Fitch Ratings has assigned Rashtriya Ispat Nigam Limited's (RINL) proposed initial public offering (IPO) of 488.98m equity shares a grade of Fitch 4(ind), out of a maximum of Fitch 5(ind). The grade indicates above-average fundamentals of the issue relative to other listed equity securities in India. This grading does not comment on the suitability of the issue process or the adequacy of the price.
The grading reflects RINL's position as one of Indias largest producers of long product steel, the favourable medium- to long-term demand outlook for its products - driven by increasing infrastructure spend, and a healthy balance sheet. However, the economic slowdown in India in the recent past, especially the construction and infrastructure sectors, could reduce domestic long steel demand in the short-term.
The grading takes into account the fact that RINL is a public sector company and post IPO, the government of India (GoI) will remain the majority shareholder (a 90% stake) in the company. The company was conferred Navratana status by GoI in November 2010, which provides a certain degree of operational and financial autonomy.
The grading also reflects RINLs comfortable liquidity position, as illustrated by a strong cash balance of INR20.68bn in FY12 (FY11: INR19.98bn) and its fund-based working capital utilisation averaging 50% during April 2011April 2012. The company had sanctioned limits of INR35.94bn as on 30 June 12. Debt to equity has remained below 0.5x over FY08-FY12, as the bulk of RINLs capex was funded through internal accruals.
The grading is, however, constrained by RINLs consistently low EBITDA (9%-10%) and a low return on average equity (6%-8%) over FY10-FY12, reflecting its lack of raw material linkages and on-going capex. The full benefit of the capex will start to accrue from FY14, thus Fitch expects return on equity to remain low in the short-to-medium term. The grading also factors in the cyclical nature of the steelindustry.
Fitch notes continuous delays in RINLs INR122.91bn capex to double its capacity to 6.3 million tonnes per annum (mtpa). While the blast furnace was commissioned in April 2012 and is under stabilisation, the remaining ancillary and downstream facilities are likely to be progressively commissioned by end-March 2013. At end-June 2012, RINL incurred INR96.06bn of capex towards the expansion programme. Besides, the company plans to repair its blast furnaces and auxiliary facilities at INR74.99bn, which will augment its capacity further by 1mtpa. Fitch expects the refurbishment capex to be implemented in phases over the next two to three years, thereby providing adequate cushion to RINL's liquidity.
Revenue grew 26.6% yoy to INR132.51bn in FY12, led by higher sales volume (6% yoy) and increased revenue per ton of blended steel (19% yoy). EBITDA margins increased slightly to 9.9% in FY12 from 9.0% in FY11, despite an increase in raw material costs (iron ore: 6% yoy, coking coal: 26% yoy), due to better operational efficiency and pass through of increased costs to customers. However, any gain from a fall in global coking coal prices was negated by rupee depreciation as the bulk of coking coal is imported.
Incorporated in 1982, RINL manufactures long steel products at its steel plant located at Visakhapatnam. Its products are predominantly used in the construction and infrastructure sectors.
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