Rashtriya Ispat Nigam Limited: Rating Placed Under Watch with Developing Implications

January 18, 2021

Summary of rating action Previous Rated Amount Current Rated Amount Instrument* Rating Action (Rs. crore) (Rs. crore) [ICRA]A3+ & (Placed Under Commercial Paper 2,000.00 2,000.00 Watch with Developing Programme** Implications) Total 2,000.00 2,000.00 *Instrument details are provided in Annexure-1; ** The rating of the aforementioned instrument is based on the condition that total short-term borrowings (including commercial paper, short-term debt and bank borrowings) of the company at any given point of time should not exceed the company’s drawing power or the bank sanctioned fund-based limits (whichever is lower)

Rationale On January 8, 2021, ICRA has received a written confirmation from the lenders of Rashtriya Ispat Nigam Limited (RINL) that they have approved the company’s one-time-restructuring (OTR) request and have invoked the resolution plan (RP) on December 31, 2020. This invocation has been made under the framework for resolution specified by the Reserve Bank of India (RBI) vide its circular dated August 6, 2020. Though the company has applied for loan restructuring, RINL has been servicing its debt obligations in a timely manner following the expiry of loan moratorium in end-August 2020. The rating of RINL has been placed on Watch with Developing Implications to reflect the uncertainty of the terms of the RP and the resultant impact on the credit profile of the company. The rating watch would be resolved upon successful implementation of the resolution plan within the regulatory timelines.

The rating continues to derive comfort from RINL’s healthy financial flexibility, given its status as a 100% Central Government-owned Navratna public sector undertaking (PSU), and its large scale and integrated nature of operations, which leads to a wide market reach, depth in product offerings, and a competitive marginal cost of production. The rating also factors in the significant upward revision in steel prices and steel demand in the recent months, which is expected to lead to a strong uptick in RINL’s performance in H2 FY2021, and the company’s competitive capital cost for the expansion and modernisation project. RINL’s rating is, however, constrained by the company’s inability to report profits across the business cycles, and a significant erosion of its net worth, which led to a marked deterioration in its capital structure and a rise in total outside liabilities. ICRA notes that RINL has largely funded its past losses through higher dependence on short-term borrowings, which resulted in a sizeable asset-liability mismatch, exposing the company to refinancing risks. RINL’s rating is also constrained by the company’s weak debt protection metrics on account of its sizeable debt-funded capex and loss-making operations, its lack of captive raw material sources, which expose the company to risks associated with price volatility and availability of raw materials, and the company’s sizeable proportion of semis/pig iron sale in the overall product mix, which depresses blended realisations, and tempers profit margins. Given RINL’s high fixed cost intensity of

operations1, its ability to quickly ramp up production to the peak rated capacity of 7.3 million tonne per annum (mtpa) was a crucial element of the company’s turnaround plan. However, the pace of ramp-up has been much slower than expected, which saddles the company’s profits with elevated levels of fixed cost. Going forward, RINL’s ability to become profitable at the net level, and steadily reduce the borrowing levels remain key rating drivers.

Key rating drivers and their description

Credit strengths Significant rise in steel prices and steel demand to support a strong recovery in RINL’s H2 FY2021 performance – The disruption in business for RINL’s key customers during the nationwide lockdown following the pandemic led to RINL reporting a large operating loss of Rs. 770 crore in Q1 FY2021. However, following the Unlock 1.0, and a gradual resumption to a normal operating environment, RINL’s financial performance witnessed sequential improvement, supported by a combination of rising steel prices, an increase in capacity utilisation levels, and a richer product mix. With RINL’s hot metal capacity utilisation levels increasing to 87% in December 2020 from 28% in May 2020, and finished steel capacity utilisation levels parallelly increasing to 103% in December 2020 from 13% in May 2020, ICRA expects RINL’s H2 FY2021 performance to rebound strongly (operating profit of Rs. 1,828 crore expected in H2 FY2021), which would be significantly better than H1 FY2021 (during when the company reported an operating loss of Rs. 955 crore).

Healthy financial flexibility, given its status as a 100% Central Government-owned Navratna PSU – Notwithstanding its weak financial performance, RINL has demonstrated its ability to access debt funding, across tenures, at a competitive cost. In FY2020, RINL’s weighted average cost of debt stood at around 8.6%.

Large scale and integrated nature of operations leads to a wide market reach, depth in product offerings, and a competitive marginal cost of production - RINL is in the process of increasing its liquid steelmaking capacity to 7.3 mtpa from 3 mtpa, which would establish it as the sixth largest domestic steel maker having a wide market reach. In addition to RINL’s large scale, the rating also derives comfort from the company’s vertically-integrated nature of operations, supported by crude steelmaking facilities through the blast furnace-basic oxygen furnace route, captive coke and sinter-making facilities, captive power plant, and various downstream finished long steelmaking facilities. ICRA believes that these would result in a competitive marginal cost of production as the output gradually ramps up. Moreover, having the advantage of steel production through the primary route, RINL fetches higher realisations from customers than the prevailing average market rates, which indicates superior product quality.

Competitive capital cost for the expansion and modernisation project - The budgeted completion cost for the 3.3- mtpa expansion programme is Rs. 12,291 crore, and for the 1-mtpa modernisation programme, the same is around Rs. 4,200 crore. ICRA notes that this pegs the capital cost for the 4.3-mtpa expansion and modernisation programme at around Rs. 38,282/MT, which remains at a competitive level, keeping the capital charges at a reasonable level. This would support the company’s net profitability once the production ramps up.

1 RINL suffers from the structural cost disadvantage of a high employee cost burden compared to private steelmakers

Credit challenges Inability to report profits across business cycles – RINL’s performance have been volatile over the years. Between FY2015 and FY2020, the company reported operating losses in three years, and net losses in four years. The ability of the company to come back in the black on a sustained basis would remain a key credit rating driver.

Significant erosion of net worth, which led to a marked deterioration in the capital structure and a rise in total outside liabilities – RINL’s tangible net worth declined to Rs. 1,099.8 crore as on September 30, 2020 compared to Rs. 7,352.3 crore as on March 31, 2019, registering a sharp fall of 85% in a short span. This led to a worsening in the capital structure and an increase in total outside liabilities. RINL’s gearing deteriorated to 19.4 times as on September 30, 2020, against 2.7 times as on March 31, 2019. The total outside liabilities to tangible net worth also deteriorated to 26.9 times as on September 30, 2020, against 3.7 times as on March 31, 2019. Large dependence on short-term borrowings led to a sizeable asset-liability mismatch, exposing the company to refinancing risks –RINL’s cumulative release of operating working capital in the steel business was ~Rs. 3,940.8 crore between FY2016 and H1 FY2021, whereas there was an incremental deployment of short-term/working capital borrowings accumulating to Rs. 2,939.3 crore during this period, which resulted in an asset-liability mismatch of Rs. 12,464.2 crore as on September 30, 2020. This indicates that over the years, such loans have built up largely to cover for the PSU’s loss-making operations. In this context, replacing RINL’s sizeable short-term funds with long-term funds (long-term debt/equity) remains crucial to reduce the company’s exposure to refinancing risks.

Lack of captive raw material sources expose the company to risks associated with price volatility and availability of raw materials – Iron ore and coking coal remain the principal raw materials used in steelmaking through the blast-furnace route. RINL does not have any captive iron ore or coking coal mines, which leads to a structural cost disadvantage over other large primary steel producers having raw material linkages. The company procures iron ore largely from NMDC Limited’s mines in Chhattisgarh. For coking coal, which accounts for ~30-35% of RINL’s overall cost of production, the company relies largely on imports. RINL has been allocated the 2.5-mtpa Rabodih Open Cast coal mine in Jharkhand. The mine is estimated to have reserves of 46 million tonne (mt), comprising a mix of coking and non-coking coal. Development of the mine would take around 30-36 months, and once operational, the same could lead to some savings in operating costs for RINL.

Weak debt protection metrics, which is unlikely to improve materially in the near term – RINL’s subdued profitability and increase in borrowing levels led to weak debt protection metrics. In FY2019, the interest coverage stood depressed at 1.1 times, and turned negative in FY2020 because of operating losses. RINL’s total debt to OPBITDA stood at an adverse 13.3 times in FY2019 and turned negative in FY2020. Though the company is expected to register a rebound in performance in the second half of the current fiscal, the interest cover is expected to remain stretched at around 0.5 times and total debt to OPBITDA at around 24.3 times for FY2021 full year.

Sizeable proportion of semis/pig iron sale depresses blended realisations and tempers profit margin – RINL’s finished steel capacity stands at 4.46 mtpa against which the liquid steel and saleable steel capacities stands much higher at 7.3 mtpa and 6.99 mtpa respectively. Given the capacity constraint at the finished steel lines, RINL sells

~15-25% of the output as semis/pig iron which are low value added compared to finished steel products, where margins remain higher.

Slow pace of production ramp-up to the peak capacity – Given RINL’s aggressive debt funded brownfield capacity expansion plan to more than double its steelmaking capacity to 7.3 mtpa from 3 mtpa, the company’s ability to optimally sweat the assets and realise its full revenue potential remained crucial to ensure sustainability of debt servicing from free cash flows. However, ICRA notes that there has been a prolonged delay in ramping up production, especially at the upstream facilities. Given that RINL suffers from the structural disadvantage of a high employee cost burden, leading to a high operating leverage2, the company’s ability to quickly scale up to its peak production levels remains crucial from the profitability perspective.

Liquidity position: Stretched Given RINL’s loss-making operations and limited headroom of undrawn working capital lines, its liquidity position is assessed to be stretched. In FY2021, RINL’s retained cash flows are expected remain at Rs. 1,079 crore, which is largely supported by the company’s ability to release working capital of Rs. 1,698 crore through a combination of reduction in inventory holding period and an extended credit period availed from suppliers. RINL is expected to have a capex deployment of Rs. 790 crore in FY2021, which would result in modest free cash flows of Rs. 290 crore, which would fall short of the scheduled long-term debt repayment obligations of Rs. 614 crore. Therefore, RINL would be largely dependent on bank borrowing to fund its FY2021 capex plans. That apart, RINL would also need to refinance short-term borrowings of ~Rs. 4,790 crore outstanding in its balance sheet, exposing the company to significant refinancing risks.

Rating sensitivities Positive triggers: The rating watch would be resolved upon successful implementation of the resolution plan within the regulatory timelines. The rating may be upgraded if the company’s debt servicing burden eases substantially, resulting in a sustained improvement in its debt coverage and capitalisation metrics.

Negative triggers: Pressure on RINL’s rating could arise if the resolution plan is not implemented by the lenders within the regulatory timelines. The rating may also be downgraded if the resolution plan, even though implemented, does not provide a relief commensurate with maintaining the existing ratings.

2 RINL’s employee cost as a share of the overall cost of steel production is expected to increase from 12% in FY2019 to 17% in FY2021 due to its falling production levels; RINL’s employee productivity stood at 489 MT crude steel per employee per annum in FY2019, which is substantially lower than other large private steelmakers

Analytical approach

Analytical Approach Comments Corporate Credit Rating Methodology Applicable Rating Methodologies Rating Methodology for Entities in the Ferrous Metals Industry Parent: RINL is 100% owned by the Government of India Parent/Group Support The assigned rating factors in the financial support by the Government to the rated entity, should there be a need. RINL has three subsidiaries, which do not have any operations at present. RINL has not given any financial support or corporate guarantee to these Consolidation/Standalone subsidiaries in the recent past. The balance sheet size of these three subsidiaries is negligible compared to that of RINL. The ratings are therefore based on the standalone financial profile of RINL.

About the company RINL, 100% owned by the Government of India, is a Navratna PSU operating under the administrative control of the Ministry of Steel. In FY1992, the company commissioned a 3-mtpa integrated steel plant in Vizag, specialising only in the long product segment. In April 2015, RINL completed a brownfield capacity of 3.3-mtpa, increasing the crude steel capacity to 6.3-mtpa. At present, RINL is undertaking a modernisation programme for the existing 3- mtpa facility, and is aiming to add a crude steel capacity of 1-mtpa, which would take its total installed capacity to 7.3-mtpa.

In H1 FY2021, on a provisional basis, the company reported a standalone net loss of Rs. 2,086.95 crore on an operating income of Rs. 6,462.92 crore compared to a net loss of Rs. 3,910.17 crore on an operating income of Rs. 15,920.46 crore in FY2020.

Key financial indicators (audited) Standalone Consolidated H1 FY2021 FY2018 FY2019 FY2020 FY2018 FY2019 (Provisional) Operating Income (Rs. crore) 14,463.89 20,492.03 15,920.46 6,462.92 14,370.55 20,515.83 PAT (Rs. crore) -1,369.01 96.71 -3,910.17 -2,086.95 -1,633.12 -383.22 OPBDIT/OI (%) 1.78% 7.16% -10.32% -14.78% 1.38% 6.73% RoCE (%) -5.77% 4.71% -12.55% -14.73% - 1.52%

Total Outside Liabilities/Tangible Net 3.32 3.66 9.20 26.89 3.19 3.73 Worth (times) Total Debt/OPBDIT (times) 64.69 13.36 -13.23 -11.16 84.28 14.29 Interest Coverage (times) 0.27 1.14 -1.09 -1.28 0.21 1.07 DSCR (excl. STD/ prepayments) 0.05 0.21 -0.76 -0.78 - 0.27 Source: RINL; FY2020 consolidated results not available

Status of non-cooperation with previous CRA: Not applicable

Any other information: None

Rating history for past three years Current Rating (FY2021) Rating History for the Past 3 Years Instrument Amount Outstanding Rating FY2020 FY2019 FY2018 Type Amount Rated (as on Jan 11, 2021) Jan 18, 2021 Mar 30, 2020 Feb 28, 2019 Nov 3, 2017 1 Commercial Paper Short Term Rs. 2,000 crore Nil [ICRA]A3+ & [ICRA]A3+ [ICRA]A2+ [ICRA]A2+ Amount in Rs. crore

Complexity level of the rated instrument ICRA has classified various instruments based on their complexity as "Simple", "Complex" and "Highly Complex". The classification of instruments according to their complexity levels is available on the website click here

Annexure-1: Instrument details ISIN Instrument Name Date of Issuance Coupon Maturity Amount Rated Current Rating / Sanction Rate Date (Rs. crore) and Outlook NA Commercial Paper NA NA NA 2,000.00 [ICRA]A3+ & – Undrawn Source: NSDL

Annexure-2: List of entities considered for consolidated analysis Company Name Ownership Consolidation Approach Eastern Investments Limited 51.00% Full Consolidation The Orissa Minerals Development Company Limited 50.01%* Full Consolidation The Bisra Stone Lime Company Limited 50.27%** Full Consolidation RINMOIL Ferro Alloys Private Limited 50.00% Equity Method International Coal Ventures Private Limited 25.94% Equity Method RINL Powergrid TLT Private Limited 50.00% Equity Method * Eastern Investments Limited (EIL) holds 50.01% in The Orissa Minerals Development Company Limited ** RINL (0.21%), EIL (50.01%) and Birds Jute & Exports Limited (0.05%) collectively holds 50.27 % of shareholding of The Bisra Stone Lime Company Limited

Analyst Contacts Jayanta Roy Ritabrata Ghosh +91 33 7150 1120 +91 33 7150 1107 [email protected] [email protected]

Relationship Contact L. Shivakumar +91 22 6114 3406 [email protected]

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