| Bharat Aluminium Company Limited | ||||||
| Long-term rating downgraded to 'CRISIL AA-' and Revised to 'Watch with Developing Implications'; Short-term rating placed on 'Watch Developing' | ||||||
| Rating Action | ||||||
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| Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings. | ||||||
| 1 crore = 10 million | ||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has downgraded its rating on the long-term bank facilities of Bharat Aluminium Company Ltd (BALCO; part of the Vedanta group) to ‘CRISIL AA-’ from ‘CRISIL AA’ and revised its rating watch to 'Rating Watch with Developing Implications' from 'Rating Watch with Negative Implications'. CRISIL Ratings has also placed it short term rating on ‘Rating Watch with Developing Implications’.
The rating action reflects a corresponding rating downgrade on the bank facilities and debt instruments of the parent company, Vedanta Limited (Vedanta), to ‘CRISIL AA-/CRISIL A1+/Watch Developing’ from ‘CRISIL AA/Watch Negative/CRISIL A1+’. This is because rating takes into account the support BALCO derives from its parent, Vedanta.
The ratings of BALCO reflect the company’s healthy market position, improving business profile with increasing raw material security, and strong financial risk profile with comfortable capital structure and debt protection metrics. The rating also factors in the company’s strategic importance to Vedanta as it contributes to nearly 25% of the group’s aluminium smelting volume and also, because of the group’s increased focus on growing its aluminium business. The strengths are partly offset by susceptibility to volatility in aluminium and alumina prices and exposure to project risk related to significant capital expenditure (capex) towards capacity expansion. |
Analytical Approach CRISIL Ratings has applied its parent notch-up framework to factor in support from the parent, Vedanta. BALCO will continue to receive support from Vedanta on account of its strategic importance to the parent and strong business and managerial linkages. Analytical adjustments have been made to the reported debt to include buyer’s or supplier’s credit. |
Key Rating Drivers & Detailed Description Strengths: Strong support from Vedanta: BALCO is a 51% subsidiary of Vedanta and is involved in the mining of bauxite, smelting of aluminium and generation of power. The company is strategically important to the parent’s plans for growing its aluminium business. The company’s existing smelter capacity of 570 KTPA accounts for 25% of the group’s aluminium smelting capacity. BALCO will continue to derive high financial flexibility from being part of the Vedanta group.
Healthy market position: The company is the third-largest aluminium player in the country, with smelting capacity of 570 KTPA and healthy primary production volume share. It has witnessed sustained operating performance, aided by utilisation of near 100% over the past three fiscals. Its capacities are likely to operate at optimum levels going ahead and the company will maintain its healthy market position over the medium term.
Increased operating profitability supported by enhanced cost efficiencies: BALCO has benefitted from improved coal supply under linkage coal, lower coal prices and improved operational efficiencies during H1 of current fiscal despite moderation in aluminium prices. Thereby, earnings before interest, tax, depreciation and amortisation (EBITDA) improved sharply to USD 390/t during H1 of fiscal 2024 from USD 213/t in fiscal 2023 and USD 991/t in fiscal 2022.
Further, the parent is enhancing alumina refinery capacity, which should result in reduced alumina freight cost for BALCO from next fiscal. Also, the company has resumed mining from its captive Chotia coal block and has recently won Barra coal block in Chhattisgarh (expected to take couple of fiscals for commissioning). These will improve coal security along with reduced energy cost for the company over the medium term. Timely commissioning of refinery capacity and ramp up of captive coal mines supporting reduced cost of production and thereby improved operating profitability will be key monitorable.
Healthy financial risk profile: Increased profitability and limited capex led to healthy free cash flow over fiscal 2021-2023 period. The company utilized this cash flow to reduce its gross debt levels, which declined sharply to Rs 1,468 crores as on September 30, 2023 from Rs 4,600 crores as of March 31, 2021. Net leverage (ratio of net debt to Ebitda) and gearing increased, mainly due to lower operating profitability, to ~2.2 times and 0.26 times as on March 31, 2023 respectively, from ~0.19 times and 0.2 time, respectively, a year earlier. While, expected improvement in Ebitda along with utilisation of cash accruals towards planned capex, will result in moderation in leverage, it is expected to remain healthy at below 1.7 times, over the medium term. Also, gearing is expected to remain less than 0.5-0.6 times over the medium term.
Weakness: Susceptibility to volatility in aluminium and alumina prices: BALCO will remain susceptible to volatility in aluminium and alumina prices, which are commoditised and cyclical, as has been witnessed over the last couple of fiscal years. Movement in aluminium prices and aluminium-alumina spreads will be a key monitorable. Further, any sharp increase in other inputs costs, like coal and carbon products can have a bearing on company’s profitability margins and shall remain monitorable.
Exposure to project risks: The company is undertaking brownfield expansion of its aluminium smelter capacity by 414 KTPA at an estimated project cost of around Rs 8,000 crore. The expansion is likely to be completed over the next fiscal. While the company has already tied up bank loan of Rs 3,000 crore for the capex, the equity portion for the capex will largely be funded from internal accruals. As on September 30, 2023, most of this proposed capex is remaining to be incurred, however, this is expected to get commissioned by Q2 of fiscal 2025. Hence, the company is not expected to witness any material impact on its capital structure on account of the planed capex. Further, the project loan will have moratorium till the commissioning of the project, which will support debt coverage ratios of the company. That said, while the group has demonstrated its ability to expand capacities across various commodities, including aluminium, timely completion of the project without any cost overrun and successful ramping up of operations will remain key monitorable. |
Liquidity: Strong BALCO had cash and equivalents continues of Rs 471 crore as on September 30, 2023 (Rs 513 crore as on June 30, 2023). The company had utilised operating cash accrual and surplus liquidity towards debt repayment in the fiscal 2023. Expected cash accrual of around Rs 1800-1900 crore during fiscal 2024, along with existing cash balance will comfortably cover debt obligation of about Rs 400 crore. Liquidity is further supported by financial flexibility derived from being a subsidiary of Vedanta. |
Rating Sensitivity Factors Upward factors
Downward factors
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About the Company BALCO was incorporated by the Government of India in 1965. In 2001, the Vedanta group acquired a 51% stake and management control in BALCO for Rs 551 crore; the government still owns the remaining 49%.
Following the takeover in March 2001, the new management undertook large capex of Rs 4,000 crore until fiscal 2007 for setting up a new cold rolling facility of 36 KTPA (in 2004), a 540-MW captive power plant (for Rs 1,300 crore, commissioned in March 2006) and a 245-KTPA custom smelter (Rs 2,200 crore, commissioned in November 2006). Subsequently, it expanded capacities by adding 325 KT of smelting capacity and 1,200 MW of captive power plant in various phases by August 2016. The smelting capacity currently stands at 570 KTPA. |
Key Financial Indicators
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Any other information: Not applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
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| Annexure - Rating History for last 3 Years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Annexure - Details of Bank Lenders & Facilities | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Criteria Details
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