India Ratings & Research (Ind-Ra) has revised Rashtriya Ispat Nigam (RINL) outlook to negative from stable while affirming its long-term issuer rating at 'AA'.
The outlook revision reflects uncertainties associated with the deleveraging of RINL's balance sheet after the expected completion of its on-going capex in FY16 (year end March). The affirmation reflects the fact that greater-than-expected financial risk has been mitigated by improving business risk profile as witnessed in the lower execution risk from near completion of its capex, a likely significant jump in its capacity and the prospective improvement in its profitability due to economies of scale and commissioning of its downstream facilities.
The ratings are supported by RINL's strong market position in the long steel segment, expected support from RINL's 100% owner, the government of India (if required) and adequate financial flexibility to access bank and capital market funding. The company had cash and cash equivalents of Rs 10.7 billion and Rs 40 billion of undrawn working capital limits as on Dec. 31, 2013. Term loans to the extent of Rs 16.3 billion are maturing in FY15, and are likely to be refinanced by long-term bonds or debentures.
RINL has incurred nearly Rs 130 billion-Rs 140 billion on its expansion and modernisation project and lined up capex and investments worth Rs 60 billion-Rs 70 billion over the next three to four years. Blast furnaces are fully commissioned, and RINL is awaiting commissioning of its downstream facilities along with power plants. In the absence of a fresh equity infusion, the capex is being fully funded by internal cash reserves and debt. While the capacity expansion to 6.3-7.3 metric tonne per annum (mtpa) from 3mtpa in Vizag is nearing completion, the stabilisation and full ramp up of production could take another two years.
Sizeable cash outflows due to capex and redemption of preference shares continued during FY13-FY14, while inflows were subdued on account of project delays and weak demand for steel products in India resulting in net adjusted leverage weakening to 5.7x for 1HFY14 (FY12: 2.6x).
