MSPL Limited October 22, 2018 Summary of rated instruments Previous Rated Amount Current Rated Amount Instrument* Rating Action (Rs. crore) (Rs. crore) [ICRA]BBB+ (Positive); upgraded Fund-based – Term Loans 445.0 445.0 from [ICRA]BBB (Positive) [ICRA]BBB+ (Positive); upgraded Fund-based – Cash Credit 315.0 315.0 from [ICRA]BBB (Positive) [ICRA]A2; upgraded from Non-fund Based 40.0 40.0 [ICRA]A3+ Total 800.0 800.0 Rating action ICRA has upgraded the long-term rating assigned to the Rs. 445.0- crore1 term loans and the Rs 315.0-crore cash credit facilities of MSPL Limited (MSPL)2 from [ICRA]BBB (pronounced ICRA Triple B) to [ICRA]BBB+ (pronounced ICRA Triple B Plus). The outlook on the long-term rating is Positive. ICRA has also upgraded the short-term rating assigned to the Rs. 40.0-crore short-term non-fund based facilities of the company from [ICRA]A3+ (pronounced ICRA A Three Plus) to [ICRA]A2 (pronounced ICRA A Two). Rationale For arriving at the ratings, ICRA has taken a consolidated view of 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 ratings upgrade and the positive outlook take into consideration the improvement in MSPL’s revenues, profits and debt-coverage metrics during the current fiscal which is expected to continue in the near to medium term, supported by favourable movement in 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 of over six decades in the iron ore mining industry. 1 100 lakh = 1 crore = 10 million 2 For complete rating scale and definitions, please refer to ICRA's website www.icra.in or other ICRA Rating Publications 1 The ratings, however, continue to be constrained by the high consolidated debt position of MSPL 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 debt servicing in the medium term, given its ballooning debt repayment structure. The company is also planning to undertake a sizeable capex programme of over Rs. 500 crore over the next three years for the development of mines won under the recent category-C mine auctions and an associated beneficiation plant, which will limit free cash flows of MSPL and also would expose the company to cost and time overrun risks, inherent to any project. The ratings also factor in the inferior grades of iron ore in above mines, the highly regulated nature of the iron-ore mining industry as well as the exposure of 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 cognizance of MSPL’s sizeable contingent liabilities, primarily towards disputed tax claims. Any adverse development on the same would be a key rating sensitivity. Outlook: Positive The Positive outlook reflects ICRA’s expectation that the company will be able to generate healthy cash accruals over the next twelve to eighteen months supported by enhanced mining capacity, improved capacity utilisation of the pellet division and buoyant prices of iron ore and pellets. The ratings may be upgraded if the company is able to achieve growth in revenues, profitability and cash generation on expected lines, resulting in a meaningful reduction in the consolidated debt position of the company, aiding in achieving adequate debt protection indicators in the medium term. Conversely, the outlook may be revised to Stable if cash accruals are lower than expected with 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 the capital structure further. Credit strengths Healthy revenue growth and cash accruals expected in FY2019 – The average sales volumes of iron ore and pellets improved by 56% and 32% respectively in the first five months of the current fiscal. Supported by buoyant prices and demand, the capacity utilisation for the pellet division has been healthy at ~95% in 5m FY2019, as against ~56% in FY2018. This coupled with improved realisations amidst a favourable demand scenario supports the revenue growth and profitability metrics in the near term. Operations strengthened by the 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. Enhanced permissible annual production for iron ore and improved capacity utilisation for the pellet division - The company’s iron ore mining production cap was enhanced to 1.8 MTPA in December 2017, post the Supreme Court (SC) raising the ceiling from 30 million tone to 35 million tonne per annum for the A and B categories that it had placed on the total iron ore production in Karnataka, which support growth prospects Sizable wind-energy generation capacity augment revenue and cash flows - MSPL has sizeable 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. 2 Healthy investments maintained by the company - MSPL maintains significant investments in market / unquoted instruments which support the liquidity and financial flexibility of the company. Established track record of the Baldota Group of Companies of over six decades 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 weaknesses 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 has 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 115 million as on August 31, 2018. Moreover, recent rupee depreciation and increasing interest rates have accentuated the funding requirement for servicing of the foreign currency loans availed in MDPL. Moderately leveraged capital structure and modest coverage metrics on a consolidated level – The capital structure of the company is leveraged as reflected by a Total debt/OPBDITA of ~4 times as on March 31, 2018 on a consolidated level. Also, the company has significant debt-repayment obligations in the near term and coverage indicators remain moderate, notwithstanding the improvement in the current fiscal. Moreover, sizeable capital expenditure plan for the development of the four new captive mines along with the associated beneficiation plant proposed to be setup over the next 2 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, and the exposure of margins to volatility in 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). Also, 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 of realising dues from state discoms - 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. Sizeable contingent liabilities and uncertainty over the nature and scale of future capital expenditures - MSPL has sizeable contingent liabilities, which primarily includes disputed income tax claims of Rs 530.2 crore, among others, as on March 31, 2018.