Detailed Rationale

Crisil Ratings has removed its rating on the long term bank facilities of The Sandur Manganese And Iron Ores Limited (SMIORE, part of Sandur group) from ‘Rating Watch with Positive Implications’ and has upgraded the rating to ‘Crisil A+’ from ‘Crisil A‘ while assigning a ‘Stable’ outlook to the long-term rating.

 

The ratings were placed on watch positive on May 8th, 2024, following a corporate announcement by SMIORE on April 26th, 2024, where in SMIORE has signed a binding share purchase agreement to acquire 99% stake in Arjas Steel Private Limited (“ASPL”) from private equity firm ADV Partners at an enterprise value of Rs 3,000 crores.

 

Crisil Ratings has resolved its ‘Watch with positive Implications’ on completion of the acquisition, along with details of the transaction and business and financial risk profile of the post-acquisition entities. The transaction is funded by an external debt of Rs 950 crores; however, this is not expected to have any material impact on the credit profile of SMIORE; backed by strong networth and healthy operating profits of the combined entity, ensuring healthy debt protection metrics.

 

Crisil Rating, while resolving the ‘watch’ has also noted the proposed ‘The Karnataka (Mineral Rights and Mineral Bearing Land) Tax Bill, 2024’, with provisions to impose taxes on mineral rights and mineral bearing land in the state of Karnataka and factored in sensitivities with respect this tax.

 

The rating upgrade reflects significant improvement in the business risk profile and healthy financial profile of the group post-acquisition, backed by integrated operations with combined full year revenue of around Rs 5,000 crores and healthy operating profits. The mining division under SMIORE has recently received approval to enhance its iron ore and manganese ore capacities from 3.81 million tons per annum (MTPA) to 4.32 MTPA and 0.46 MTPA to 0.58 MTPA respectively, which is expected to drive revenue growth over the medium term. ASPL, which was going through multiple shutdowns in the past, owing to upgradation and debottlenecking of its plant has resumed normal operations since November 2024; and should drive scale and profitability over the medium term. Further, despite the debt funded acquisition; the group’s gearing is expected to remain around 1 times and Net Debt to EBIDTA is likely to remain around 1.50-2.00 times over the medium term. Any further inorganic growth opportunities necessitating material debt addition and its impact on debt metrics will remain monitorable.

 

The rating continues to reflect the strong market position of the group in mining and specialty steel with a track record over many decades, its large mining reserve and a strong financial risk profile. These strengths are partially offset by susceptibility to regulatory changes and inherent cyclicality in the steel sector.

Analytical Approach

Crisil Ratings has revised its analytical approach and has now consolidated the business and financial risk profile of SMIORE, ASPL and Arjas Modern Steel Pvt Ltd (AMSPL) (wholly owned subsidiary of ASPL) while arriving at its rating. This is because of the parent subsidiary relationship and these entities are in a related line of business with material financial and operational linkages

 

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:

• Long track record and extensive mining reserves: SMIORE was set up in 1954 when Y R Ghorpade, the former Maharaja of Sandur, transferred the mining lease awarded to him in favour of the Company. The Company has two mining leases valid upto December 31, 2033, with estimated reserve of 117 MT of iron ore and around 17 MT of manganese ore with production capacity of 4.32 MTPA and 0.58 MTPA respectively. The company is among the few entities classified in category A mining leases with a production capacity of more than 1 MTPA of iron ore. Increase in mining capacity, which is available for production for full year from fiscal 2026, will drive revenue over the medium term along with revenues from the steel division under ASPL post acquisition. ASPL is a specialty steel manufacturer with established market position and a preferred vendor to reputed OEMs. The extensive reserves, incremental revenue streams from specialty steel segment post acquisition, and extensive experience of the management should benefit business risk profile. However, quality of ores, realisation from the mining segment and sustenance of improved profitability in the specialty steel segment will be key monitorable over the medium term.

 

• Strong financial risk profile: The group’s financial risk profile is strong supported by healthy capital structure and robust debt protection metrics. Overall gearing on a consolidated basis is expected to be sustained at around 1 time, despite the debt funded acquisition, and likely to be sustained at similar level. Expected debt protection metrics continue to be robust, as reflected in healthy interest coverage and Net Debt to EBITDA sustained at around 1.50-2.00 times over the medium term.

 

Weaknesses:

• Exposure to regulatory risks associated with the mining industry: The mining industry in India is highly regulated by various state and central government agencies. Production, sale, expansion, environmental clearances, taxation and extension/renewal of licenses are governed by various regulations and policies. Unfavorable changes in the regulations may have an adverse impact on the business risk profile. However, the Company is classified as a Category A mining company and has a track record of more than seven decades of regulatory compliance and absence of operational disruptions owing to environmental, societal or company-specific regulatory issues. Its mines are rated five-star by the Indian Bureau of Mines, Government of India under its Sustainable Development Framework (SDF). While exposure to regulatory risk will remain a key monitorable, the scientific and systematic mining processes followed by the Company, in adherence to existing rules and regulations, mitigates this risk.

 

• Susceptibility to cyclicality in the steel sector: The group has significant exposure to the steel sector as majority of its products find application in the steel industry, which is inherently cyclical. This makes the company vulnerable to decline in demand or realisation during a downturn in the steel industry and may impact the volumes and operating cashflow

Liquidity: Strong

Bank limit utilisation was low at 22% on average for the 12 months through December 2024. Net cash accrual, expected to be healthy over the medium term, will sufficiently cover yearly maturing debt obligation of Rs 150-300 crores over the medium term. Current ratio was healthy at 2.30 times as on March 31, 2024. The group is expected to maintain cash and liquid assets of around Rs 500 crore on average over the medium term. Low gearing and strong networth enhances its ability to raise funds in case of exigencies and strengthens group’s financial flexibility.

Outlook: Stable

Crisil Ratings believes SMIORE, along with its subsidiaries, will continue to benefit from the extensive experience of its promoter, and its established market position.

Rating sensitivity factors

Upward factors:

• Sustained revenue growth and profitability, supported by enhanced capacity utilization and improved profitability in the specialty steel segment; leading to consolidated operating profits of over Rs 900 crores and strong net cash accruals.
• Strong financial risk profile with healthy capital structure and sustained financial flexibility

Downward factors:

• Lower-than-expected revenue from enhanced capacities or significant fall in profitability, leading to healthy consolidated operating profit over medium term
• Large debt funded capex/acquisition or material decline in profitability weakens leverage levels, debt protection metrics and overall financial flexibility of the group with Net Debt to EBIDTA of over 2.5 times sustained over medium term.
• Significantly higher than expected taxation on mineral rights and mineral bearing land under SMIORE, impacting profitability and weakens overall debt protection metrics

About the Company

SMIORE mines low-phosphorous manganese and iron ore in the Hosapete-Ballari region of Karnataka. It is the fifth-largest iron ore miner in Karnataka and the third-largest miner of manganese ore in India. It is the flagship business of the Ghorpades, the Royal family of Sandur. SMIORE has a 95,000-TPA ferroalloy plant, a 32-MW captive power plant and a 0.5-MTPA coke oven plant with two waste recovery boilers

Any other information: Not Applicable