Rationale

 The revision in the outlook on the long-term rating of KIOCL Limited (KIOCL) factors in the impact of recently announced hefty levies on export of iron ore pellets. On May 21, 2022, the Government of India (GoI) imposed an export duty of 45% (from nil earlier) on pellets to rein in rising prices and contain inflation. As exports accounted for more than 95% of KIOCL's total sales in FY2022, the export duty is likely to severely impact KIOCL's cost-competitiveness in the export markets, in turn adversely impacting profitability and capacity utilisation levels. While the company's sizeable liquid investments provide adequate cushion to any near-term challenges, operating under a prolonged export duty regime could weaken its liquidity position and would remain a key monitorable from the credit perspective. The ratings continue to factor in KIOCL's status as a Miniratna company under the Ministry of Steel, GoI with the latter holding a 99.03% stake as on March 31, 2022, and its debt-free status at present, which imparts a high degree of financial flexibility. Moreover, KIOCL's sovereign ownership is expected to give it access to need-based funding support from the GoI. The ratings also factor in the company's comfortable financial risk profile and healthy liquidity position, with an unencumbered cash balance of Rs. 1,107.6 crore as on March 31, 2022. The ratings also consider the long track record of the company in iron ore mining/pellet manufacturing businesses and the extensive experience of its management. The ratings, however, are constrained by the company's adverse cost structure for the pellet business due to elevated freight charges as the company sources a large part of its iron ore requirement from Chhattisgarh. Besides, in the absence of a beneficiation plant, KIOCL is dependent on costlier iron ore fines with high Fe content. ICRA however notes that the recent favourable verdict of the Hon'ble Supreme Court for allowing the export of iron ore from Karnataka would allow KIOCL the flexibility to party source its ore requirement from nearby mines in Karnataka, in turn leading to some savings in freight costs. The ratings also factor in the sensitivity of the company's profitability to the spread between prices of iron ore fines and pellets, which have witnessed significant volatility in the past. The ratings are also tempered by its non-operational pig iron division, which remains a drag on the company's business return indicators. The company is in the process of setting up a coke oven plant and a ductile iron (DI) pipe unit at an estimated cost of Rs. 837 crore, having a project gearing of 2 times. While this capex is expected to revive its pig iron operations, it would also expose the company to project implementation risk as the company has no track record of setting up coke oven or DI pipe manufacturing facilities. The ratings also factor in sizeable contingent liabilities of Rs. 657 crore1 as on March 31, 2021, which if crystallised, could adversely impact the financial risk profile of KIOCL.