By Mahaveer Jain

India Ratings and Research (Ind-Ra) has rated Tata Sponge Iron Limited’s (TSIL) commercial paper (CP) as follows:


Instrument Type

Date of Issuance

Coupon Rate (%)

Maturity Date

Size of Issue (billion)

Rating

Rating Action

CP

-

-

180 days

INR40

IND A1+

Assigned

The proceeds of the CP will be used to facilitate the proposed acquisition of the steel division of Usha Martin Limited (UML; ‘IND BB+’/RWP). The CP will be refinanced with a long-term source of funding.

 

Rating/Analytical Approach: Ind-Ra has taken a standalone approach to arrive at the rating, along with a rating uplift as TSIL is a strategically important entity for Tata Steel Ltd (TSL; ‘IND AA’/Stable).

KEY RATING DRIVERS

Strong Parentage and Strategic Linkages: TSIL is a 54.5%-owned subsidiary of TSL. TSL has publicly notified that TSIL is of strategic importance to it and is a part of its strategy to expand its presence in the long product business. In addition, TSL has publicly notified that it will support the funding of the proposed acquisition of the steel division of UML. TSIL procures a substantial portion of its iron ore requirement from TSL’s iron ore mines and sells surplus power to TSL. TSL’s two senior employees are on TSIL’s board of directors.

 

Proposed Acquisition: TSL has signed a definitive agreement to acquire, either directly or through its subsidiary, the steel division of UML through a slump sale on a going concern basis for a consideration of INR45.25 billion on a debt-free, cash-free and nil working capital basis, subject to adjustments as per the business transfer agreement. The steel division includes a specialised steel alloy manufacturing plant, an operative iron ore mine, an under-development coal mine and a captive power plant.

 

The conclusion of the transaction is subject to the fulfilment of conditions precedent and the receipt of various approvals and consent, including from regulatory, shareholders and lenders. The transaction is likely to be completed in the next six-nine months. As per the agreement, all employees under the steel division will be transferred to TSL and the sale proceeds will be entirely utilised to repay existing lenders, subject to tax and transaction cost, if any.

 

Profitability Expectation of Combined Entity: Ind-Ra expects a combined EBITDA per tonne of INR5,800 for TSIL’s sponge iron and acquired alloy steel businesses. TSIL’s sponge business is likely to generate an average EBITDA per tonne of INR2,700 (including the power sales revenue) and its acquired steel division to generate a blended EBITDA per tonne of INR7,000 per tonne. Moreover, the agency estimates the overall annual EBITDA at INR7.5 billion-8.0 billion. TSIL has a nameplate sponge iron manufacturing capacity of 0.42 million tonnes per annum. The acquired division is likely to produce a mix of semis and rolled products of 0.9 million tonnes per annum

 

Robust Credit Metrics:  At end-September 2018, TSIL was a debt-free company. As of September 2018, it had cash and cash equivalents totalling INR5 billion. The completion of the acquisition is likely to result in a debt of INR20 billion-25 billion in FY20 for TSIL.

 

Ind-Ra expects TSIL’s credit metrics to remain strong in the near to medium term, even with partly debt-funded acquisition. In FY20, TSIL’s net leverage and EBITDA interest coverage are likely to be about 2.5x and 3.5x-4.0x respectively.

 

Adequate Liquidity: Ind-Ra expects TSIL to post strong operational cash flows for FY19 on the back of robust demand and steady realisations. The management has notified Ind-Ra that the term loan to be used to fund the acquisition will have a well spread-out maturity profile with ballooning repayments. The agency assumes the combined entity to require incremental working capital and maintenance capex of INR2.5 billion over the 12 months subsequent to the completion of the acquisition.

 

Weak Industry Profile: The semis product division of TSIL is likely to experience cyclical demand and high volatility in margins. Volatility in the prices of coal and other raw materials, as well as in foreign exchange, will lead to volatility in margins. TSIL’s contribution per tonne remained volatile at INR1,600-5,200 during FY14-FY18. However, the volatility is likely to be dampened with the acquisition, as UML has a mix of value added products, as well as with an improved backward integration into own iron ore and coal sourcing.


RATING SENSITIVITIES

Negative: Any deterioration in TSL’s or TSIL’s credit profile, or any weakening of the linkages between the two entities could lead to a negative rating action.


COMPANY PROFILE

TSIL manufactures high-grade sponge iron and is also sells surplus power.

FINANCIAL SUMMARY

Particulars

1HFY19

FY18

Revenue (INR million)

4,771.50

8,001.7

EBITDA (INR million)

900.6

 1,826.9

EBITDA margin (%)

18.9

22.

Gross EBITDAR interest coverage (x)

150

56.3

Net debt (INR million)

-5,714.7

-5,496.4

Source: TSIL



COMPLEXITY LEVEL OF INSTRUMENTS

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

SOLICITATION DISCLOSURES

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.

ABOUT INDIA RATINGS AND RESEARCH

About India Ratings and Research: India Ratings and Research (Ind-Ra) is India's most respected credit rating agency committed to providing India's credit markets accurate, timely and prospective credit opinions. Built on a foundation of independent thinking, rigorous analytics, and an open and balanced approach towards credit research, Ind-Ra has grown rapidly during the past decade, gaining significant market presence in India's fixed income market. 

Ind-Ra currently maintains coverage of corporate issuers, financial institutions (including banks and insurance companies), finance and leasing companies, managed funds, urban local bodies and project finance companies. 

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Analyst Names

  • Primary Analyst

    Mahaveer Jain

    Associate Director
    India Ratings and Research Pvt Ltd Wockhardt Towers, 4th Floor, West Wing, Bandra Kurla Complex, Bandra East,Mumbai - 400051
    +91 80 46666817

    Media Relation

    Namita Sharma

    Manager – Corporate Communication
    +91 22 40356121