Long track record and experienced management

NPSPL is promoted by the Kolkata-based Atha Group. The promoters have around six decades of experience in the iron ore mining and steel business. Going forward, increased iron ore procurement from mines would reduce freight costs further as these mines are located closer to ASPL’s pellet plant. Acuité believes the vast experience of the promoters has enabled the group to build strong relationships with customers as well as suppliers, resulting in continued order flow from customers.

Sustained revenue growth

Supported by a strong rebound in steel demand post-unlocking of the economy, the group witnessed an improvement in its scale of operations, marked by revenues of Rs. 2309.52 crore in FY2022 as against Rs. 673.51 crore in FY2020, which increased at a CAGR of 50 percent over FY20–FY22. The average realisations for sponge iron, billets, and pellets have rallied sharply since FY2021, and such buoyant realisations led to robust growth in the company’s operating income in FY2022. The average realisation and sales volume of both intermediate and finished products had witnessed improvement because of rising demand from end-user segments. Further, NPSPL has started operating its Barbil iron ore mine since Q4FY21, which helped the company reduce its dependence on external supplies of iron ore, boosting the top line.
However, Acuité noted that with the softening of realisations in FY23, in tandem with a demand slowdown in the international market, the top line of the group moderated, recording a muted revenue of Rs 2067.13 crore (prov). On May 21, 2022, the Government of India (GoI) imposed a steep 45 percent duty (from nil earlier) on the export of iron ore pellets, post which pellet prices came under pressure. Although iron ore prices also declined significantly, partly cushioning the decline in pellet prices, the gross contribution level reduced from the high of FY2022, leading to a moderation in FY2023 earnings for merchant pellet makers like ASPL.

Healthy financial risk profile

The financial risk profile of the group is marked by strong net worth, comfortable gearing, and moderate debt protection metrics. The tangible net worth of the group improved to Rs. 837.66 crore (adjusted) as of March 31, 2023 (prov) from Rs. 792.79 crore as of March 31, 2022, aided by sizeable accretion to reserves and the infusion of compulsorily convertible preference shares worth Rs. 222.00 crore in FY2019, considered part of net worth. Further, Acuité has considered unsecured loans of Rs. 166.00 crore as of March 31, 2023, as quasi-equity as the management has undertaken to maintain the amount in the business over the medium term. The gearing of the group stood comfortably below unity at 0.66 times (prov) as of March 31, 2023, due to limited reliance on external debt to support the working capital requirements, as the promoters have extended significant financial support to the group via unsecured loans to cover the working capital and the debt obligations. Acuité notes that the group has been regularly incurring capex in the last few years to improve the share of value-added products in the overall revenue and profitability mix and foray into backward integration. The total outside liabilities/tangible net worth (TOL/TNW) stood at 1.29 times (prov) as of March 31, 2023. Even though with the surge in earnings, the coverage ratios improved significantly in FY22, the same moderated in FY23 due to declining EBITDA levels, as the interest coverage ratio stood at 2.71 times and the debt service coverage ratio at 1.49 times as of March 31, 2023 (prov). Calibrated capex undertaken by the group over the past years, funded through internal accruals, unsecured loans, and debt, has also helped it maintain steady leverage. Commensurate returns from the planned capex in the form of backward integration and optimal capacity utilisation will remain key credit monitorables for the group. Acuité expects the leverage and coverage indicators to remain healthy in FY24 on the back of the stabilisation of metal prices.

Working capital-intensive nature of operations

The working capital intensive nature of operations of the group is reflected in the improved GCA days of 205 days as of March 31, 2023 (prov) as compared to 250 days as of March 31, 2022. The high GCA days are on account of significant loans and advances to related parties. However, the improvement in GCA days is supported by a low debtor period of only 10 days as of March 31, 2023 (prov), since the group mostly sells to reputed clients and follows an efficient collection mechanism. Further, the inventory holding improved and stood moderate at 61 days on March 31, 2023 (prov) as compared to 77 days on March 31, 2022, benefiting from a low lead time for procurement. Acuité believes that the working capital operations of the group will remain at the same level, as evident from efficient collection mechanisms and comfortable inventory levels over the medium term.

Inherent cyclical nature of the steel industry with fluctuations in the prices of raw materials and finished goods

The group's performance remains vulnerable to cyclicality in the steel sector given the close linkage between the demand for steel products and the domestic and global economies. The end-user segments such as real estate, civil construction, and engineering also display cyclicality. Further, operating margins are vulnerable to volatility in input prices (iron ore and coal) as well as realisation from finished goods. The operating margin of the group declined in FY22 to 9.49 percent from 25.34 percent in FY21, as the cost structure of NPSPL was severely impacted by the payment of a 90.90 percent royalty per tonne of iron ore dispatched by it to the Government of Odisha since FY22, decreasing its overall operating margin. Further, the margins took a hit again in FY23 with the imposition of export duty in May 22. However, the margins stabilised since Q4 FY23, with the removal of the duty in November 22. Acuité believes that going forward, the profitability margin of the group will be supported by backward integration measures and economies of scale, as the RM prices have already seen some moderation, especially for iron ore. Coking coal, one of the key input raw materials that changes the dynamics of the steel industry, has plunged over the last few days with easing supply concerns. That said, the FSA price hike by Coal India remains a risk. EBITDA margin should remain healthy at 6-7 percent, aided by cost advantages emanating from lower power costs as well as the improving cost structure on account of backward integration.