Crisil downgrades rating outlook on RINL's long-term debt to negative

Ratings agency Crisil has revised its rating outlook on the long-term debt of Rashtriya Ispat Nigam Ltd to negative from stable as the agency believes that the company’s business risk profile will remain under pressure over the medium term due to weak demand and subdued profitability.

Decline in profitability coupled with increased debt level has adversely impacted the debt protection measures, said Crisil. The company’s net cash accruals to total debt deteriorated to 0.06 times in 2012-13 from 0.16 times in 2011-12 and interest coverage declined to 3.0 times in 2012-13 from 5.2 times in 2011-12, Crisil said in a release today.

However, the agency has withdrawn its rating on the state-owned company’s short-term debt program as there is no amount outstanding against this instrument.

RINL recorded an operating profitability of 7.6% during Apr-Sep, which remains lower compared to its historical levels. The company's delays in commissioning of its additional capacity of 6.3 million tonne from 3 million earlier coupled with a slowdown in investments in the infrastructure and construction segment will curtail any significant improvement in its operating performance, said the agency. In addition, increased debt levels will continue to constrain RINL's debt protection metrics over the medium term.

The company's ability to ramp up utilisation of the additional capacity while improving its profitability will also remain as a key rating sensitivity factor, said the agency.

The ratings reflect RINL's established position in the domestic long steel products segment and moderate financial risk profile, marked by adequate liquidity. These rating strengths are partially offset by the company's vulnerability to volatility in prices of its key raw materials, iron ore and coking coal, and its exposure to cyclicality in the construction industry.

RINL is undertaking a capital expenditure program of Rs 13,000 crore for the 3.3 million tonne capacity expansion. Until December 2013, it had incurred about 85% of this capex, significantly funded through internal accruals. The balance major capex will be incurred by the first quarter of 2014-15, when the company is likely to commission the finished steel production section of the added capacity.

Crisil believes that RINL will fund a major portion of the remaining capex through internal accruals and its existing cash and bank balance, thereby maintaining conservative gearing levels. RINL also has adequate liquidity, backed by cash and cash equivalents of about Rs 1,050 crore as on November 30, 2013.