MSPL Limited

March 15, 2019

Summary of rated instruments Previous Rated Amount Current Rated Amount Instrument* Rating Action (Rs. crore) (Rs. crore) [ICRA]A-; upgraded from [ICRA]BBB+; Fund-based – Term Loans 445.0 285.0 outlook revised from Positive to Stable [ICRA]A-; upgraded from [ICRA]BBB+; Fund-based – Cash Credit 315.0 200.0 outlook revised from Positive to Stable [ICRA]A-; upgraded from [ICRA]BBB+; Unallocated 0.0 275.0 outlook revised from Positive to Stable Non-fund Based 40.0 40.0 [ICRA]A2+; upgraded from [ICRA]A2 Total 800.0 800.0 *Instrument details are provided in Annexure-1

Rationale For arriving at the ratings, ICRA has taken a consolidated view of MSPL Limited (MSPL), along with its subsidiaries – MSPL Maritime Pte Limited (MMPL) and its step-down subsidiary MSPL Diamond Pte Limited (MDPL), on account of significant financial linkages between the entities, including the corporate guarantee extended by MSPL on behalf of its subsidiary’s borrowings.

The rating upgrade takes into consideration the higher-than-anticipated growth in MSPL’s revenues and profits during the first nine months of the current fiscal leading to a considerable improvement in its debt coverage indicators. The same is likely to continue in the near to medium term, supported by favourable movement in the prices of iron ore and pellets. Further, the ratings factor in the captive mines won by MSPL in the recent auction, which is expected to provide assured supply of iron ore for the pellet plant over the long-term. Operationalisation of the mines in a timely manner, however, remains to be seen. The ratings continue to take comfort from MSPL’s operation of one of Karnataka’s largest private sector mines with adequate reserves of good-quality iron ore and the considerable wind energy generation capacity of 127.8 MW spread across Karnataka, Maharashtra and Gujarat, which augment revenues and cash flows. The ratings also take into account the high-margin nature of the mining business and demand from regional steel manufacturers supporting the domestic prices of iron ore in Karnataka. Further, the ratings derive comfort from the significant amount of investments maintained by the company and the established track record of the Baldota Group spanning over six decades in the iron ore mining industry.

The ratings, however, continue to be constrained by MSPL’s high consolidated debt position with significant debt servicing requirements in the medium term. The ratings take into account the modest performance of the shipping business with the dry bulk charter rates being inadequate to cover its operational and financial obligations. MDPL will continue to rely on the funding from MSPL for timely medium-term debt servicing, given its ballooning debt repayment structure. The company is also planning to undertake a sizeable capital expenditure (capex) programme of over Rs. 500 crore, over the next two years, for the development of mines won under the recent category-C mine auctions and an associated beneficiation plant, which could expose it to cost and time overrun risks, inherent to any project. Moreover, an additional capital outlay of ~Rs. 104 crore is envisaged towards a captive windmill project for the pellet division in FY2020, which will further limit MSPL’s free cash flows. The ratings also factor in the highly regulated nature of the iron- ore mining industry as well as the exposure of its cash accruals to volatility in iron ore and pellet prices, given the inherent cyclicality in end-user segments. These apart, the impact of variability in wind speed and grid availability on the

PLFs and the counterparty risks in the wind power segment, given the exposure to state discoms, remain a concern. ICRA also takes cognisance of MSPL’s sizeable contingent liabilities, primarily towards disputed tax claims. Any adverse development on the same would be a key rating sensitivity.

Outlook: Stable The Stable outlook reflects ICRA’s expectation that the company will be able to generate healthy cash accruals over the near to medium term supported by improved capacity utilisation of the pellet division and buoyant prices of iron ore and pellets. The outlook may be revised to Positive if the company is able sustain the healthy growth in revenues, profitability and cash generation, resulting in a meaningful reduction in the consolidated debt position of the company. Conversely, the outlook may be revised to Negative if cash accruals are lower than expected on account of unfavourable movement in prices of iron ore or dry bulk charter rates or if any unexpected major debt-funded capital expenditure, or stretch in the working capital cycle, weakens its capital structure and liquidity position.

Credit strengths Healthy revenue growth and cash accruals expected in FY2019 - The average sales volumes of iron ore and pellets improved by 54% and 46%, respectively in the first nine months of the current fiscal. Supported by buoyant prices and demand, the capacity utilisation for the pellet division remained healthy at ~98% in 9M FY2019, as against ~56% in FY2018. This coupled with improved realisations amidst favourable demand scenario supports near-term revenue growth and profitability metrics.

Operations strengthened by mining rights for four category-C mines to be used for captive purpose - Besides, Karthikeya Mines (KM) and Lakshminarayan Mining Company (LMC), MSPL has recently won two additional category-C mines, H. G. Rangangouda (HGR) and Kahaiyalal Dudheria (KLD) during the auctions in September 2018. These captive mines are likely to generate considerable cost savings, besides providing an assured supply of raw material for the pellet division. However, operationalisation of the mines and the beneficiation plant (considering the inferior grade iron ore in the above mines), in a timely manner, remains to be seen.

Sizeable wind energy generation capacity augment revenue and cash flows - MSPL has sizeable a wind energy generation capacity of 127.8 MW through wind assets in Maharashtra, Gujarat and Karnataka. The generations from the assets are sold to corresponding state discoms.

Healthy investments maintained by the company - MSPL maintains significant investments in market / unquoted instruments, which support its liquidity and financial flexibility.

Established track record of the Baldota Group in the iron ore mining industry - MSPL operates one of the largest private sector mines in the Bellary district of Karnataka, the Vyasanakere Iron Ore Mine (VIOM), with adequate reserves of good- quality iron ore. ICRA takes comfort from the considerable experience of the promoters in the sector.

Credit challenges Weak financial performance of MSPL’s shipping subsidiary - MSPL Maritime Pte Limited (MMPL) functions as a holding company for the subsidiary, MSPL Diamonds Pte Limited (MDPL), which owns and operates four post-Panamax vessels. Continued weak global shipping scenario resulted in MMPL registering net losses over the years, leading to weak debt protection metrics. To fund the losses and maintain timely debt servicing, MSPL has advanced funds over the years totalling to ~USD 122 million as on December 31, 2018. Moreover, the recent rupee depreciation and increasing interest rates have accentuated the funding requirement for servicing of the foreign currency loans availed in MDPL.

Significant capital expenditure plan and sizeable repayment obligations on a consolidated level - Although the capital structure and coverage indicators witnessed considerable improvement in the current fiscal, the repayment obligations on a consolidated level remain significant in the medium term, considering the ballooning repayment structure of the loan in the shipping subsidiary. Moreover, sizeable capex plan for the development of the four new captive mines along with the associated beneficiation plant and the captive windmill project proposed to be set up over the next two years may have additional impact on the capital structure and free cash generation in the medium term.

Risks arising from operating in the highly regulated iron ore mining industry with margins exposed to volatile iron ore prices - MSPL’s earnings from the mining business remains volatile, as it is exposed to fluctuations in the prices of iron ore and any changes to the regulatory framework (as witnessed by the mining restriction in Karnataka in the past and in Goa recently). Moreover, additional supply with the recent auction of category-C mines and the enhancement of the mining cap to 35 MMTPA in Karnataka, could limit the upward price movement over the medium term.

Impact of variability in wind speed and grid availability on the PLFs and counterparty risk - The credit profile is constrained by the risks inherent to wind power generation, namely seasonality in generation of wind power and counterparty risk associated with timely realisation of dues from state discoms.

Liquidity position MSPL’s liquidity position remained comfortable as reflected by high free cash flows of Rs. 291.6 crore and healthy liquid investments and cash balances of ~Rs. 127.7 crore as on December 31, 2018. Notwithstanding a substantial capex outgo in the near term towards the captive mines and wind mill and the sizeable debt repayment obligations on a consolidated level over the medium term, MSPL’s liquidity position is likely to remain comfortable, supported by healthy growth in cash accruals and sanction of fresh term loans for the capex. Besides, MSPL maintains sizeable investments in market / unquoted instruments, which amounted to Rs. 396.4 crore as on December 31, 2018.

Analytical approach Analytical Approach Comments Rating Methodology for Mining Entities Rating Methodology for Wind Power Producers Applicable Rating Methodologies Rating Methodology for Entities in the Shipping Industry Corporate Credit Rating Methodology Parent/Group Support Not Applicable Consolidation / Standalone The ratings are based on the consolidated financial profile of the entity

About the company MSPL Limited is the flagship company of the Karnataka-based Baldota Group, and was promoted by the Late A. H. Baldota in 1962. The company is managed by Mr. Narendrakumar Baldota and his two sons. The Group has footprints in diverse businesses such as iron and steel, renewable energy, shipping and logistics, and industrial gases. MSPL operates one of the largest private sector mines in Bellary district, Karnataka, the Vyasanakere Iron Ore Mine (VIOM). Spread across 348 Ha, VIOM is a fully-mechanised open-cast mine that commenced operation in 1962. MSPL also has an iron- pellet manufacturing capacity of 1.2 MTPA and an installed wind-power generation capacity of 127.28 MW with wind assets in Maharashtra, Gujarat and Karnataka. MSPL is an ISO 9001:2000, ISO 14001:1996 and OHSAS 18001:1999 certified company.

In FY2018, on a standalone level, the company reported a net profit of Rs. 119.9 crore on an operating income (OI) of Rs. 918.2 crore compared to a net profit of Rs. 167.6 crore on an OI of Rs. 788.2 crore in the previous year. Based on the provisional numbers for nine months of FY2019, it reported a net profit of Rs. 313.4 crore on an OI of Rs. 983.8 crore.

Key financial indicators (Standalone)

FY2017 FY2018

Operating Income (Rs. crore) 788.2 918.2 PAT (Rs. crore) 167.6 119.9 OPBDIT/ OI (%) 27.6% 34.3% RoCE (%) 8.9% 15.9%

Total Debt/ TNW (times) 0.9 0.6 Total Debt/ OPBDIT (times) 4.3 2.2 Interest Coverage (times) 2.1 3.7

Key financial indicators (Consolidated)

FY2017 FY2018

Operating Income (Rs. crore) 886.7 1,032.3 PAT (Rs. crore) 89.2 73.6 OPBDIT/ OI (%) 26.4% 35.3% RoCE (%) 10.1% 7.1%

Total Debt/ TNW (times) 1.9 1.4 Total Debt/ OPBDIT (times) 7.7 4.2 Interest Coverage (times) 1.5 2.9 * The consolidated financial statements of the Group include subsidiaries (including step-down subsidiary) - MSPL Maritime Pte Limited, MSPL Diamond Pte Limited, Ace Maritime Pte. Limited, Aaress Iron & Steel Limited and P. Venganna Setty & Bros.

Status of non-cooperation with previous CRA: On January 29, 2018, CRISIL has in its rationale highlighted that the ratings continue to be 'CRISIL B/Stable/Issuer not cooperating'. CRISIL has withdrawn its rating on the long-term bank facilities of MSPL at the entity's request and receipt of no objection certificate from State Bank of India.

Any other information: None

Rating history for last three years: Chronology of Rating History for the Current Rating (FY2019) past 3 years Amount Amount O/s as Date & Rated on Dec 31, Date Date Date & Rating in Rating in (Rs. 2018 &Rating &Rating FY2018 FY2017 Instrument Type crore) (Rs. crore) Mar 2019 Oct 2018 Jan 2018 Sep 2017 Sep 2016 1 Term Loans Long 285.0 279.1 [ICRA]A- [ICRA]BBB+ [ICRA]BBB [ICRA]BBB- [ICRA]BBB- Term (Stable) (Positive) (Positive) (Stable) (Negative) 2 Cash Credit Long 200.0 - [ICRA]A- [ICRA]BBB+ [ICRA]BBB [ICRA]BBB- [ICRA]BBB- Term (Stable) (Positive) (Positive) (Stable) (Negative) 3 Unallocated Long 275.0 - [ICRA]A- - - - - Term (Stable) 4 Non fund- Short 40.0 - [ICRA]A2+ [ICRA]A2 [ICRA]A3+ [ICRA]A3 [ICRA]A3 based Term

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 www.icra.in

Annexure-1: Instrument Details Date of Issuance / Coupon Maturity Amount Rated Current Rating and ISIN No Instrument Name Sanction Rate Date (Rs. crore) Outlook NA Term Loans FY2013 - FY2026 285.0 [ICRA]A- (Stable) NA Cash Credit - - - 200.0 [ICRA]A- (Stable) NA Unallocated - - - 275.0 [ICRA]A- (Stable) NA Non-fund Based - - - 40.0 [ICRA]A2+ Source: MSPL

ANALYST CONTACTS Jayanta Roy R Srinivasan +91 3371501120 +91 44 45964315 [email protected] [email protected]

Ritika Periwal +91 80 49225562 [email protected]

RELATIONSHIP CONTACT Jayanta Chatterjee +91 80 4332 6401 [email protected]

MEDIA AND PUBLIC RELATIONS CONTACT

Ms. Naznin Prodhani Tel: +91 124 4545 860 [email protected]

Helpline for business queries:

+91-9354738909 (open Monday to Friday, from 9:30 am to 6 pm) [email protected]

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