KEY RATING DRIVERS
Domestic Leadership: The ratings reflect SAIL's leadership in the domestic steel industry with an established brand, country-wide sales network and presence in almost the entire range of mild steel products.
EBITDA/t Likely to Improve: Ind-Ra expects SAIL's EBITDA/t to increase to INR5,500-INR6,000 in FY16 and further over FY17-FY18 driven by a) improved net sales realisation as the product mix changes towards higher value-added products b) better absorption of fixed costs (primarily employee cost) as volume picks up post capacity expansion and c) an improvement in the techno-economic parameters such as coke rate (9MFY15: 508kg/thm, 9MFY14: 515kg/thm), specific energy consumption (6.54Gcal/tcs; 6.58Gcal/tcs) and coal dust injection rate (55kg/thm; 51.4kg/thm). Also, a decline in global coking coal prices will boost EBITDA/t as SAIL imports 80% of coking coal. EBITDA/t for 9MFY15 improving to INR4,300/t (9MFY14: INR3,404/t) is a positive.
Process Improvement: As the company's new capacity is advanced and comes with a high degree of mechanisation and improved processes (basic oxygen furnace vs twin hearth furnace and continuous casting vs ingot teeming), a further improvement in operating parameters and accordingly in EBITDA/t is likely. Additionally, the installation of top pressure recovery turbines at major blast furnaces is likely to increase the share of captive power generation, thereby reducing the overall cost of production.
Capex Likely to be Completed by FY17: SAIL is undertaking capex of INR618.7bn for upgradation (INR227.4bn) and expansion (INR391.3bn) of its facilities. An additional INR102.6bn has been earmarked for augmenting raw material availability, which is only partially complete. At end-December 2014, INR570.6bn of capex related to upgradation and expansion was completed. The benefits of this capex are likely to be visible in FY16 and FY17. Over FY16-FY17, Ind-Ra estimates total capex of INR165bn to be funded through a debt:equity ratio of 50:50, thus limiting further long-term debt draw-down.
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Credit Metrics to Improve FY16 Onwards: The decline in the EBITDA to INR39bn in FY14 (FY13: INR46bn) along with the debt draw-down for the on-going capex led to the net leverage (net debt/EBITDA) increasing to 5.7x from 3.9x. However, the leverage is likely to moderate with the likely EBITDA improvement and the limited additional debt draw-down over the next two years. Ind-Ra expects SAIL's leverage to moderate below 4.5x in FY16, which though higher for its rating category, will be better than its peers. The agency believes the company is now in a better position to handle the higher leverage as its capex is largely complete and the benefits from the upgradation and expansion will show results.
Utilisation to Remain Low: The Negative Outlook reflects Ind-Ra expectation of a muted pick-up in demand as the industry continues to grapple with domestic overcapacity leading to a low utilisation level and cheap imports from China and other countries. This will add to pressure on realisations. Additionally, the full benefits of the upgradation and capacity expansion are yet to be seen through in the company's operating performance. Ind-Ra expects a gradual pick-up in volumes on increasing spend on infrastructure by the government and growth in the auto sector, among other reasons.
Raw Material Pricing Risk: SAIL is backward integrated with self-sufficiency in iron ore reserves, thus is protected from volatility in iron ore prices. However, the contribution to District Mineral Foundation, as outlined in the MMDR Act 2015, could result in an additional cost of INR200/t-INR300/t.
Also, lack of self-sufficiency in coking coal remains a risk, as SAIL imports a major part of coking coal requirements which, coupled with negligible exports, exposes it to forex risks.
Strong Liquidity: SAIL's liquidity is adequate with cash balance of close to INR20bn at FYE15 (FYE14: INR28.5bn, FYE13: INR38.5bn), though it has declined due to the on-going capex. It also has fund-based working capital limits of INR45bn. Ind-Ra believes the company will meet the maturities due over the next two years (FY16: INR21.93bn, FY17: INR24.55bn) comfortably, based on its healthy cash flow from operations if EBITDA/t and volume off-take improve.
Strong Financial Support: The government of India owns 75% of SAIL and has demonstrated strong financial support. The 'Maharatna' status of the company provides it considerable financial and operational autonomy.
RATING SENSITIVITIES
In line with Ind-Ra's 'Parent Subsidiary Linkage' methodology, SAIL's ratings benefit from the potential support of the Indian government, if required.
SAIL's rating could be downgraded if its net financial leverage is sustained above 4.5x from FY16 on project cost or time overruns and/or on lower-than-expected volume off-take and/or lower-than expected EBITDA/t. Additionally, any weakening of linkages with the government could be negative for the ratings.
COMPANY PROFILE
SAIL is India's leading steel producer with a 16% (FY14) share in domestic crude steel production. Its crude steel capacity will increase to 21.4mt from the existing 13.5mt. During 9MFY15, SAIL had revenue of INR341.2bn, EBITDA of INR36.7bn and PAT of INR17.5bn and crude steel and saleable steel production of 10.19mt and 9.4mt, respectively.
SAIL's ratings are as follows:
- Long-Term Issuer Rating: affirmed at 'IND AAA'; Outlook Negative
- INR45bn fund-based working capital limits: affirmed at 'IND AAA'/Negative
- INR70bn long-term non-fund-based bank limits: affirmed at 'IND AAA'/Negative
- INR20bn non-fund-based working capital limits: affirmed at 'IND A1+'
- INR20bn long-term bank loan: affirmed at 'IND AAA'/Negative
- INR150bn long-term bond programme: affirmed at 'IND AAA' /Negative
- INR60bn short-term debt/commercial paper programme: affirmed at 'IND A1+'
- INR10bn medium-term debt programme - public deposit: affirmed at 'IND tAAA'/Negative
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