By Akash Krishnatry

India Ratings and Research (Ind-Ra) has revised Steel Authority of India Limited’s (SAIL) Outlook to Stable from Negative while affirming its Long-Term Issuer Rating at ‘IND AA-’. The instrument wise rating actions are as follows:

Instrument Type

Date of Issuance

Coupon Rate (%)

Maturity Date

Size of Issue (million)

Rating/Outlook

Rating Action

Bonds*

-

-

-

INR114,430 (reduced from INR170,000)

IND AA-/Stable

Affirmed; Outlook Revised to Stable from Negative

Public deposits

-

-

-

INR10,000

IND tAA/Stable

Affirmed; Outlook Revised to Stable from Negative

Bank loan

-

-

-

INR20,000

IND AA-/Stable

Affirmed; Outlook Revised to Stable from Negative

Non-fund-based limits

-

-

-

INR70,000

IND AA-/Stable

Affirmed; Outlook Revised to Stable from Negative

Non-fund-based working capital limits

-

-

-

INR20,000

IND A1+

Affirmed

Fund-based working capital based limits

-

-

-

INR45,000#

IND AA-/Stable/IND A1+

Affirmed; Outlook Revised to Stable from Negative

Commercial paper

-

-

Up to 180 days

INR80,000

IND A1+

Affirmed

# Bank sanctioned limits INR70,000 million as on date
* Details given in annexure

The Outlook revision reflects EBITDA/tonne recovery by SAIL over 2HFY18-1HFY19 and Ind-Ra’s expectations of a rise in EBITDA in FY19-FY20 in view of sales volume ramp-up and healthy EBITDA/tonne during the period on account of steady net sales realisation (NSR) and operating leverage benefits. Although sales volume ramp-up was lower in FY18 than Ind-Ra’s expectations, the agency believes that strong sales volume improvement will start from 2HFY19.

KEY RATING DRIVERS

EBITDA/Tonne to Further Improve: Ind-Ra expects SAIL’s EBITDA/tonne (excluding other income) to rise to INR6,000-7,000 in FY19 from INR3,300 in FY18 in view of strong gross margins, led by healthy NSR. Ind-Ra believes that range-bound coking coal prices, operating leverage benefits and SAIL’s focus on operational efficiency improvements should enhance its profitability.

The rise in SAIL’s EBITDA/tonne to INR3,300 in FY18 from INR29 in FY17 was in line with Ind-Ra’s expectations. The rise was driven by an increase in NSR to INR40,880 in FY18 from INR33,933 in FY17 and was partially offset by volatile coking coal prices throughout the year. However, SAIL benefitted from low captive iron ore costs. There has been a significant uptick in SAIL’s steel sales volume (FY18: 14.1 million tonnes; FY17: 13.1 million tonnes), though marginally lower than Ind-Ra’s expectations of 14.5 million tonnes in FY18.

Steady NSR Expectations: Ind-Ra expects SAIL’s NSR to benefit from strong and steady domestic steel prices across the long and flat segments. Ind-Ra revised the credit outlook for the steel sector to stable for FY19 from negative in FY18, in view of healthy domestic and global demand growth, along with ongoing capacity rationalisation in China. Moreover, an increase in the share of value-added products (such as cold-rolled coils and structural steel) in the product portfolio would further augment NSR.

Production Ramp-up to Pick up Pace: Logistical and integration challenges during the INR720 billion capex undertaken on the modernisation and expansion of capacities during FY10-FY18 led to a lower-than-expected ramp-up in production in FY17-FY18. However, Ind-Ra expects SAIL to pick up production pace in 2HFY19, given the majority of its new capacities are in the integration and stabilisation phase. Therefore, its production volume is likely to rise by about 10% and 9% in FY19 and FY20, respectively.

Operating Leverage Benefits: The likely ramp-up in SAIL’s production by about 10% yoy in FY19 and manpower optimisation will improve operating efficiencies, providing operating leverage benefits. An increase in production volume would lead to better fixed cost absorption. Therefore, Ind-Ra estimates fixed costs to reduce by about INR800/tonne in FY19, with a higher proportion of the reduction to be achieved over 2HFY19. These benefits would directly augment SAIL’s EBITDA/tonne over FY19.

Significant Reduction in Debt Unlikely: SAIL’s gross debt increased to INR454 billion in FY18 from INR414 billion in FY17 owing to the capex on the modernisation and expansion of capacities during FY10-FY18. Working capital efficiency kept a check on working capital financing, despite production volume growth, high coking coal prices and steel price recovery in FY18. Ind-Ra does not expect a significant reduction in SAIL’s debt despite healthy fund flow from operations in view of an annual capex of about INR50 billion and increasing working capital requirements over FY19.

Improving Liquidity: SAIL has been in discussion with its lenders to enhance its fund-based working capital limits to INR100 billion from INR70 billion, aimed at improving its backup lines available for commercial paper instruments. Moreover, as on date, INR53 billion of liquidity is available from undisbursed term loans, in addition to free cash flow from operations, to support the capex requirements and redemption of commercial paper.

The focus of SAIL’s management is to change the maturity profile of borrowings to strengthen its current ratio and liquidity profile. As of October 2018, 25% of SAIL's borrowings were short-term facilities, including commercial paper, about 75% (INR340 billion) were long-term loans and debentures. The management has informed Ind-Ra that it is trying to replace/reduce its short-term borrowings gradually by INR10 billion per quarter over 3QFY19-4QFY19. Therefore, Ind-Ra expects commercial paper utilisation to moderate in the near term.


Recovery in Credit Metrics: The recovery in EBITDA/tonne allowed SAIL to deleverage to some extent in FY18. Ind-Ra expects the increase in the sales volume and the likely healthy EBITDA/tonne in FY19 to help SAIL in reducing its net adjusted leverage (net adjusted debt/operating EBITDA) below 5.0x in FY19, assuming a total capex of about INR50 billion for the year.

SAIL’s net adjusted leverage recovered to 9.7x in FY18 from 1,100.0x in FY17 and gross interest coverage (operating EBITDA/gross interest expenses) improved to 1.6x (0.01x). Considering the likely healthy EBITDA generation over FY19, Ind-Ra believes it to be sufficient to cover scheduled debt repayments.

Industry Risks: SAIL’s cash flow remains exposed to the cyclicality inherent in the steel industry and the volatility in the prices of raw materials, particularly coking coal.


RATING SENSITIVITIES

Positive: Net adjusted leverage reducing below 3.5x, on a sustained basis, could be positive for the ratings.

Negative: Any significant decrease in EBITDA/tonne and/or higher-than-expected debt-led capex or acquisition, leading to net adjusted leverage exceeding 5.0x beyond FY19, on a sustained basis, could be negative for the ratings.


COMPANY PROFILE

SAIL is an integrated iron and steelmaker with five integrated steel plants: Bhilai Steel Plant, Durgapur Steel Plant, Rourkela Steel Plant, Bokaro Steel Plant and IISCO Steel Plant. In addition, it has three special steel plants: Alloy Steel Plant, Salem Steel Plant and Visvesvaraya Iron & Steel Plant.

SAIL is one of the largest steelmakers in India, with a total crude steel and saleable steel capacity of 19.1 million tonnes per annum and 17.9 million tonnes per annum as on 30 June 2018, respectively.


FINANCIAL SUMMARY

 

Particulars

1HFY19

FY18

FY17

Revenue (INR million)

326,252

589,624

497,671

EBITDA (INR million)

49,415

46,179

371

EBITDA margin (%)

15.1

7.8

0.1

Interest coverage (x)

3.2

1.6

0.0

Net leverage (x)

4.6

9.7

1,100

Source: Ind-Ra, SAIL 

*Annualised


RATING HISTORY

Instrument Type

Current Rating/Outlook

Historical Rating/Outlook

Rating Type

Rated Limits (million)

Rating

2 August 2017

 

29 July 2016

 

16 June 2015

Issuer rating

Long-term

-

IND AA-/Stable

IND AA-/Negative

IND AA/Negative

IND AAA/Negative

Bonds

Long-term

INR114,430

IND AA-/Stable

IND AA-/Negative

IND AA/Negative

IND AAA/Negative

Public deposits

Long-term

INR10,000

IND tAA/Stable

IND tAA/Negative

IND tAA/Negative

IND tAAA/Negative

Bank loan

Long-term

INR20,000

IND AA-/Stable

IND AA-/Negative

IND AA/Negative

IND AAA/Negative

Non-fund-based limits

Long-term

INR70,000

IND AA-/Stable

IND AA-/Negative

IND AA/Negative

IND AAA/Negative

Non-fund-based working capital limits

Short-term

INR20,000

IND A1+

IND A1+

IND A1+

IND A1+

Fund-based working capital limits

Long-/short-term

INR45,000

IND AA-/Stable/IND A1+

IND AA-/Negative/IND A1+

IND AA/Negative/IND A1+

IND AAA/Negative

Commercial paper

Short-term

INR80,000

IND A1+

IND A1+

IND A1+

IND A1+

ANNEXURE

Instrument Type

ISIN

Date of Issuance

Coupon Rate (%)

Maturity Date

Size of Issue (million)

Rating/Outlook


Bonds

INE114A07695

23 April 2010

8.75

23 April 2020

INR5,450

IND AA-/Stable


Bonds

INE114A07703

30 April 2010

8.72

30 April 2020

INR6,600

IND AA-/Stable


Bonds

INE114A07448

1 May 2009

8.9

1 May 2019

INR9,500

IND AA-/Stable


Bonds

INE114A07455

11 May 2009

7.7

11 May 2019

INR250

IND AA-/Stable


Bonds

INE114A07794

25 May 2012

9.3

25 May 2019

INR570

IND AA-/Stable


Bonds

INE114A07802

25 May 2012

9.3

25 May 2020

INR570

IND AA-/Stable


Bonds

INE114A07810

25 May 2012

9.3

25 May 2021

INR570

IND AA-/Stable


Bonds

INE114A07828

25 May 2012

9.3

25 May 2022

INR570

IND AA-/Stable


Bonds

INE114A07745

25 May 2012

9.3

25 May 2019

INR150

IND AA-/Stable


Bonds

INE114A07752

25 May 2012

9.3

25 May 2020

INR150

IND AA-/Stable


Bonds

INE114A07760

25 May 2012

9.3

25 May 2021

INR150

IND AA-/Stable


Bonds

INE114A07778

25 May 2012

9.3

25 May 2022

INR150

IND AA-/Stable


Bonds

INE114A07463

22 June 2009

8.8

22 June 2019

INR8,250

IND AA-/Stable


Bonds

INE114A07950

1 August 2016

8.3

1 August 2023

INR12,000

IND AA-/Stable


Bonds

INE114A07968

3 August 2016

8.3

3 August 2023

INR8,000

IND AA-/Stable


Bonds

INE114A07471

11 August 2009

8.55

11 August 2021

INR7,000

IND AA-/Stable


Bonds

INE114A07711

23 August 2011

9.3

23 August 2021

INR4,000

IND AA-/Stable


Bonds

INE114A07489

25 August 2009

8.7

25 August 2024

INR3,000

IND AA-/Stable


Bonds

INE114A07935

25 August 2015

8.27

25 August 2020

INR2,650

IND AA-/Stable


Bonds

INE114A07729

09 September 2011

9.35

9 September 2026

INR4,550

IND AA-/Stable


Bonds

INE114A07505

15 September 2009

8.75

15 September 2019

INR500

IND AA-/Stable


Bonds

INE114A07513

15 September 2009

8.75

15 September 2024

INR500

IND AA-/Stable


Bonds

INE114A07869

14 October 2014

9

14 October 2024

INR10,000

IND AA-/Stable


Bonds

INE114A07570

26 October 2009

8.8

26 October 2019

INR140

IND AA-/Stable


Bonds

INE114A07588

26 October 2009

8.8

26 October 2020

INR140

IND AA-/Stable



Bonds

INE114A07596

26 October 2009

8.8

26 October 2021

INR140

IND AA-/Stable


Bonds

INE114A07604

26 October 2009

8.8

26 October 2022

INR140

IND AA-/Stable


Bonds

INE114A07612

26 October 2009

8.8

26 October 2023

INR140

IND AA-/Stable


Bonds

INE114A07620

26 October 2009

8.8

26 October 2024

INR140

IND AA-/Stable


Bonds

INE114A07638

26 October 2009

8.8

26 October 2025

INR140

IND AA-/Stable


Bonds

INE114A07646

19 November 2009

8.6

19 November 2019

INR3,350

IND AA-/Stable


Bonds

INE114A07943

19 November 2015

8.35

19 November 2022

INR11,850

IND AA-/Stable


Bonds

INE114A07661

7 December 2009

8.5

7 December 2019

INR1,200

IND AA-/Stable


Bonds

INE114A07679

30 December 2009

8.65

30 December 2019

INR4,500

IND AA-/Stable


Bonds

INE114A07885

21 January 2015

8.3

21 January 2020

INR5,000

IND AA-/Stable



Bonds

INE114A07687

1 February 2010

8.65

1 February 2020

INR2,420

IND AA-/Stable


Bonds

INE114A07893

15 April 2015

7.95

9 April 2018

INR6,700

WD (paid in full)


Bonds

INE114A07851

6 May 2013

8.25

6 May 2016

INR5,550

WD (paid in full)


Bonds

INE114A07851

6 May 2013

8.25

6 May 2018

INR2,450

WD (paid in full)


Bonds

INE114A07455

11 May 2009

7.70

11 May 2014

INR5000

WD (paid in full)


Bonds

INE114A07786

25 May 2012

9.30

25 May 2018

INR570

WD (paid in full)


Bonds

INE114A07737

25 May 2012

9.30

25 May 2018

INR150

WD (paid in full)


Bonds

INE114A07901

9 June 2015

8.35

9 June 2018

INR4200

WD (paid in full)


Bonds

INE114A07919

27 July 2015

8.25

27 July 2018

INR5,000

WD (paid in full)


Bonds

INE114A07836

27 August 2012

9.18

27 August 2017

INR,3000

WD (paid in full)


Bonds

INE114A07927

10 August 2015

8.18

10 August 18

INR10,000

WD (paid in full)


Bonds

INE114A07497

15 September 2009

8.75

15 September 2014

INR500

WD (paid in full)


Bonds

INE114A07653

7 December 2009

8.00

7 December 2014

INR300

WD (paid in full)


Bonds

INE114A07531

26 October 2009

8.80

26 October 2014

INR140

WD (paid in full)


Bonds

INE114A07539

26 October 2009

8.80

26 October 2015

INR140

WD (paid in full)


Bonds

INE114A07547

26 October 2009

8.80

26 October 2016

INR140

WD (paid in full)


Bonds

INE114A07554

26 October 2009

8.80

26 October 2017

INR140

WD (paid in full)


Bonds

INE114A07562

26 October 2009

8.80

26 October 2018

INR140

WD (paid in full)


Bonds

INE114A07844

08 November 2012

8.75

8 November 2017

INR,5000

WD (paid in full)


Bonds

INE114A07877

16 December 2014

8.38

16 December 2017

INR6,450

WD (paid in full)


Total

INR114,430

 



COMPLEXITY LEVEL OF INSTRUMENTS

For details on the complexity levels of the instruments, please visit https://www.indiaratings.co.in/complexity-indicators.

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Additional information is available at www.indiaratings.co.in. The ratings above were solicited by, or on behalf of, the issuer, and therefore, India Ratings has been compensated for the provision of the ratings. 

Ratings are not a recommendation or suggestion, directly or indirectly, to you or any other person, to buy, sell, make or hold any investment, loan or security or to undertake any investment strategy with respect to any investment, loan or security or any issuer.

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Applicable Criteria

Analyst Names

  • Primary Analyst

    Akash Krishnatry

    Senior Analyst
    India Ratings and Research Pvt Ltd 601-9 Prakashdeep Building 7 Tolstoy Marg New Delhi 110001
    +91 11 43567263

    Media Relation

    Namita Sharma

    Manager – Corporate Communication
    +91 22 40356121