By Rohit Sadaka

India Ratings and Research (Ind-Ra) has affirmed NMDC Limited’s Long-Term Issuer Rating at ‘IND AAA’. The Outlook is Stable. The instrument-wise rating actions are given below:

Instrument Type

ISIN

Date of Issuance

Coupon Rate

Maturity Date

Size of Issue (billion)

Rating/ Rating Watch/Outlook

Rating Action

Non-fund-based limits

-

-

-

-

INR24.0 (reduced from INR24.5)

IND AAA/Stable/IND A1+

Affirmed

Fund-based limits

-

-

-

-

INR1.0 (increased from INR0.5)

IND AAA/Stable/IND A1+

Affirmed

Proposed non-convertible debentures
(NCDs)*

-

-

-

-

INR44.76

IND AAA/RWN

Assigned final rating and maintained on Rating Watch Negative (RWN)

NCD

INE584A08010

28 August 2020

7.3%

28 August 2025

INR5.24

IND AAA/RWN

Maintained on RWN

*The final rating has been assigned on the basis of the assumption that the terms and condition for the proposed NCD will be in line with those of the issued NCDs.

The NCD rating has been maintained on RWN in view of the pending demerger of NMDC Iron & Steel Plant (NISP), which is based in Nagarnar, from NMDC and its transfer to a new entity, which shall mirror the shareholding structure of NMDC. Furthermore, the assets and liabilities of NISP 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. Following the demerger, Ind-Ra will assess the rating of the new entity on the basis of its standalone business and financial profile which may, inter alia, include the benefits accruing on account of its raw material linkages with NMDC and potential support, if any, from the government of India. However, given the stated intent to divest a majority stake to a strategic partner, government’s stake is likely to become diluted, which will have an important bearing on Ind-Ra’s assessment of parental support. Ind-Ra will resolve the RWN on the completion of the demerger and expects the NCDs to be rated ‘IND A’ or below.

 

Ind-Ra notes the presence of (i) a demerger event consent clause in the final term sheet, stating the proposed demerger of NISP 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

Strong Business Profile: NMDC is the largest iron ore producer in India, with a market share of around 29% (FY20: 17%-18%) based on merchant mining production during FY21. As per the management, it is also among the low-cost iron ore producers globally, with cost per tonne (excluding statutory levies) of about INR829/tonne in FY21 (FY20: INR935/tonne). 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 1,776.6 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 FYE21, the visibility is for more than 34 years. All the mining licences of NMDC are valid, providing significant advantage in the highly-regulated mining industry, wherein private miners could face stoppage of operations due to the lack of a valid licence or clearance, or have to pay a high premium. The license of Chhattisgarh mines has been extended till FY35-FY37; meanwhile, the license of the Karnataka-based mines, Donimalai is valid up to November 2038, and Kumarswami up to October 2022.

Continued Strong Financial Performance in FY21 Despite COVID:  NMDC’s revenue increased 31.4% yoy to INR153.70 billion in FY21 despite COVID-19-led disruptions and the Donimalai mine being non-operational for the most part of the year (due to regulatory issues) The revenue grew owing to an increase in the average realisation to INR4,581/mt (FY20: INR3,671/mt) and growth in the sales volumes to 33.25MT (FY20: 31.51MT), resulting from higher output from other mines. Consequently, the company’s EBITDA increased by 46% yoy to INR87.96 billion, and the EBITDA margin rose to 57.2% (FY20: 51.4%). The EBITDA per tonne of iron ore increased by INR738/MT yoy to INR2,645/MT in FY21. NMDC continued to have a net cash position in FY21. The interest coverage (EBITDA/Interest cost) remained high at 608x in FY21 (FY20: 523x).

Proposed Demerger of Steel Plant: NMDC’s board has approved the demerger of NSP into a separate company, which the management has articulated could take around four-to-five months post obtaining the necessary approvals from the Securities and Exchange Board of India and stock exchanges. The company has spent around INR187 billion till date out of the total planned capex of INR219 billion to set up a three million tonne-steel plant at Chhattisgarh; the management expect the plant to commence operations from 4QFY22. The capex so far has mainly been funded by internal accruals, with NMDC raising debt of only INR50 billion, which will be transferred to the new entity on the demerger. Though the broad terms of the scheme of demerger are available, the applicability of the scheme and the stage at which the plant will be transferred remain uncertain. 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 would witness significantly higher competition, and consequently, lower profitability than the mining business. Though the company will benefit from the strong demand for steel and the existing price realisation levels, it will also face stiff competition from large steel players in the flat steel segment, as it does not have any track record of operating a steel plant. Furthermore, the new entity will have a leveraged balance sheet, with net leverage of around 3.5x-4.0x in the initial years, considering issued and proposed NCD programme/bank debt of INR50 billion and capacity utilisation of 65%-70%; however, the debt will be lower than that of other similar-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.

Liquidity Indicator - Superior: Despite continued high capex and dividend payouts, NMDC’s free cash balance remained high and rose to INR58.06 billion at FYE21 (FYE20: INR23.84 billion), due to strong operational cash flow generation. About 95% of the company’s cash balance is in the form of fixed deposits, on which it earned an interest income of INR2.4 billion in FY21 (FY20: INR3.7 billion; FY19: INR4.5 billion). The company has limited repayment obligations over FY22-FY23. Also, its fund-based bank facilities of INR6.8 billion remained unutilised for the most part of FY21 and continued to be unutilised at end-1QFY22.  NMDC’s cash flows from operations have remained positive since FY16 and rose to INR75.5 billion in FY21 (FY20: INR24.1 billion) owing to the increase in the EBITDA. 

The agency expects NMDC’s liquidity position to remain robust over FY22-FY23, as its high free cash generation would be sufficient to fund its moderate capex plans. 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 over FY21-FY22; the first tranche of INR5.24 billion was raised in August 2020. NMDC did not avail the Reserve Bank of India-prescribed debt moratorium in FY21.

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 enabled the renewal of its mining licences that had expired 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 had halted production at the mine since November 2018 due to the matter being heard at the tribunal. The operations at the mine resumed in February 2021. NMDC’s mines in Chhattisgarh also were renewed for 20 years in December 2019. Furthermore, NMDC has been allotted two coal mines in Jharkhand, with a combined mining capacity of 10 million tonnes per annum. However, as per the MMDR Amendment Act – 2021, NMDC will have to pay an additional premium (1.5 times of royalty ie. 22.5% effectively based on current iron ore royalty of 15%) on all the mines (other than Kumaraswamy mines) and the same is likely to be prospective in nature i.e. after the commencement of the Mines and Minerals (development and Regulation) Amendment Act, 2021.


RATING SENSITIVITIES

For Issuer Rating and Bank Facilities:

 

Negative: Higher-than-expected debt-led capex and/or deterioration in the free cash flow, leading to the net leverage exceeding 1.5x, on a sustained basis, would be negative for the ratings. Furthermore, any 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 once the agency receives clarity on the demerger and the 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. 

CONSOLIDATED FINANCIAL SUMMARY 

Particulars

FY21

FY20

Net revenue (INR billion)

153.70

116.99

EBITDA (INR billion)

87.96

60.10

EBITDA margin (%)

57.20

51.40

EBITDA interest coverage (x)

523

608

Net adjusted leverage (x)

Negative

Negative

Source: Company, Ind-Ra


RATING HISTORY

Instrument Type

Current Rating/Outlook

Historical Rating/Outlook

Rating Type

Rated Limits (billion)

Rating/Outlook/Watch

8 September 2020

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

IND AAA/Stable

Fund-based limits

Long-term/Short-term

INR1.0

IND AAA/Stable/IND A1+

IND AAA/Stable/IND A1+

IND AAA/Stable/IND A1+

IND AAA/Stable/IND A1+

IND AAA/Stable/IND A1+

NCD

Long-term

INR50

IND AAA/RWN

IND AAA/RWN

Provisional IND AAA/Stable

-

-

Non-fund-based limits

Long-term/Short-term

INR24.0

IND AAA/Stable/IND A1+

IND AAA/Stable/IND A1+

IND AAA/Stable/IND A1+

IND AAA/Stable/IND A1+

IND AAA/Stable/IND A1+


COMPLEXITY LEVEL OF INSTRUMENTS

Instrument Type

Complexity Indicator

Non-fund-based limits

Low

Fund based limits

Low

NCD

Low

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.

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. 

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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