By Rohit Sadaka

India Ratings and Research (Ind-Ra) has affirmed NMDC Limited’s Long-Term Issuer Rating at ‘IND AAA’ with a Stable Outlook while placing its non-convertible debentures (NCDs) on Rating Watch Negative (RWN). The instrument-wise rating actions are given below:

Instrument Type

ISIN

Date of Issuance

Coupon Rate

Maturity Date

Size of Issue (billion)

Rating/Outlook/Rating Watch

Rating Action

Non-fund-based limits

-

-

-

-

INR24.5

IND AAA/Stable/IND A1+

Affirmed

Fund-based limits

-

-

-

-

INR0.5

IND AAA/Stable/IND A1+

Affirmed

Proposed Non-Convertible Debentures
(NCDs)*

-

-

-

-

INR44.76 (reduced from INR50)

Provisional IND AAA/RWN

Placed on RWN

NCD#

INE584A08010

28 August 2020

7.3%

28 August 2025

INR5.24

IND AAA/RWN

Assigned and Placed on RWN

*The final rating will be assigned following the closure of the issue upon the receipt of final documentation, conforming to the information already received by Ind-Ra. The final documentation includes all finalised financing and transaction document
#The assignment of the final rating follows the receipt of final NCD documents

The NCDs have been placed on RWN reflecting the in-principle approval of the board of directors to demerge Nagarnar steel plant (NSP) in the future and transfer it to a new entity, which shall mirror the shareholding structure of NMDC. Furthermore, the assets and liabilities of NSP shall be transferred to the new entity as on the effective date of the demerger scheme. Consequently, the liability towards the proposed NCD  shall be transferred to the new entity without the need for any separate consent solicitation exercise from the debenture holders. Ind-Ra will resolve the RWN on completion of the demerger, which may lead to a multi-notch rating downgrade of the NCDs.

Ind-Ra notes the presence of (i) a demerger event consent clause in the final term sheet stating the proposed demerger of NSP and the consequent transfer of the NCD liability rated under the NCD programme without further consent from the debenture holders, and (ii) a rating downgrade event clause stating that any rating downgrade of the new entity shall enhance the coupon rate further by 25bp for each notch of rating downgrade below ‘AAA’.

KEY RATING DRIVERS

Proposed Demerger of Steel Plant: NMDC’s board has approved the in-principle demerger of NSP into a separate company, which will be completed in the next eight-to-nine months. The company has spent around INR170 billion to set up a 3 million tonne-steel plant at Chhattisgarh, which as per the management is expected to commence operations from 1QFY22. The balance amount of INR40 billion (including contingency), to be spent for the completion of capex, is likely to be funded by raising debt on NSP. The scheme of demerger is yet to be finalised and the full details of the demerger are unavailable. However, the new entity will mirror the shareholding pattern of NMDC.

Ind-Ra believes that the new entity will have a significantly weaker credit profile than NMDC’s, considering the steel plant is yet to commence operations and will take time to ramp up/stabilise operations, and face significantly higher competition and consequently lower profitability than the mining business. Furthermore, the new entity will have a leveraged balance sheet with the issued and proposed NCD programme; although the debt will be lower than other same-sized steel plants. The agency will continue to monitor the progress of the demerger plan and will assess the rating of the new entity after gaining clarity on the timelines and financials of the new entity.

Assessment of Business Profile of New Entity:
Following the demerger, Ind-Ra will assess the rating of the new entity on the basis of its linkages with NMDC, the government of India under Ind-Ra’s parent subsidiary linkage criteria, along with other business and financial parameters such as raw material linkages, cost position, value-added product sale, profitability, leverage, financial flexibility, among others, which are deemed necessary.

Strong Business Profile:
NMDC is the largest iron ore producer in India with 17%-18% market share during FY20. It is also among the low-cost iron ore producers globally as per the management with cost per tonne of about INR770 excluding royalties, selling expenses, etc. The company earns a higher realisation per tonne of iron ore than peers due to the enhanced quality of ore with iron content of 63%-65%, which is among the highest grades of iron ore mines.

NMDC has a reserve of 1,839.6 million metric tonnes (mt) across five mines in Chhattisgarh and two mines in Karnataka. With the extraction capacity of around 51.8 million mt at FYE20, the visibility is for more than 40 years. All the mining licences of NMDC are valid, providing significant advantage in the highly-regulated mining industry where private miners could suffer stoppage of operations due to lack of a valid licence or clearance, or have to pay a premium. The license of Chhattisgarh mines has been extended till FY36-FY37, while that of Karnataka-based mines, Donimalai is valid up to November 2038 and Kumarswami up to October 2022.

Continued Strong Financial Performance Despite Marginal Deterioration: 
NMDC’s revenue declined 3.7% yoy to INR116.99 billion in FY20 owing to 1% yoy decrease in average realisation to INR3,673/mt and around 2.5% yoy drop in sales volumes to 31.5 million mt due to the COVID-19 led lockdown in the last week of March 2020. Consequently, the company’s EBITDA declined 13% yoy to INR60 billion in FY20 and EBITDA margin to 51.3% (FY19: 57%). The EBITDA per tonne of iron ore decreased INR235 yoy to INR1,905 in FY20. NMDC had a net cash position in FY19 and FY20.

Liquidity Indicator
- Adequate: NMDC maintained a high cash balance of INR24.37 billion at FYE20 (FYE19: INR41.34 billion, FYE18: INR50.5 billion), although declining due to the continued high capex and dividend payouts. About 95% of the company’s cash balance is in the form of fixed deposits, on which it earned an interest income of INR3.7 billion in FY20 (FY19: INR4.5 billion). The company does not have repayment obligations due to the absence of long-term liabilities on its balance sheet. Also, its fund-based bank facilities of INR6.8 billion remained unutilised over the 12 months ended July 2020. NMDC has been reporting positive cash flow from operations since FY16, although decreased to INR25.2 billion in FY20 (FY19: INR45.5 billion, FY18: INR41.86 billion) due to the lower EBITDA and an increase in the working capital requirement at the end of the year.

The agency expects NMDC’s liquidity position to remain robust over FY21-FY22, backed by high free cash generation, sufficient to fund its moderate capex plan. However, a significantly high outflow by way of dividends or otherwise, leading to a reduction in free cash availability may negatively impact the ratings. NMDC plans to increase its flexibility by raising INR50 billion of NCDs for funding the capex of its steel plant in FY21; the first tranche of INR5.24 billion has been raised in August 2020. NMDC has not availed the Reserve Bank of India-prescribed debt moratorium.

Low Regulatory Risk Being a Public Sector Undertaking (PSU):
 NMDC as a PSU is eligible for the preferential treatment under the amended Mines and Minerals (Development and Regulation) Act, 2015. This enables the renewal of its existing mining licences which are expiring in March 2020. The Act also gives special powers to the government to allocate mines and renew mining licences of PSUs. NMDC had renewed the licence for its Donimalai mine for another 20 years in November 2018 with the intervention of government and stay order from the High Court, though the company has halted production at the mine since November 2018 due to the matter being heard at the tribunal. NMDC’s mines in Chhattisgarh also were renewed for 20 years with no requirement to pay a premium. Furthermore, NMDC has been allotted two coal mines in Jharkhand, with a combined mining capacity of 10mtpa.

Government Ownership:
NMDC is 69.65%-owned by the government of India and is a Navaratna under the administrative control of the Ministry of Steel. While there are no instances of financial support by the government in the past, the above facts and the special provision made for the preferential treatment to be given to PSUs for the renewal and allocation of mines indicates that the government would extend its support to NMDC, if required.

Large Capex Plan:
 NMDC has a planned capex of around INR18.6 billion in FY21, which is mainly towards setting up of the Chhattisgarh-based steel plant. The company incurred capex of INR24 billion in FY20 and is likely to incur lower-than-planned capex further due to the slow execution. The company expects to commence operations at the steel plant from 4QFY21. There has been a significant delay in the completion of capex, resulting in a cost overrun of around INR76 billion. Considering the subdued demand of steel, stiff competition from large steel players in the flat steel segment and no track record of operating a steel plant, the ramp up of production could be slow over FY21-FY22.

NMDC did not borrow any term loan during FY19-FY20, due to the presence of sufficient cash accruals and the deferment and slowdown of capex. It is planning to raise INR50 billion in FY21, although the cash balance in FY20 would be sufficient for other major capex over the year towards a slurry pipeline and screening plant at the mines.


RATING SENSITIVITIES

For issuer rating and bank facilities:

Negative: Higher-than-expected debt-led capex and/or deterioration in free cash leading to a significant increase in the net leverage above 1.5x on a sustained basis would be negative for the ratings. Furthermore, regulatory intervention leading to the non-renewal of mining lease or loss of the PSU status would be negative for the ratings.

For NCD rating:
The RWN indicates that the ratings may be either affirmed or downgraded upon resolution. Ind-Ra will resolve the rating watch by May 2021, by when there would be clarity on the demerger and financial profile of the new entity post the scheme of demerger. In case of demerger, the rating could be materially impacted and downgraded by multiple notches based on Ind-Ra’s assessment of the steel business.


COMPANY PROFILE

NMDC is a Navratna public sector enterprise engaged in the mining of iron ore. The company is also engaged in the production and sale of sponge iron as well as pellets, and generation and sale of wind power. 

FINANCIAL SUMMARY
 

Particulars

FY20

FY19

Net revenue (INR billion)

116.99

121.52

EBITDAR (INR billion)

60.02

69.24

EBITDAR margin (%)

51.3

57.0

EBITDAR interest coverage (x)

607.5

171.7

Gross adjusted leverage (x)

0.1

0.1

Source: NMDC, Ind-Ra


RATING HISTORY

Instrument Type

Current Rating/Outlook/Rating Watch

Historical Rating/Outlook

Rating Type

Rated Limits (billion)

Rating/Outlook

31 March 2020

30 May 2019

18 April 2018

Issuer rating

Long-term

-

IND AAA/Stable

IND AAA/Stable

IND AAA/Stable

IND AAA/Stable

Fund-based limits

Long-term/Short-term

INR0.5

IND AAA/Stable/IND A1+

IND AAA/Stable/IND A1+

IND AAA/Stable/IND A1+

IND AAA/Stable/IND A1+

NCDs

Long-term

INR50

IND AAA/RWN

Provisional IND AAA/Stable

-

-

Non-fund-based limits

Long-term/Short-term

INR24.5

IND AAA/Stable/IND A1+

IND AAA/Stable/IND A1+

IND AAA/Stable/IND A1+

IND AAA/Stable/IND A1+


COMPLEXITY LEVEL OF INSTRUMENTS

For details on the complexity level of the instruments, 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.

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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. 

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Analyst Names

  • Primary Analyst

    Rohit Sadaka

    Director
    India Ratings and Research Pvt Ltd Room no - 1201, 12th Floor, OM Towers, 32 Chowringhee Road, Kolkata-700071, India
    +91 33 40302503

    Media Relation

    Ankur Dahiya

    Manager – Corporate Communication
    +91 22 40356121