Integrated operation with long track record and experienced promoters
The company is promoted by the Agrawal family of Raigarh (Chhattisgarh). The company is managed by Mr. Parmanand Agarwal, who has two decades of experience in the steel business. The company is ably supported by a strong and experienced line of mid-level managers. Acuité believes the vast experience of the promoter has enabled the company to build strong relationship with customers as well as suppliers, resulting in continued order flow from customers. The company has integrated operations with capacities to produce sponge iron, billets and TMT Bars. The installed capacity of the company is 180,000 MT of sponge iron, 120,000 MT of billets and 105,000 MT of TMT bars respectively. In the current fiscal, the company has commissioned 165,000 MT of sponge iron capacity. The company has undertaken capex plan to enhance existing capacities. The project cost of ongoing capex is around Rs 104 Cr which will be funded through a mix of debt and equity in 1.90:1 ratio. The expansion capex will enhance the existing sponge iron capacity by 165000 MTPA. The project is expected to complete by Q2FY24.

Healthy scale of operation coupled with stable profitability margin
The revenue of the company witnessed a 34.42 per cent growth in FY2022, its revenue increased to Rs.683.06 crore in FY2022 as compared to Rs.508.14 crore in the previous year. This growth of the revenue is majorly due to increase in average realization per unit during FY2022 backed by steady demand for billet, 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 moderated globally from the second half of the current fiscal, which may lead to an overall sluggish growth in the revenue during FY2023. The company has booked around Rs.385 crore of sales till 30th Sept 2022 (Prov.).

The operating profitability margin of the company stood healthy at 13.04 per cent in FY2022 and 13.03 per cent in the previous year. The profitability margin of the company is stagnant on account of increase in raw material cost during the period, which further led to increase the realisation per unit during FY2022. Going forward, Acuité believes, that the profitability margin of the company will increase and sustain at healthy levels over the medium term backed by steady demand, stable realization, and integrated nature of plant. The operating profitability margin has further increased and stood healthy at 14.16 per cent during 6MFY2023.

The net profitability margin of the company stood healthy at 6.57 per cent in FY2022 as compared to 7.04 per cent in the previous year.

Above average financial risk profile
The financial risk profile of the company is marked by healthy net worth, modest gearing and strong debt protection metrics. The net worth of the company stood healthy at Rs.179.99 crore in FY 2022 as compared to Rs 134.47 crore in FY2021. This improvement in networth is mainly due to the retention of current year profit. The gearing of the company stood at 1.17 times as on March 31, 2022 when compared to 1.06 times as on March 31, 2021. This further increase in gearing is mainly on account of increase in long-term debt and short-term debt during the period. Interest coverage ratio (ICR) is strong and stood at 7.54 times in FY2022 as against 5.50 times in FY2021. The debt service coverage ratio (DSCR) of the company also stood strong at 3.17 times in FY2022 as compared to 2.24 times in the previous year. The net cash accruals to total debt (NCA/TD) stood comfortable at 0.30 times in FY2022 as compared to 0.29 times in the previous year. Going forward, Acuité believes the financial risk profile of the company will remain healthy on account of steady net cash accruals over the near term despite of on-going debt funded capex by the company.

Moderate working capital management
The operation of the company is moderate working capital intensive marked by moderate gross current asset (GCA) days of 106 days in FY2022 as compared to 99 days in the previous year. Moreover, the inventory days of the company has improved and stood moderate at 47 days in FY2022 as compared to 66 days in the previous year. The debtor days of the company has stood comfortable at 04 days in FY2022 and in the previous year respectively. The overall GCA days of the company has sightly increased on account of increase in other current assets during FY2022 , which mainly consisting of advance to suppliers and advance tax paid during the period. Going forward, Acuité believes the working capital intensity will remain at similar levels over the medium term.

Continuous debt funded capex plan
The company is planning to increase its sponge iron capacity by another 165000 MTPA along with billet unit by 99000 MTPA, power plant with 20 MW and going to install a new unit for ferro alloys with the installed capacity of 15000 MTPA at the same location. The total project cost would be around Rs.242 crore funded through bank loans of Rs.160 crore and internal accrual of Rs.82 crore. The company has already expended Rs.87 crore till date towards this project through the internal accruals. The company is yet to apply for the bank loan and expected to complete this project by March 2024 and start the commercial operations from April 2024 onwards. This will help the company to enhance its overall business risk profile by improvement in top-line and bottom-line respectively. Acuité believes the coverage and leverage ratios of the group will witness slight moderation over the medium term because of the rise in the debt levels.

Intense competition and inherent cyclicality in the steel industry
The company is operating in competitive and fragmented nature of industry especially in primarily steel producing industry. There are several players who are engaged in the sponge iron and billets manufacturing business in organized and unorganized sector. Moreover, the profit margins and sales of the company remains exposed to inherent cyclicality in the steel industry.