By Shreyas Vaidya

India Ratings and Research (Ind-Ra) has assigned Global Coal and Mining Private Limited (GCMPL) a Long-Term Issuer Rating of ‘IND A’. The Outlook is Stable. The instrument-wise rating actions are as follows:

Instrument Type

Date of Issuance

Coupon Rate (%)

Maturity Date

Size of Issue (million)

Rating/Outlook

Rating Action

Fund-based limits

-

-

-

INR550

IND A/Stable/IND A1

Assigned

Non-fund-based limits

-

-

-

INR7,100

IND A/Stable/IND A1

Assigned

Term loan

-

-

November 2025

INR2,222

IND A/Stable

Assigned

KEY RATING DRIVERS

Improvement in Coal Beneficiation Volumes: GCMPL’s coal beneficiation volumes improved to 5.2 million tonnes per annum (mtpa) in FY19 (FY18: 3.8mtpa, FY17: 4.5mtpa), owing to an increase in capacity utilisation of its two washeries Talcher and IB Valley to 52% (FY18: 31%) and 51% (FY18: 29%), respectively. The improvement in capacity utilisation of the Talcher washery was due to the renewal of its contract with its key customer Andhra Pradesh Power Development Company Limited (APPDCL). The company had failed to renew its contract with APPDCL in July 2017 owing to the lack of clarity on the rates of taxes for discharge of tax liability post the implementation of the Goods and Services Tax in July 2017. As a result, the washery was closed from July 2017 to January 2018.

Presence of Off-take Agreements of Beneficiated Coal:
GCMPL has 70% of its beneficiation capacity tied up with various customers including APPDCL, West Bengal Power Development Corporation Limited (WBPDCL; ‘IND BBB’/Stable), and Singareni Colleries Company Limited. The contracts have duration of three years; the remaining life of the existing contracts ranges between two months and two years. Since the existing contracts for Talcher and IB Valley washeries do not ensure guaranteed tied up volumes, any reduction in the beneficiated volumes will directly impacts the company’s revenue and profitability. However, the management expects these contracts to get renewed timely due to the absence of other major washeries in the area and moderate-to-high entry barriers in the business.

GCMPL is also in discussions with other private power generators to tie up the remaining capacity. Although coal demand by the power sector is expected to remain firm and the regulations ensure coal to be washed for transportation between 500kms to 749kms, the timely renewal of the existing contracts and maintaining coal beneficiations volumes as expected would remain a key rating sensitivity.

Revenue Likely to Improve Further in FY20:
As per FY19 provisional financials, GCMPL’s gross revenue increased to INR5,424 million (FY18: INR3,326 million) on account of the increase in coal beneficiation and sale of coal reject volumes. An increase in washery utilisation leads to increased coal rejects availability, which are sold in the market and in turn aids in increasing revenue. During FY19, revenue from coal beneficiation increased to INR3,382 million (FY18: INR2,281 million) and sale of coal rejects increased to INR1,380 million (INR705 million).

GCMPL’s revenue is likely to increase further in FY20 as it has secured an EPC contract on a build-operate-maintain basis for its two washeries of 10mtpa capacity each from Coal India Limited (CIL). The overall contracts are estimated to earn revenue of around INR7,000 million over FY20-FY22. GCMPL would also earn coal beneficiation revenue, post the setup of these washeries.

Improvement in EBITDA:
GCMPL’s EBITDA improved to INR1,154 million in FY19 (FY18: INR535 million) due to the improvement in beneficiation, as well as coal reject sales volumes which earn higher margins, thus aiding the overall profitability. The coal reject sales volumes improved to 1.06mtpa in FY19 (0.63mtpa) and net realisations to INR1,312/t in FY19 (INR1,121/t).

Ind-Ra expects the EBITDA to improve further during FY20 on account of EBITDA accretion from the EPC business, given GCMPL’s track record of setting up washeries under the envisaged time and cost.

Capex on New Washeries:
GCMPL has received contracts from CIL to set-up four new washeries Lakhanpur (10mtpa), Jagannath (10mtpa), Sathupalli (4mtpa) and Ashok (4mtpa). While Lakhanpur and Jagannath washeries will be built on a build-operate-maintain basis for CIL, the Sathupalli and Ashok washery will be built under build-own-operate basis and will be owned by GCMPL. The company will incur capex of INR2,300 million for the owned washeries over FY21-FY23, which is likely to be funded by a mix of debt and equity.

Although GCMPL would not incur any capex for Lakhanpur and Jagannath washeries, it has to provide a bank guarantee for the entire contract value of around INR8,000 million, for which it has to keep a cash margin of INR2,400 million (30% of the bank guarantee value). The bank guarantee would be released in phases over 10 years post the commencement of the washery. Any delay in execution of these washeries can impact the company’s profitability and credit metrics. GCMPL can claim the escalation amount in case there is any increase in the capex on account of a delay in setting up the washeries because of the owner.

Credit Metrics Likely to Improve in FY20:
Despite the stable debt, GCMPL’s net leverage (net debt/EBITDA) improved to 2.2x in FY19 (FY18: 4.1x) owing to the improvement in EBITDA. Ind-Ra expects GCMPL to raise new debt for providing the cash margin money and for the construction of new washeries, leading to an increase in the debt. However, GCMPL is entitled to receive mobilisation advance of 10% of the total project cost for the Lakhanpur washery from CIL, which can be utilised for providing the cash margin money for the Jagannath washery, thus reducing its reliance on external debt in FY20.

Ind-Ra expects the net leverage to remain below 1.8x during FY20-FY21 on account of the improvement in EBITDA. GCMPL has already provided cash deposit of INR800 million as of April 2019 as bank guarantee for the Lakhanpur washery. The cash margin would increase to INR1,200 million by April 2020. GCMPL is expected to provide similar amount of cash margin as bank guarantee for the Jagannath washery starting FY20.

Major Investments in Group and Other Companies:
Although GCMPL’s outstanding investments and advances in the form of inter-corporate deposits (ICDs) to its group and other companies reduced to around INR2,000 million at FYE19 (FYE18: INR2,391 million,), the total investments remained substantial at 55% of the net worth. While Ind-Ra expects the investment levels to not increase above INR2,200 million-2,300 million and the increase would be to the tune of accrued interest only, any increase in the investments would remain a key rating sensitivity.

High Receivables, Moderate Liquidity:
GCMPL had high receivables of INR2,350 million in FY19 (FY18: INR1,559 million), due to delays in receipt of payments from APPDCL. As a result, cash flow from operations (adjusted for interest) declined to INR256 million in FY19 (FY18: INR843 million). GCMPL expects the receivable period to improve as CIL’s dues from the EPC business are likely to be paid within 30 days.

GCMPL has repayments of INR510 million and INR453 million million during FY20 and FY21, respectively. The company’s average use of the fund-based working capital limits was around 85% for the 12 months ended May 2019. At FYE19, it had a cash balance of INR350 million (FYE18: INR605 million).


RATING SENSITIVITIES

Positive: An improvement in the utilisation of washeries, along with EBITDA generation from the EPC business as expected by Ind-Ra and/or no major increase in investments and support to other companies, leading to the net leverage sustaining below 2.25x would be positive for the ratings.

Negative: Failure to improve the utilisation of washeries from the existing levels, along with lower-than-expected EBITDA from the EPC business and higher-than-expected support by way of ICDs or investments in other companies, leading to net leverage increasing above 2.25x on a sustained basis, would be negative for the ratings.


COMPANY PROFILE

Incorporated in 1998, GCMPL is engaged in coal beneficiation, transportation and logistics of coal, and coal trading in mineral rich states, Odisha, Andhra Pradesh and Telangana. It has total installed capacity of 10.0mtpa distributed amongst its four coal washeries located in Odisha at Talcher (4.0mtpa) and Ib Valley (3.5mtpa), and in Telangana at Ramagundam (1.0mtpa) and Manuguru (1.5mtpa).

FINANCIAL SUMMARY

Particulars

FY19 (Provisional)

FY18

Revenue (INR million)

5,424

3,326

EBITDA (INR million)

1,154

535

EBITDA margin (%)

21

16

Net leverage (x)

2.1

4.1

Gross interest coverage (x)

3.2

1.6

Source: Ind-Ra, GCMPL



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