RATING RATIONALE
19Aug2022
KIOCL Ltd.
Brickwork Ratings reaffirms the ratings and changes the outlook to Negative for the Bank Loan Facilities of Rs. 1050.00 Crs. of KIOCL Ltd.
Particulars| Facilities** | Amount (Rs.Crs.) | Tenure | Rating# | ||
|---|---|---|---|---|---|
| Previous | Present | Previous (28 Jul 2021) |
Present | ||
| Fund Based | (5.00) | (5.00) | Long Term |
BWR AA-/Stable
Assignment |
BWR AA -
/Negative Reaffirmation and change in Outlook |
| (6.00) | (6.00) | ||||
| (4.00) | (4.00) | ||||
| Non Fund Based | 1050.00 | 1050.00 | Short Term |
BWR A1+
Assignment |
BWR A1 +
Reaffirmation |
| (70.00) | (125.00) | ||||
| (75.00) | (30.00) | ||||
| (15.00) | (15.00) | ||||
| (15.00) | (15.00) | ||||
| Grand Total | 1050.00 | 1050.00 | (Rupees One Thousand Fifty Crores Only) | ||
**Details of Bank Loan facilities,consolidation or instruments are provided in Annexure
RATING ACTION / OUTLOOK
Brickwork Ratings (BWR) revises the outlook for KIOCL Limited (KIOCL or the company) considering the deterioration in the financial performance in Q1FY23 due to the imposition of export duty on iron ore pellets at 45%. The company’s ratings were reaffirmed at BWR AA- and BWR A1+ considering factors such as the established track record, experienced and qualified management, minimal external debt, satisfactory financial performance up to FY22, and adequate liquidity position, coupled with high cash and bank balances in the form of term deposits. However, the company’s ratings are constrained by volatility in product prices and reliance on third-party mines, thereby leading to an increase in operating costs, exposure to currency fluctuations, and the recent imposition of export duty on the iron ore pellets. BWR notes that the operations of the pellet unit were suspended on 07 Jun 2022 and the same has been resumed from 12 Aug 2022.
The company’s outlook was revised to Negative considering the deterioration in the financial performance in Q1FY23 owing to the imposition of export duty on iron ore pellets at 45%. The outlook would be revised to Stable if the company recovers from the operating losses incurred in Q1FY23 and there is a favourable change in the export duty.
Credit Strengths:
-
Established track record and flagship company of GoI :
KIOCL Limited, a flagship company under the Ministry of Steel, Government of India (GoI), with a Mini Ratna status, was formed on 2 April 1976. KIOCL started its pellet operation in 1987 and has established a market presence in India and abroad. Currently, it is the second-largest merchant pellet plant in India with an annual capacity of 3.5 Million Tonnes Per Annum (MTPA) and utilising around 60% of the installed capacities. It is of strategic importance to the GoI as it is the fourth largest exporter of pellets from India, having a 16% to 18% share, on average, in the total pellet exports from FY21 to FY22.
-
Experienced and qualified management :
The company’s senior management has extensive experience in the iron ore mining and pellet manufacturing business, which not only improves KIOCL’s competitive position, but also provides it with an additional revenue stream in the form of mineral exploration, and Operation and Maintenance (O&M) contracts.
-
Minimal long-term debt :
Despite being in a capital-intensive sector, the company was a debt-free entity as of FY21. During FY22, the company availed term loans of Rs. 9.00 crs for the forward and backward Integration Projects to the Blast Furnace Unit. Additionally, the company has low utilization of its non-fund-based facilities.
-
Satisfactory financial performance :
During FY22, the company’s scale of operations improved by 27% from Rs. 2361.36 Crs in FY21 to Rs. 3653.45 Crs in FY22. The company reported satisfactory operating and net profit margins during FY21 and FY22. The company's tangible net worth as on 31 March 2022 was reported at Rs. 1958.28 Crs. The company had not utilized any cash credit facilities and has availed term loans of Rs.9 crs only for the forward and backward Integration Projects to the Blast Furnace Unit as of FY22. As on 31 March 2022, the cash and equivalents were reported at Rs. 1107.58 Crs. During Q1FY23, the company reported revenues of Rs. 366.24 crs and incurred net losses of Rs. 43.78 Crs. The net losses during Q1FY23 were owing to the recent imposition of the export duty on the iron ore pellets of 45%. Going forward, the company’s financial performance is a key monitorable
-
Volatility in demand price of the products being sold :
The prices of pellets are highly volatile in nature. Any sudden fall in the prices in the near term will impact the company’s profitability.
-
Susceptibility to volatility in raw material prices :
Due to the closure of a captive iron ore mine in Kudremukh in 2006, the company has to source its raw material from Chhattisgarh and Odisha, and it transports the raw materials via the rail network to Gangavaram seaport near Visakhapatnam. From there, the raw materials are transported via seaway to Mangalore. As a result, this increases the freight costs, which drags down the company’s operating margins. However, it is expected that post the commencement of mining in Devadari block in Bellary district of Karnataka in the next 1-2 years, which is currently in the advanced stage of being given clearance from the GoI and Government of Karnataka (GoK), the company will have the option to source raw material from this block, which in turn will help it reduce freight costs and consequently, increase profitability. Till then, KIOCL would remain more exposed to the risks associated with price volatility and raw material availability till the captive iron ore mine becomes operational.
-
Currency fluctuation and foreign exchange volatility :
As the company's products are being sold in international markets, the company is exposed to forex risk. However, it is partially mitigated by hedging of 85-90% of the forex exposure.
-
Imposition of the export duty on the pellets :
On 21 May 2022, the GoI imposed an export duty of 45% on the pellets, which was nil earlier. This would impact the company’s margins and financial performance in the medium term
To arrive at its ratings, BWR has relied on the company’s standalone financials. BWR has applied its rating methodology as detailed in the Rating Criteria.
RATING SENSITIVITIES
- Upward: The ratings can move upward if there is a substantial improvement in the scale of operations and profitability from the FY22 levels, the mining operations in Karnataka commence as anticipated, which would result in an improvement in the profitability levels and if the company continues to be a cash-rich with low debt-equity levels.
- Downward: The ratings can move downward if there is further decline in the financial performance and a deterioration in the debt-equity levels owing to the ongoing capex.
The company has reported an adequate liquidity position. KIOCL has no repayment obligations in FY23. During FY22 (audited), the company generated net cash accruals of Rs.344.59 Crs, and cash and cash equivalents were at Rs. 1107.58 Crs as on FY22. The company has non-fund-based limits, i.e., a letter of credit and bank guarantees, wherein the utilisation levels are less than 50% for FY22. The company availed a term debt of Rs.9 crs during FY22 for the CAPEX planned for FY23 to FY25, for which the repayment obligations would commence from Q4FY26. BWR expects that the liquidity continues to remain adequate in the medium term.
ABOUT THE ENTITYKIOCL Limited (formerly Kudremukh Iron Ore Company Limited), a flagship company under the Ministry of Steel, GoI, was formed on 2 April 1976 for mining and the beneficiation of low-grade iron ore at Kudremukh, Karnataka, India. KIOCL is classified under the Mini Ratna category. KIOCL manufactures both blast furnaces and DR-grade pellets. KIOCL has the facilities to operate a 3.5 MTPA iron-oxide pellet plant, a blast furnace unit to manufacture 2.16 lakh tonnes of PA pig iron at Mangalore, Karnataka. Apart from the manufacturing facilities, the company also operates in O&M extraction. KIOCL is a publicly listed entity, and the shares of the company are listed on the Bombay Stock Exchange (BSE), National Stock Exchange (NSE), and MSEL (Metropolitan Stock Exchange of India Limited).
KEY FINANCIAL INDICATORS (Standalone)| Key Parameters | Units |
FY 21-22 (Audited) |
FY 20-21 (Audited) |
|---|---|---|---|
| Operating Revenue | Rs.Crs. | 3006.45 | 2386.91 |
| EBITDA | Rs.Crs. | 380.13 | 361.95 |
| PAT | Rs.Crs. | 313.41 | 301.17 |
| Tangible Net Worth | Rs.Crs. | 1958.28 | 1980.36 |
| Total Debt/Tangible Net Worth | Times | Not Available | Not Available |
| Current Ratio | Times | 6.62 | 7.34 |
The terms of sanction include standard covenants normally stipulated for bank loan facilities.
NON-COOPERATION WITH PREVIOUS CREDIT RATING AGENCY
Nil
ANY OTHER INFORMATIONNil
RATING HISTORY FOR THE PREVIOUS THREE YEARS (including withdrawal and suspended)| Facilities | Current Rating (2022) | 2021 | 2020 | 2019 | |||||
|---|---|---|---|---|---|---|---|---|---|
| Type | Tenure | Amount (Rs.Crs.) |
Rating | Date | Rating | Date | Rating | Date | Rating |
| FB SubLimit | LT | (5.00) |
BWR AA-/Negative
(Reaffirmation and change in Outlook) |
28Jul2021 |
BWR AA-Stable
(Assignment) |
NA |
NA
|
NA |
NA
|
| (6.00) |
BWR AA-/Negative
(Reaffirmation and change in Outlook) |
NA |
NA
|
NA |
NA
|
NA |
NA
|
||
| (4.00) |
BWR AA-/Negative
(Reaffirmation and change in Outlook) |
NA |
NA
|
NA |
NA
|
NA |
NA
|
||
| Non Fund Based | ST | 1050.00 |
BWR A1+
(Reaffirmation) |
28Jul2021 |
BWR A1+
(Assignment) |
NA |
NA
|
NA |
NA
|
| NFB SubLimit | ST | (125.00) |
BWR A1+
(Reaffirmation) |
NA |
NA
|
NA |
NA
|
NA |
NA
|
| (30.00) |
BWR A1+
(Reaffirmation) |
NA |
NA
|
NA |
NA
|
NA |
NA
|
||
| (15.00) |
BWR A1+
(Reaffirmation) |
NA |
NA
|
NA |
NA
|
NA |
NA
|
||
| (15.00) |
BWR A1+
(Reaffirmation) |
NA |
NA
|
NA |
NA
|
NA |
NA
|
||
| Grand Total | 1050.00 | (Rupees One Thousand Fifty Crores Only) | |||||||
BWR complexity levels are meant for educating investors. The BWR complexity levels are available at www.brickworkratings.com / download / ComplexityLevels.pdf. Investors queries can be sent to info@brickworkratings.com.
Hyperlink/Reference to applicable Criteria| Analytical Contacts | |
|---|---|
|
Sowmya Yatham Manager - Ratings Board : +91 80 4040 9940 sowmya.y@brickworkratings.com |
Vipula Sharma Director - Ratings Board : +91 80 4040 9940 vipula.s@brickworkratings.com |
| 1-860-425-2742 | media@brickworkratings.com | |
| SL.No. | Name of the Bank/Lender | Type Of Facilities | Long Term(Rs.Crs.) | Short Term(Rs.Crs.) | Total(Rs.Crs.) |
|---|---|---|---|---|---|
| 1 | HDFC Bank | Letter of Credit | _ | 125.00 | 125.00 |
| Sub-Limit (BG (Sublimit of LC)) | (125.00) | ||||
| 2 | HDFC Bank | Forward Contract | _ | 25.00 | 25.00 |
| 3 | ICICI Bank | Letter of Credit | _ | 65.00 | 65.00 |
| Sub-Limit (Overdraft (Sublimit of LC)) | (5.00) | ||||
| 4 | ICICI Bank | Derivative Limit | _ | 15.00 | 15.00 |
| 5 | IndusInd Bank | Standby line of Credit (SLC) | _ | 5.00 | 5.00 |
| 6 | IndusInd Bank | Standby line of Credit (SLC) | _ | 10.00 | 10.00 |
| 7 | IndusInd Bank | Bank Guarantee | _ | 60.00 | 60.00 |
| 8 | IndusInd Bank | Letter of Credit | _ | 110.00 | 110.00 |
| 9 | IndusInd Bank | Forward Contract | _ | 15.00 | 15.00 |
| 10 | Un tied portion | BG/ILCProposed | _ | 520.00 | 520.00 |
| 11 | Yes Bank | Letter of Credit | _ | 75.00 | 75.00 |
| Sub-Limit (Bank Guarantee) | (30.00) | ||||
| Sub-Limit (Cash Credit) | (4.00) | ||||
| Sub-Limit (Packing Credit (PCFC)/ INR EPC) | (15.00) | ||||
| Sub-Limit (Post Shipment Finance ) | (15.00) | ||||
| Sub-Limit (Working Capital Demand Loan) | (6.00) | ||||
| 12 | Yes Bank | Forward Contract | _ | 25.00 | 25.00 |
| Total | 0.00 | 1050.00 | 1050.00 | ||
| TOTAL (Rupees One Thousand Fifty Crores Only) | |||||
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