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 and have 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 exigencies considering its strategic importance and the government’s 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 annual production capacity of 51.8 million tonne (MT). Annual production was 32-35 MT during the past five fiscals and the company accounted for 16-18% of total iron ore production in the country. 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 more than 30 years. The business is supported by environment clearance for all the mines along with long-term validity of mining licenses (till 2035-38) for six of the seven mines. The license for the Kumaraswamy mine in Karnataka is valid till October 2022, and is expected to be renewed on time. Also, with resumption of production from the Donimalai mine in Karnataka (annual capacity of 7 MT) in the fourth quarter of fiscal 2021 post renewal of mining license, the annual output is expected to increase in fiscal 2022. NMDC plans to increase its production and evacuation capacity to around 65 MT by fiscal 2025.

High operating profitability owing to low cost of production

NMDC had healthy operating profitability of 50-60% during the past four fiscals. Supported by its stable and low-cost mining operations. NMDC is among the lowest cost producers globally with cost of production (excluding statutory taxes and levies) of around Rs 1,000 per tonne. Also, NMDC’s iron ore has higher realisation per tonne than the industry average due to better ore quality with iron content of 63-65%, among the highest grades of iron ore. Thus, low cost of production and healthy realisations (Rs 4,581 per tonne in fiscal 2021) support high operating profitability (earnings before interest, tax, depreciation and amortisation of 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 average selling price (in addition to existing iron ore royalty payout of 15%) on all its mines from fiscal 2022. Hence, profitability will moderate, though it will remain healthy.

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

NMDC is majority held by GoI (61%) and is under the administrative control of the Ministry of Steel. The company’s high strategic importance to GoI is also reflected in its Navratna status and leading position in the domestic iron ore industry which is a key raw material for steel production. NMDC benefits from being a public sector enterprise (PSE) as it gets preferential treatment under the amended MMRD Act, 2021, which gives special powers to the government to allocate mines and renew mining licences of PSEs.

Strong financial risk profile supported by net cash position

Capital structure and debt protection metrics are healthy on account of strong net-worth, absence of any significant long-term debt, and healthy operating cash accrual and cash balance, resulting in net cash position over the years. Gearing and total outside liabilities to tangible networth ratio were 0.07 and 0.24 time, respectively, as on March 31, 2021, and are expected below 0.1 and 0.3 time, respectively, over the medium term. Net cash accrual to total debt ratio was 2.11 times for fiscal 2021 against 3.44 times in fiscal 2020.

Weaknesses

Susceptibility to inherent cyclicality in the steel sector

Iron ore is the key raw material for steel production, which is an inherently cyclical industry. Around 70% of NMDC’s iron ore sales are to three counterparties: Rashtriya Ispat Nigam Ltd, JSW Steel Ltd and Arcelor Mittal Nippon Steel India Ltd (erstwhile Essar Steel Ltd). This exposes NMDC to risks of decline in demand or realisation during a downturn in the steel industry, which could impact volume and operating cash flow. However, low cost of production and high ore quality provides some cushion against the offtake risk.

Credit profile of steel business weaker than mining; proposed to be demerged

NMDC is setting up a greenfield steel plant with annual capacity of 3 MT in Chhattisgarh, which is expected to be commissioned by June 2022. Of the project cost of around Rs 21900 crore, NMDC had spent around Rs 18700 crore as of July 2021. While the project is being funded primarily through internal accrual with debt of only Rs 5000 crore (Rs 3495 crore of project debt remains unutilised), time and cost overruns have resulted in higher per tonne project cost compared with the industry average. The steel business is expected to have weaker credit profile than the mining business, as besides project risk, the plant will take time to ramp up and stabilise operations after commissioning. Also, the steel business is expected to have 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 with peers in the steel industry.

However, the steel plant is proposed to be demerged from NMDC into a separate company. NMDC’s board approved the demerger on July 13, 2021. While NMDC has received approval from exchanges, Securities and Exchange Board of India and Competition Commission of India, it is awaiting other requisite approvals including approval from creditors and minority shareholders. The Cabinet Committee on Economic Affairs had approved the demerger scheme in October 2020. The demerger is expected to be completed by the first quarter of fiscal 2023. Progress on the demerger and on the steel project, and composition of the new management for the demerged entity will be key monitorables.

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 will continue to benefit from its low cost of production, resulting in healthy cash accrual.

Key Financial Indicators consolidated)

Annexure - Details of Instrument(s)

Annexure – List of entities consolidated

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