Long track record of operations for the group and experienced management
The group has had a long operational track record in the iron and steel industry for around one and a half decades. Royal Group is a Punjab-based group engaged in the manufacturing of flat steel products and ingots. Further, the key promoter of the group, Mr. Sanjeev Sood, has more than two decades of experience in the iron and steel industry. He is ably supported by other highly qualified and experienced promoters. Moreover, the promoters are resourceful and have also supported the group companies by infusing unsecured loans as and when required to support the business operations.

Acuité believes that the long operational track record of the group coupled with the extensive experience of the management will continue to benefit the group going forward, resulting in steady growth in the scale of operations.

Steady business risk profile
The group witnessed an improvement in its scale of operations, marked by its revenue of Rs. 557.37 crore in FY2022 as against Rs. 378.94 crore in FY2021. The group has been able to scale up operations on account of increased average realisation and sales volume of Ms. Flats on the back of rising demand from end user segments. Further, the group has achieved a revenue of Rs. 665.26 crore in FY2023 (Prov), thereby registering a CAGR of 27 percent for FY20–23. The semi-integrated nature of operations provides the group with the flexibility to use them for captive consumption.

Acuite believes the scale of operation will remain almost at the same level in the near to medium term on account of almost full utilisation of installed capacity with no expected capex in the near term.

The EBITDA margin of the group moderated to 3.26 percent in FY2022 as against 3.45 percent in FY2021 due to an increase in power and fuel costs. The group registered an EBITDA margin of 3.41 percent in FY2023 (Prov). The group has a semi-integrated nature of operations, having manufacturing facilities for ingots and MS flats. Raw material consumption is the single largest cost component of the group (constituting 90% of sales in FY2022). The group does not have integration for sponge iron and captive power plants and has to source the same from the open market, leading to pressure on the operating margins.

Acuite expects the operating margin to be range-bound between 3.4 and 3.5 percent in the near and medium term on account of the semi-integrated nature of operations and reliance on external power sources.

Efficient working capital management
The efficient working capital management of the group is marked by improved GCA days of 73 days in FY2022 as against 83 days in FY2021. The improvement in GCA days is on account of an improved debtor period of 26 days in FY2022 as against 45 days in FY2021 due to an efficient collection mechanism. Further, the inventory period stood comfortably at 24 days in FY2022 as against 22 days in FY2021. The group maintained GCA days at a comfortable level of 69 days in FY2023 (estimated).

Acuité believes that the working capital requirement is likely to remain at similar levels in the near and medium term.

Moderate financial risk profile
The group’s financial risk profile is marked by a moderate net worth base, low gearing, and moderate debt protection metrics. The tangible net worth of the group increased to Rs. 74.69 crore as of March 31, 2022, from Rs. 62.40 crore as of March 31, 2021, due to the ploughing back of profits. Further, the tangible net worth of the group increased to Rs. 82.93 crore as of March 31, 2023 (prov). Acuité has considered unsecured loans of Rs. 49.90 crore as of March 31, 2022, as quasi-equity as the management has undertaken to maintain the amount in the business over the medium term. The group follows a conservative financial policy, as reflected by its peak gearing of 0.63 times as of March 31, 2021. The gearing of the group stood comfortably at 0.40 times as of March 31, 2022, as against 0.63 times as of March 31, 2021, and continued to remain at a low level at 0.53 times as of March 31, 2023 (Prov.). The Total Outside Liabilities/Tangible Net Worth (TOL/TNW) stood at 0.92 times as of March 31, 2022, as against 1.04 times as of March 31, 2021, and continued to remain at comfortable levels at 0.89 times as of March 31, 2023 (Prov). Moreover, the moderate debt protection metrics are marked by an interest coverage ratio (ICR) of 1.85 times as of March 31, 2022, and a debt service coverage ratio of 1.47 times as of March 31, 2022. Further, the interest coverage ratio and debt service coverage ratio remained moderate at 1.88 times and 1.57 times, respectively, as of March 31, 2023 (Prov). The Net Cash Accruals/Total Debt (NCA/TD) stood at 0.29 times as of March 31, 2022, and is expected to remain almost at the same levels in the near term.

Acuité believes that going forward, the financial risk profile of the group is likely to be sustained, backed by steady accruals and no major debt-funded capex plans.

Inherent cyclical nature of the steel industry
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 the input prices (sponge iron, iron ore, and coal) as well as realisation from finished goods. The prices and supply of the main raw material, sponge iron, directly impact the realisation of finished goods. Any significant reduction in demand and prices adversely impacting the operating margins and cash accruals of the group will remain a key monitorable.