| Long track record of operation and experienced management
The group has a long execution track record of 25 years in the iron and steel industry and is one of the leaders in the Bihar and Jharkhand market. The promoter of the group Mr. Rajesh Kumar Kanodia, Mr. Sanjeev Kanodia and Mr. Ajay Kumar Jhujhunwala possesses more than two decades of experience in the iron and steel industry. The group has a long presence in this sector and has established a healthy relationship with customers for more than a decade.
Healthy scale of operation
The revenue of the company witnessed a 32.32 per cent growth in FY2022, its revenue increased to Rs.580.42 crore in FY2022 as compared to Rs.438.66 crore in the previous year. This growth in sales is majorly due to increase in average realization per unit during FY2022 backed by steady demand for rolled products. Further, the average realization of the rolled product has also improved during the 1st half of FY2023, however, the realization for rolled product has declined globally, which may lead to an overall sluggish growth in the revenue during FY2023. The company has booked around Rs.475 crore of sales till 30th November 2022 (Prov.).
Strong distribution network & Established brand presence
The group has strong distribution network and sell its finished products to the dealers located in Bihar and Jharkhand. The group has 15 distributors and each distributor having 40 dealers. Therefore, around 600 dealers, sub-dealers and retailers are spread across the various market places in Bihar and Jharkhand. This provide the strong distribution network and help the group to increase the market share in the region.
The group also has an established position in the TMT bars industry with a strong recall for its brand ‘Balmukund Diamond’ especially in Bihar and Jharkhand. The strong presence and distribution network help the group to hold around 7-8 per cent in Bihar organized market. Acuite believes, going forward established brand presence and strong distribution network help the group to maintain strong business risk profile.
Healthy financial risk profile
The financial risk profile of the group is marked by healthy net worth, comfortable gearing and strong debt protection metrics. The net worth of the company stood healthy at Rs.96.95 crore in FY 2022 as compared to Rs 72.06 crore in FY2021. This improvement in networth is mainly due to the retention of profit. The gearing of the group stood at 0.83 times as on March 31, 2022 when compared to 0.81 times as on March 31, 2021. This further increase in gearing is mainly on account of increase in short term debt during the period. Interest coverage ratio (ICR) is strong and stood at 7.02 times in FY2022 as against 10.37 times in FY2021. The debt service coverage ratio (DSCR) of the group also stood comfortable at 3.85 times in FY2022 as compared to 8.53 times in the previous year. The net cash accruals to total debt (NCA/TD) stood comfortable at 0.20 times in FY2022 as compared to 0.31 times in the previous year. Going forward, Acuite believes the financial risk profile of the group will remain strong on account of steady net cash accruals.
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| Debt funded capex plan
The group is undertaking a capex in BRGD Sponge & Iron Private Limited. The group is going to set up MS Billet and TMT manufacturing facility with the capacity of 144,000 MTPA and 140,000 MTPA respectively. The project work has already been commenced and land has already been acquired in Purulia, West Bengal which is also in close vicinity of the borders of Jharkhand. The total project cost would be Rs.90.00 crore. Out of which Rs.20 crore has already been expended through the promoters own fund and balance Rs.70.00 crore would be funded through the fresh term loan of Rs.50.00 crore and rest through the promoters contributions. The term loans have been sanctioned and partially disbursed. The management of the group is trying to enter into the West Bengal market through this capex. Moreover, the group will also enjoy the lower power cost from DVC as well, which further help them to maintain the operating margin. The project is expected to complete by October 2024 and will start its operation after that.
Declining profitability margin
The operating profitability margin of the company has decreased to 3.79 per cent in FY2022 as compared to 5.10 per cent in the previous year. This decrease in profitability margin is on account of significant increase in raw material price during FY2022. Going forward, Acuite believes, that the profitability margin of the company will increase and sustained at moderate levels over the medium term backed by steady demand and stable realization. The operating profitability margin has further increased and moderate at 4.55 per cent during 6MFY2023.
The net profitability margin of the company stood comfortable at 2.41 per cent in FY2022 as compared to 3.48 per cent in the previous year.
Intense competition and inherent cyclicality in the steel industry
The group is operating in competitive and fragmented nature of industry due to the presence of many unorganized players on account of low entry barriers. Moreover, demand for steel products predominantly depends on the construction and infrastructure sectors. Thus, the profit margins and sales of the company remains exposed to inherent cyclicality in these sectors.
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