| Established presence of promoters in ship recycling industry
HG has established business presence of around three decades in the ship-breaking business and the promoter holds more than three decades of experience in the said business line. The business model entails acquiring old ships, dismantling them and recovering the investment through sale of scrap and parts. The long presence of the management in the industry has resulted in establishing healthy relationship with its customers. The promoters are well versed with price dynamics of ship breaking industry and have developed healthy relations with various ship aggregators, which helps in buying ships at competitive rates depending on the market scenario. The company has RINA certification, guidelines for safe and environmentally sound ship recycling. These green recycling companies are preferred over non-RINA certified companies. Further, HG enjoys location advantage as its operations are conducted at Alang (Gujarat), which is the world's largest ship breaking yard ensuring easy availability of ship, human resource and infrastructure. However, presently the overall ship breaking industry is experiencing downturn on account of low availability of ships for dismantling globally on account of continuing geo-political tensions, such as Russia-Ukraine conflict and disruptions in the middle eastern shipping routes coupled with rising freight rates further limiting the incentive for shipowners to retire vessels impacting supply to shipbreaking yards.
For, real estate activities, the group has entered into partnership with reputed players and have completed various real estate projects in partnership firms mainly in Bengaluru city. Acuité believes that the group will continue to benefit from its experienced management and long track record of operation in the ship demolition industry, however, the operating performance is expected to remain subdued in the near term on account of headwinds in the shipbreaking industry.
Moderate financial risk profile
HG's financial risk profile is moderate, marked by below unity gearing and moderate debt-protection metrices. The tangible net worth of the group stood at Rs.283.76 Cr. as on 31 March 2024 as against Rs.281.81 Cr. as on 31 March 2023. The net worth has improved on account of accretion of profits to reserves. The gearing level of the group is healthy and stood at 0.13 times in FY2024 as against 0.21 times in FY2023. However, ~92% of HG’s networth as of March 31, 2024, remains invested in entities engaged in real estate business. The total debt of the group stood at Rs.36.80 Cr. as on March 31, 2024. The debt comprises of Rs.0.11 Cr. of long-term debt, Rs.23.78 Cr. of USL from directors/promoters, Rs.12.77 Cr. of short-term debt and Rs.0.11 Cr. of CPLTD. Interest Coverage Ratio (ICR) stood moderate at 1.43 times for FY2024 against 2.27 times for FY2023. Debt Service Coverage Ratio (DSCR) stood moderate at 1.48 times for FY2024 against 1.76 times for FY2023. The total outside liabilities to tangible net worth (TOL/TNW) of the company is healthy and stood at 0.20 times in FY2024 as against 0.81 times in FY2023. The Debt/EBITDA levels stood at 2.66 times in FY2024 as against 4.64 times in FY2023.
Going ahead, the ability of the group to avoid any deterioration in its financial risk profile on account of expected subdued operating performance will remain a key monitorable.
|
| Deterioration in operating performance
HG purchases ship ranging from 10,000 MT to 60,000 MT which takes around six to twelve months for dismantling. During the dismantling period the inventory buildup is significantly high. The prices of the steel are fluctuating and any adverse movement in the prices impacts HG's profitability margin. During FY2024, the revenues declined to Rs. 326.77 Cr. against Rs. 379.68 Cr. in FY2023. Despite a marginal improvement in price realizations, volumes declined in FY2024. The average realisation price stood at Rs. 50975/MT in FY2024 against Rs. 48624/MT in FY2023. Group's overall operating margins declined to 0.04 percent in FY2024 against 0.25 percent in FY2023.
Further, in 6MFY25, the group has reported revenue of ~Rs.85 Cr. and overall operating performance is expected to remain subdued in FY2025 reflecting the broader challenges faced by the shipbreaking industry and also the group currently has only one ship which is being dismantled in Inducto Steel Limited.
Going ahead, the ability of the group to improve its scale of operations and profitability will remain a key monitorable.
Susceptibility of profitability towards volatility in forex rates and steel prices along with exposure to environmental and regulatory risks
HG purchases ship ranging from 10,000 MT to 60,000 MT which takes around six to twelve months for dismantling. During the dismantling period the inventory buildup is significantly high. The prices of the steel are fluctuating and any adverse movement in the prices impacts HG's profitability margin. The vessel purchase transaction is typically denominated in USD and is generally backed by 90-360 days of letter of credit. Moreover, the scrap sales are typically in the domestic market with realizations being denominated in the Indian Rupee. Consequently, HG remains exposed to any adverse movement in foreign currency exchange rate. Any upward revision in the dollar-rupee exchange rate increases the purchase cost of the vessels. Though the group uses forwards to hedge its forex risk, the cover is taken based on management's expectations on forex movement over a longer duration of LC ranging from 90 to 360 days. Further, the group is also exposed to environmental and regulatory risk as the ship-scrapping industry attracts considerable attention on the issues relating to environmental pollution, health problems of the labourers and violation of human rights.
Significant exposure to real estate segment
HG has significant exposure in the real estate business through investments in various partnership firms. The group has invested around Rs. 256 Cr. into the real estate segemnt through its Partnership firms. The slowdown in the real estate segment possesses significant risk to HG towards recovery of the investment. Acuité believes that any further increase in the real estate exposure may impact group’s credit risk profile.
|
