support from GoI in case of any exigency, considering its strategic importance and the majority ownership (61%).

 

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:

• Strong business risk profile as the largest iron ore producer in the country

NMDC is the largest iron ore producer in India, with an average annual production capacity of 51.8  million tonne (MT). Annual production was 42 MT in fiscal 2022, against 32-35 MT recorded over the four fiscals ended March 2021, after operations resumed at the Donimalai mine in Karnataka. In fiscal 2022, the company accounted for around 18% of the total iron ore production in India.

 

NMDC has seven iron ore mining leases (five in Chhattisgarh and two in Karnataka) with total reserves of 1,776 MT, providing high revenue visibility with mining life of over three decades. The company has environment clearances for all the mines, and long-term validity of licenses (2035-38) for six of the seven mines. NMDC plans to increase its production and evacuation capacity to around 65 MT by fiscal 2025.

 

• Healthy operating profitability

NMDC has reported a healthy operating margin of 50-60% over fiscals 2018-2021, supported by its stable and low-cost mining operations. It is among the lowest cost producers globally with cost of production (COP, excluding statutory taxes and levies) of around Rs 1,000 per tonne. The company earns a higher realisation on per tonne of iron ore as compared with industry average due to better ore quality with iron content of 63-65%, also among the highest grades. Thus, low cost of production and healthy realisations (Rs 6,298 per tonne in fiscal 2022 and Rs 4,581 per tonne in fiscal 2021) support the high operating profitability (earnings before interest, tax, depreciation and amortisation {Ebitda} of Rs 3,102 per tonne in fiscal 2022 and Rs 2,637 per tonne in fiscal 2021) and strong cash accrual.

 

That said, as per the amended MMDR Act, 2021, NMDC has been paying a premium of 22.5% of the average selling price (in addition to existing iron ore royalty payout of 15%) on all its mines from fiscal 2022. Hence, Ebitda margin moderated to around 50% in fiscal 2022, from 58% in fiscal 2021, yet being healthy.

 

Subsequently, on May 21, 2022, to increase domestic supply, GoI hiked the export duty on iron ore to 50% from 30% earlier and imposed an export duty of 45% on iron pellets. Post the duty imposition, NMDC had reduced its iron ore prices (fines) by ~ 50% during the first half of fiscal 2023, mainly due to increase in domestic supply. Operating margin contracted to 34% in the first half of fiscal 2023 (Ebitda per tonne of Rs 1,683).

 

However, on November 19, 2022, GoI reversed the export duty on iron ore and pellets to levels prior to May 21, 2022. This, along with improved demand for iron ore post monsoon has supported increase in iron ore prices in the past few months. NMDC’c iron ore prices (fines) have increased from ~ Rs 2,910 per tonne in September 2022 to Rs 3,910 per tonne currently. During the nine months of fiscal 2023, NMDC has reported iron ore production of 26.93 MT with Ebitda per tonne of Rs 1507 (against volume of 28.32 MT and Ebitda per tonne of Rs 2345 during the corresponding period of the previous fiscal). The prices are FOR based, excluding royalty, DMF, NMET cess, forest permit fee and other taxes.

 

While the average iron ore prices for fiscal 2023 are expected to remain lower over previous fiscal, realisations should continue to be healthy. Though the same is expected to result in moderation in operating margins over fiscal 2023 the same will still be healthy supported by low COP. Further, the expected growth in volume by NMDC will also support cash accrual. Hence, accrual is likely to remain robust going forward.

 

• Majority ownership by and significant strategic importance to GoI, resulting in low regulatory risk

NMDC is majority held by GoI (61%) and under the administrative control of the Ministry of Steel. High strategic importance to GoI is also reflected in the Navratna status and leading position of the company in the domestic iron ore industry, as iron ore is a key raw material for steel production. Being a public sector enterprise (PSE), NMDC receives preferential treatment under the amended MMRD Act, 2021. The Act permits special powers to the government to allocate mines and renew mining licences of public sector enterprises (PSEs).

 

• Strong financial risk profile supported by net cash position

Capital structure and debt protection metrics are healthy, aided by strong networth, absence of any significant long-term debt and healthy operating cash accrual and balance, resulting in net cash position over the years. Gearing and total outside liabilities to tangible networth ratios were 0.10 time (0.07 time in fiscal 2021) and 0.29 time (0.24 time), respectively, as on March 31, 2022, and are likely to be below 0.1 time and 0.3 time, respectively, in the medium term. Net cash accrual to total debt ratio was 1.54 times for fiscal 2022, against 2.11 times in fiscal 2021.

 

Weaknesses:

• Susceptibility to inherent cyclicality in the steel sector

Iron ore is the key raw material for the production of steel, which is an inherently cyclical industry. NMDC sells around 70% of its iron ore to three counterparties: Rashtriya Ispat Nigam Ltd, JSW Steel Ltd and Arcelor Mittal Nippon Steel India Ltd (erstwhile Essar Steel Ltd) (CRISIL AA-/Stable/A1+; CCR AA-/Stable). This makes NMDC vulnerable to decline in demand or realisations during a downturn in the steel industry and could in turn impact the volume and operating cash flow. However, low COP and high ore quality offer some cushion against offtake risk.

 

• Credit profile of steel business under NSL to be weaker than mining; demerger effective from October 2022

NMDC is setting up a greenfield steel plant with annual capacity of 3 MT in Chhattisgarh, which is to be commissioned by the end of fiscal 2023. While the project is being funded primarily through internal accrual with debt of only Rs 5000 crore (Rs 1,765 crore of project debt remains unutilised as on February 1, 2023), time and cost overruns have resulted in higher per tonne project cost, vis-à-vis the industry average. The steel business may have a weaker credit profile than the mining business, as besides project risk, the plant will take time to ramp-up and stabilise operations post commissioning. Also, the steel business may witness lower profitability than the iron ore mining business, and lower returns on account of higher-than-expected per tonne capital employed, though per tonne debt will be low compared to industry peers.

The steel plant has been demerged into a separate company called NSL and as per the Scheme of Arrangement, the RTL and all the other assets and liabilities related to the steel plant are deemed to be transferred to NSL. NSL was listed on the stock exchange on February 20, 2023. The plant is expected to be commissioned by the end of fiscal 2023 and operations are slated to commence from fiscal 2024. Timely commissioning of the steel plant and clarity on the extent of need-based support to be provided by GoI to NSL will be key monitorables.

Liquidity: Superior

Liquidity is supported by healthy cash accrual (despite significant dividend payout and capex incurred over the years), low bank limit utilisation and no major term debt. Cash accrual is projected at Rs 3000-3200 crore in fiscal 2023 (around Rs 4300 crore in fiscal 2022), against negligible term debt. Annual capex of Rs 1,500-2,000 crore (excluding for the steel plant) earmarked for expanding iron ore capacity in fiscal 2023, is expected to be funded through internal accrual. As on February 1, 2023, total cash and bank balance stood at Rs 8,557 crore, with net cash of Rs 3,672 crore.

Outlook for fund-based and non-fund-based facilities: Stable

CRISIL Ratings believes NMDC will maintain its leading market position in the domestic iron industry and continue to benefit from its low COP, resulting in healthy cash accrual.

Rating Sensitivity factors

Downward factors for fund- and non-fund-based facilities

• Significant decline in production or operating margin, leading to material deterioration in cash accrual
• Any major debt-funded capex weakening the capital structure
• Reduction in GoI holding to less than 51% resulting in diluted importance to the central government

 

Upward factors for RTL facility:

• Strong support philosophy of the parent towards the new demerged entity, NSL, along with shareholding of not less than 51%
• Timely commissioning of the steel plant without any material cost overruns or any material delay beyond the currently stipulated timelines, under the new demerged entity, NSL
• Timely ramp up and stabilization of operations of the steel plant with healthy utilization rates and operating margins supporting high free cash generation and strong capital structure

 

Downward factors for RTL facility

• Completion of the demerger along with the transfer of all the liabilities (including RTL), with no financial and managerial linkages between NMDC and the new demerged entity
• Drop in stake of GoI, below 51% in the demerged entity

About the Company

NMDC, incorporated in 1958, is a Navaratna PSE, primarily involved in iron ore mining. It is under the administrative control of the Ministry of Steel, GoI. It has seven operational iron ore mining leases: five in Chhattisgarh and two in Karnataka. NMDC is listed on the Bombay Stock Exchange and National Stock Exchange. Its market capitalisation stood at Rs 33,995 crore as on February 22, 2023.

Key Financial Indicators (consolidated)*

Particulars	Unit	2022	2021
Operating income	Rs crore	25,882	15,370
Profit after tax (PAT)	Rs crore	9,391	6,247
PAT margin	%	36.3	40.6
Adjusted debt/adjusted networth	Times	0.10	0.07
Interest coverage	Times	322	544

*CRISIL Ratings adjusted numbers

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	Fund-Based Facilities	NA	NA	NA	3,300	NA	CRISIL AAA/Stable
NA	Non-Fund Based Limit	NA	NA	NA	2,700	NA	CRISIL A1+
NA	Rupee Term Loan	NA	MCLR-6M +0.15%	Mar-30	4,500	NA	CRISIL AA/Watch Negative

 

Annexure – List of entities consolidated

Names of entities consolidated	Consolidation approach	Rationale for consolidation
NMDC Power Ltd	Full consolidation	Significant managerial, operational and financial linkages
NMDC Steel Ltd	Full consolidation
J&K Mineral Development Corporation Ltd	Full consolidation
Karnataka Vijaynagar Steel Ltd	Full consolidation
Jharkhand Kolhan Steel Ltd	Full consolidation
NMDC CSR Foundation	Full consolidation
Bastar Railways Pvt Ltd	Equity method
NMDC SAIL Ltd	Equity method
NMDC CMDC Ltd	Equity method
Jharkhand Mineral Development Corporation Ltd	Equity method
International Coal Ventures (Pvt) Ltd	Equity method
Krishnapatnam7 Railway Company Ltd	Equity method
Chhattisgarh Mega Steel Ltd	Equity method