Detailed Rationale

Crisil Ratings has reaffirmed its ‘Crisil AA-/Stable/Crisil A1+’ ratings on the bank facilities of Sarda Energy and Minerals Ltd (SEML; part of the Sarda group).

 

The ratings continue to reflect the healthy business risk profile of the company supported by steady performance in the existing metals business, expansion of the captive Gare Palma IV/7 coal mine from 1.44 million tonne per annum (MTPA) to 1.68 MTPA and strong financial risk profile, driven by comfortable debt protection metrics, healthy cash accrual and strong liquidity, despite the recent debt-funded acquisition of SKS Power Generation (Chhattisgarh) Ltd (SKS Power) by SEML under the National Company Law Tribunal (NCLT) process.

 

The company reported a decline in operating profit before depreciation, interest and taxes (OPBDIT) to ~ Rs 591 crore in FY2024 (from Rs 863 crore in FY2023) mainly due to lower realisations and high feedstock costs during the fiscal. The moderation was largely in line with expectations. However, during the first half of fiscal 2025, the operating profitability has improved to Rs 446 crore (SEML standalone and Sarda Metals and Alloys Limited), supported by decline in raw material costs for the company and robust prices for long steel. Operating earnings for the metals business is expected to remain healthy, over the medium term, with operating margins at 20-22%.

 

Crisil Ratings has taken note of the recent debt-funded acquisition of SKS Power by SEML in August 2024. The deal settlement amount, valued at Rs 1,950 crore, has been funded by the company through a long-term debt of Rs 1,375 crore and the remaining by its cash balance (outstanding liquid investments of more than Rs 1,000 crore as on March 31, 2024). SKS Power has a 600-megawatt (MW) operational thermal power plant in Raigarh, Chhattisgarh, with plant load factor (PLF) reported at 56% and revenue at Rs 1,367 crore for fiscal 2024 (provisional figures), which has further improved in current fiscal. That said, sustained improvement in PLFs of SKS Power and its operating cash accrual, supported by addition of long-term power purchase agreements (PPAs), competitive cost of generation and healthy domestic power demand will be key rating sensitivity factors.

 

Furthermore, Crisil Ratings believes this debt-funded acquisition will not have any material adverse impact on the financial risk profiles of SEML, while the business profile is likely to be supported by an expected increase in diversity and earnings from the said acquisition. The financial risk profile of the company has been strong with adjusted interest coverage ratio at 14.1 times in fiscal 2024 (21.4 times in fiscal 2023), adjusted gearing at 0.13 time in fiscal 2024 (0.19 time in fiscal 2023), and net cash position* estimated at Rs 424 crore as on March 31, 2024. Crisil Ratings understands that healthy operating cash accrual with no material planned capital expenditure (capex) other than the ongoing plans for commissioning and expansion of coal mines over the medium term, should support the financial risk and liquidity profiles (cash and cash equivalent stood at around Rs 1008 crore as on September 30, 2024) and it will be monitorable. This will also be supported by healthy operating earnings from the existing steel business (cash accrual of more than Rs 500 crore in fiscal 2024) as well as from operations of SKS Power. Furthermore, annual debt obligation should be manageable as the debt will be amortised over a tenure of 10 years.

 

SEML has made investments in and provided loans and advances of ~Rs 1,293 crore as on March 2024 (36% of the networth); ~Rs 1,149 crore as on March 31, 2023 (35% of the networth) - to subsidiaries and associates (excluding SMAL). Crisil Ratings understands the company has no further plans to make any major investment in group entities. Indeed, most of the loans and advances are callable and can be ploughed back into the company in case of any cash flow requirement.

 

The ratings continue to reflect the established market position of the Sarda group, supported by diversified revenue streams and integrated nature of operations, and strong financial risk profile. These strengths are partially offset by exposure to cyclicality in the steel and ferro alloy industries and large investment in associate entities.

 

*Net cash = total cash and cash equivalents - total debt

Analytical Approach

Crisil Ratings has combined the business and financial risk profiles of SEML and SMAL, together referred to as the Sarda group. SMAL is a wholly owned subsidiary of SEML and both are engaged in the same line of business. Furthermore, SEML has guaranteed Rs 52 crore of the debt of SMAL (outstanding debt against this guarantee was Rs 17.29 crore as on March 31, 2024) and provided support to the latter through unsecured loans in the past. Crisil Ratings has also moderately consolidated the subsidiaries, Madhya Bharat Power Corporation Ltd (MBPCL) and Chhattisgarh Hydro Power LLP (CHP LLP), in case SEML infuses funds in these entities over the medium term (as seen in the past). The remaining subsidiaries, joint ventures and controlled entities are treated as financial investments.

 

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:

• Established market position: The group is one of the largest players in the steel and steel intermediates industry in eastern and Central India. The promoters have been associated with the steel industry for over four decades. Revenue is diversified across sale of intermediate and finished steel products, ferro alloys and surplus power from the captive power plants. The company has expanded its portfolio through strategic diversification into the power sector, having recently acquired SKS power generation limited via Insolvency and Bankruptcy code (IBC), which has an operational 600 MW power plant.

 

• Diversified nature of operations: The company continues to have varied sources of revenue with operations across mining, steel, ferro alloys and power business (with recent acquisition of SKS Power). The company's existing coal mining operations, strategically located in close proximity to the power plant, are anticipated to create a synergistic operational linkage, thereby enhancing sales diversification and driving business growth. The company has strong backward integration with a captive iron ore mine that meets 40-50% of the total iron ore requirement and captive power plants that meet total power requirements for the steel business, leading to high operational efficiency. Integration has further improved after commissioning of the coal mine, which meets the entire requirement of thermal coal of SEML’s steel business. Flexibility of changing revenue mix within intermediate steel products and final products as well as power sales helps in successfully manoeuvring business cycles and sustaining operating margin. Procuring raw material in bulk helps save cost. Similarly, proximity of SMAL to the Vishakhapatnam port in Andhra Pradesh saves logistics cost and helps target global markets. Hence, operating margin has remained healthy at around 14% even during the downturn in fiscal 2016.

 

• Strong financial risk profile: Debt protection metrics were robust, with adjusted interest coverage and net cash accrual to total debt ratios of 14.1 times and 1.16              times, respectively, in fiscal 2024 (21.4 times and 0.52 time, respectively, during fiscal 2023). The capital structure is comfortable, with gearing of 0.13 time as on March 31, 2024 (0.19 time as on March 31, 2023). The financial risk profile is expected to remain healthy due to high cash accrual and limited capex in existing steel and ferro alloys business. Crisil Ratings expects the adjusted interest coverage ratio to be 8-10 times and gearing to be below 0.50 time for fiscals 2025 and 2026, respectively. However, while the overall debt protection metrics have moderated owing to the incremental debt undertaken for the acquisition of SKS Power, the overall financial risk profile continues to remain stable.

 

Weaknesses:

• Exposure to cyclicality in the steel and ferro alloy industries: These are closely linked to the domestic and global economies as growth depends on the level of construction and infrastructure activities. Any downturn in the economic cycle adversely impacts demand, as was seen in fiscal 2016. Furthermore, any change in government policies on imports or exports affect the industries (Currently, exports account for approximately 20-30% of the group's revenue; however, this proportion is expected to decrease following the recent acquisition). In addition to demand risk, the industries remain exposed to volatility in raw material prices and finished product realisations, which can impact operating margin. The prices are largely subject to global commodity prices. However, this is partially offset by the integrated nature of operations, flexibility in changing revenue mix between steel and steel intermediates, ferro alloys and power, and the ability to pass through any change in raw material prices to customers. Any significant variation in demand and pricing scenario will remain monitorable.

 

• Substantial investment in subsidiaries and group entities: Equity investments and loans and advances in group entities (including associates, joint ventures and controlled entities excluding SMAL) were around Rs 1,293 crore as on March 31, 2024 (~Rs 1,149 crore as on March 31, 2023). These investments are largely in unrelated businesses (such as hydro power) and in entities with weaker credit risk profiles as well as back-ended returns. Crisil Ratings understands that no further investments are needed in these entities. However, any major increase in loans and advances that may impact the financial risk profile of SEML will remain a key rating sensitivity factor.

Liquidity: Strong

Liquidity stood at Rs 1008 crore (cash and cash equivalent standalone) while unutilised fund-based bank limit was Rs 122 crore, as on September 30, 2024. Net cash accrual is expected to be over Rs 800 crore in fiscal 2025 which, along with existing liquidity, should be adequate to meet debt obligation and capex.

Outlook: Stable

The group will continue to benefit from its established market position in key long steel products and ferro alloys, while the strategic acquisition of SKS Power is expected to further enhance its revenue diversification and operational integration, thereby ensuring healthy cash generation. The financial risk profile is likely to remain strong over the medium term.

Rating sensitivity factors

Upward factors:

• Healthy operating performance with continued volume growth in metals business supported by high-capacity utilisation and operating margin of more than 25% due to increased integration, leading to significant and sustained improvement in scale of operations as well as net cash accrual
• Significantly higher-than-expected operating cash accrual from SKS Power on sustained basis, driven by the addition of long-term PPAs at remunerative tariffs and low cost of generation, supporting PLFs of more than 60-65%.
• Substantial and steady improvement in the financial risk profile, with no material debt-funded capex or acquisition; and better liquidity with maintenance of higher cash surplus on the balance sheet

 

Downward factors:

• Deterioration of operating performance due to weakened steel demand and intense competition leading to a fall in margin to below 15-18% in the steel business on sustained basis, thereby materially reducing cash accrual
• Significantly weak operating performance of SKS Power’s plant with material reduction in PLFs and operating margin from current levels
• Any significant increase in exposure to group entities weakening liquidity
• Large, debt-funded capex or acquisition adversely affecting the financial risk profile

About the Company

Based in Chhattisgarh, the Sarda group is promoted by Mr Kamal Kishore Sarda, who manages operations with his son, Mr Pankaj Sarda, and a team of professionals. The group manufactures iron pellets, sponge iron, billets, wire rods and wires, along with ferro alloys and eco-friendly fly ash brick. The group has thermal power plants and a waste-heat recovery boiler to generate power that is largely used for captive consumption. The company has recently acquired SKS power generation limited via Insolvency and Bankruptcy code (IBC), which has an operational 600 MW power plant.

 
SEML, incorporated in 1973, is the flagship company of the group. It is a vertically integrated producer of steel with captive iron ore and commercial coal mines. It also manufactures and exports niche-grade manganese-based ferro alloys, with self-sufficient captive power from waste heat and coal. Furthermore, the company has successfully diversified its portfolio through the strategic acquisition of SKS Power, marking a significant foray into the energy sector

 

SMAL, incorporated in October 2008, is a wholly owned subsidiary of SEML and operates a 2x33-MVA plus 36 MVA ferro alloys plant, backed by an 80-MW captive thermal power plant.

 

The group also has interests in hydropower projects through special project vehicles, MBPCL, CHP LLP and Parvatiya Power Ltd.

Key Financial Indicators - consolidated*

Particulars	Unit	2024	2023
Operating income	Rs crore	3,546	3,911
Profit after tax (PAT)	Rs crore	477	619
PAT margin	%	13.4	15.8
Adjusted debt/adjusted networth	Times	0.13	0.19
Adjusted interest coverage	Times	14.1	21.4

* As per analytical adjustments made by Crisil Ratings

Any other information: Not Applicable