Acuité has consolidated the business and financial risk profiles of Gagan Ferrotech Ltd (GFL), Gajanan Iron Pvt. Ltd. (GIPL), Shakambhari Overseas Trades Pvt. Ltd. (SOTPL) and Spintech Tubes Pvt. Ltd. (STPL) together referred to as the ‘Gagan Group’ (GG). The consolidation is in the view of common promoters and management, intercompany holdings, operational linkages between the entities and a similar line of business.

Long track record of operations and strategic location of the plant
Promoters are engaged in the steel industry with presence across steel value chain. The group has a diversified product mix which includes pellets, sponge iron, billets, cast iron and TMT bars. Moreover, the group has a locational advantage as the plants are located in the industrial area of Durgapur, West Bengal, which is in close proximity to various steel plants and sources of raw materials. Further the plants are well connected through road and rail transport which facilitates easy transportation of raw materials and finished goods.

Acuité believes that the long operational track record of Gagan group and promoters’ extensive understanding and expertise will support the group’s growth plans going forward.

Augmentation in scale of operations
The consolidated revenues of the Gagan Group witnessed a growth of ~10.45% YoY in its scale of operations in FY23 at Rs. 2173.20 Cr as against Rs. 1967.56 Cr in FY22. The augmentation in the scale of operations was on account of buoyant demand, increased contribution from the recently enhanced capacities, better product diversity and favourable sales realisations. Gagan Group also earned its revenue by exporting its products to Nepal primarily through Gagan Ferro Tech Limited and Shakambhari Overseas Traders Private Limited. The company receives advance payments in INR against export sales, eliminating the need for a hedging policy. Despite a decline in the margins of the group, operating profit per tonne of steel sold has demonstrated a year-on-year increase from Rs. 4154.27 Cr in FY22 to Rs. 5106.27 in FY23.

Healthy Financial Risk Profile along with prudent working capital management
The financial risk profile of the group is healthy marked by healthy networth, low gearing and comfortable debt protection metrics. The tangible networth of the group stood Rs. 974.82 Cr in FY23 as against Rs. 815.37 Cr in FY22. Acuite has considered unsecured loans to the tune of Rs. Rs. 30 Cr from Gajanan Iron Private Limited as on March 31, 2023 as part of networth as these loans are subordinated to bank debt. Gagan Ferrotech Limited has repaid its long-term debt in FY23. Gagan Group has infused additional equity of Rs. 3.98 Cr in Spintech Tubes Private Limited in FY23 for funding the construction of the plants in the company.

The debt outstanding of the group in FY23 comprises of long-term debt of Rs. 100.75 Cr, Rs. 65.81 Cr of non-interest bearing unsecured loans from promoters and Rs. 188.49 Cr of short-term debt. The increase in debt levels in FY23 is on account of additional loans taken by STPL to complete the construction. The gearing of the group improved and stood at 0.36 times in FY23 as against 0.43 times in FY22. The TOL/TNW stood at 0.56 times in FY23 as against 0.61 times in FY22. The debt protection metrics remained comfortable with debt service coverage ratio of 3.04 times and interest service coverage ratio stood at 6.83 times in FY23. Acuité expects while these new capex initiatives would increase the debt levels, healthy revenues and profits generated from the existing business are expected to adequately support the financial profile over the medium term, followed by limited debt repayment obligations. ' Capex of ~Rs 800 - 850 Cr. is expected over the next 2-3 years in the group companies, which is expected to be largely funded by a term loan of Rs. ~Rs 500 Cr, but given the healthy cash generation, Acuité does not foresee any material impact on group’s capital structure and debt metrics. Higher-than-expected debt-funded capex resulting in deterioration in debt metrics and capital structure will remain a key rating sensitivity factor.

The working capital operations of the group are efficient in nature marked by 23 days in FY23 as against 22 days in FY22. GCA days of the group stood at 112 days in FY23 as against 114 days in FY22. The group maintains inventory levels of 54 days in FY23 as against 62 days in FY22. Generally, the group maintains 2-2.5 months of inventory of iron ore and coal to mitigate the price volatility for which significant amount of advances is paid to the suppliers. The Creditor days of the group stood at 3 days in FY23 as against 7 days in FY22. The company receives 25- 30 days credit period from the suppliers. The average bank limit utilisation by the group stood at 44.13% for fund based facilities and 29.59% for non-fund facilities till October 2023.

Acuité believes that the working capital operations of the group will remain at same level as evident from efficient collection mechanism and moderate inventory levels over the medium term.

Moderation in profitability margins
The profitability of the group has moderated in FY23 as reflected in the EBITDA margins which stood at 5.47% in FY23 as against 6.57% in FY22 on account of an extraordinary expense in Gagan Ferrotech Limited from increase in the power cost by Damodar Valley Corporation (DVC) and additional demand for Rs. 53.72 crore against tariff adjustment for the period of 2020-2022. Gagan Group along with all other steel companies have made an appeal against the same. The decline in margins in FY22 was on account of rise in energy and raw material costs (coking and thermal coal, refractories and ferroalloys). The PAT margin also declined to 3.25 per cent in FY2022 from 3.81 per cent FY2021 due to subsequent increase in interest cost on account of higher working capital requirements. In line with EDBITA margin, the PAT margins of the group also declined and stood at 2.37% in FY23 as against 3.25% in FY22. The decline in PAT margins is due to subsequent increase in interest cost on account of higher working capital requirements.

Project implementation risk
Spintech Tubes Pvt. Ltd. (STPL) currently has undertaken a project for setting up a pellet plant (600,000 MTPA), a sponge iron plant (150,000 MTPA), a SMS (180,000 MTPA), a Rolling mill (180,000 MTPA) and captive power plant of 20MW. The construction for the pellet plant has been completed in January 2024. Till date, STPL earned revenue through trading of scrap, iron, steel and billets. The implementation risk for STPL is high as the company is still in project stage and has only completed the construction of 1 plant till date raising the possibility of slight delays and project completion issues. '

Acuité notes that the company has been regularly incurring capex in the last few years for debottlenecking and improving efficiency.

Cyclical nature of the industry
The group’s performance remains vulnerable to cyclicality in the steel sector as demand for steel depends on performance of end user segments such as construction and real estate. Indian steel sector is highly competitive due to presence of large number of players. The operating margin of the group is exposed to fluctuations in the prices of raw materials (coal and iron ore) as well as realization from finished goods.