India Ratings & Research (Ind-Ra) has downgraded Usha Martin (UML) long-term issuer rating to 'A' from 'A+' and simultaneously placed it on Rating Watch Negative (RWN).

The rating action follows the cancellation of the coal block allocated to UML for captive use by the order passed by the Supreme Court of India (SC) on Sept. 24, 2014. The extraction of coal from the cancelled blocks will have to end by Mar. 31, 2015 and an additional levy of Rs 295/metric ton of coal extracted is also payable. This amount in the case of UML works out to around INR800m. Substitution of captive coal either through a coal linkage from Coal India or through import is likely to impact EBITDA to the extent of Rs 600 million to Rs 1.6 billion per annum. The overall impact of the order would be to delay the expected deleveraging to below 4x by at least an year.

The RWN reflects the fact that the extent of the impact is not entirely certain. If UML obtains a coal linkage, it will have to pay an extra cost in the range of Rs 700-Rs 1,000 per MT which will reduce EBITDA by anywhere between Rs 600 million-Rs 800 million every year. If this were to be funded by additional debt the net leverage will likely increase by 0.35x-0.45x on a consolidated basis in FY16 and FY17.

Shares of the company declined Rs 0.4, or 1.72%, to trade at Rs 22.85. The total volume of shares traded was 57,998 at the BSE (2.42 p.m., Tuesday).