** Commentary from IND-RATINGS **
The demerger of Nagarnar-based NMDC Iron & Steel Plant (NISP) from NMDC and its transfer to NSL was approved by all authorities on 6 October 2022. The appointed date of the scheme is 1 April 2021 and the effective date is 13 October 2022. NSL mirrors the shareholding structure of NMDC (government of India’s (GoI) shareholding of 60.79%, public shareholding of 39.21%) and shall be listed on BSE Ltd, National Stock Exchange of India Limited and Calcutta Stock Exchange. Furthermore, the formalities for the transfer of NISP’s assets and liabilities to NSL on a going concern basis as on the effective date of the demerger scheme is under process. The liability towards the NCDs issued by NMDC in August 2020 has been transferred to NSL, pending listing formalities.
There is an ongoing disinvestment of the GoI’s stake in NSL. The GoI shall divest its 50.79% shareholding in NSL, along with management control to a strategic buyer through a two-stage, competitive bidding process. A preliminary information memorandum and a request for expression of interest for the interested bidders was floated on 1 December 2022. As per the first stage, multiple expressions of interest were received on 27 January 2023. The second stage is under process. Subsequently, the GoI’s remaining 10% stake in NSL shall be offered to NMDC. With this proposed arrangement, NSL shall forego all the associated benefits allowed due to a public sector undertaking (PSU) status, which shall have a material bearing on the rating assessment. Further, the industry positioning and financial strength of the new buyer shall also impact the rating.
Considering the timeline for the process is uncertain, Ind-Ra will treat the disinvestment as an event and review the rating on receiving clarity on the new strategic buyer and its financial, operational and strategic linkages with NSL post the conclusion of the disinvestment under process.
Key Rating Drivers
Advanced Stage of Operations; Favorable Funding Pattern: The steel plant is in the advanced stage of implementation and likely to commence operations in 1QFY24. Of the total project cost of INR219.40 billion, 97.5% was incurred as of end-October 2022. The total capex has been funded by debt of INR29.26 billion till October 2022 and has an undisbursed loan of INR20.74 billion for meeting the balance expenditure and support liquidity post the commencement of operations, as the capex required is lower than the undisbursed amount. Ind-Ra estimates the debt/equity ratio to be favourable at 0.3x compared with other steel projects, requiring a substantially high proportion of debt funding.
Strengthening of NSL’s Business Profile: The proposed steel plant is fully integrated, except for captive iron ore mines for which it has a long-term tie-up with NMDC, assuring 100% availability of iron ore. The proximity to iron ore mines shall result in significant logistics cost savings. Furthermore, leveraging on NMDC’s long-term established relations with suppliers, NSL has an arrangement with coking coal suppliers assuring around 40% of the coking coal requirement is met. The balance shall be arranged partially by centralised quarterly procurement channels for key PSUs. Additionally, the plant’s operations shall be supported by around 25% captive power generation and the balance shall be procured from the state grid. NSL will be producing value-added flat products (hot-rolled coils), earning a relatively higher profitability than commodity products. MECON Limited has been awarded the operations and maintenance of the plant during the commissioning phase and subsequent operations.
On completion of the capex, the balance sheet of the steel plant will be significantly less levered than other steel manufacturing greenfield projects as the debt component in funding is less than 25% of the project cost. Although NMDC has infused more than the required equity in NSL, it is allowed to take disbursement of the full sanctioned limit as per the term sheet as reimbursement of capex. Ind-Ra assumes the plant will be ramped up in FY25, which will be the first full year of operations.
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