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| Product | Quantum (Rs. Cr) | Long Term Rating | Short Term Rating |
| Bank Loan Ratings | 59.00 | ACUITE BB- | Stable | Upgraded | - |
| Bank Loan Ratings | 7.00 | - | ACUITE A4 | Reaffirmed |
| Total Outstanding Quantum (Rs. Cr) | 66.00 | - | - |
| Total Withdrawn Quantum (Rs. Cr) | 0.00 | - | - |
| Rating Rationale |
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Acuité has upgraded the long-term rating to ‘ACUITE BB-’ (read as ACUITE double B minus) from ‘ACUITE B-’ (read as ACUITE B minus) and reaffirmed the short-term rating of ‘ACUITE A4’ (read as ACUITE A four) on the Rs.66.00 Cr bank facilities of H M Steels Limited (HMSL). The outlook remains ‘Stable’.
Rationale for the rating The rating upgrade factors the significant improvement in the operating income of the company in FY2022 marked by 65 per cent Y-o-Y growth in the revenues. The rating also considers the experienced management and the above average financial risk profile of the company reflected by comfortable gearing. These strengths are, however, offset by the moderate working capital management and the highly fragmented industry. |
| About the Company |
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Incorporated in 1999, H M Steels Limited (HMSL) is promoted by Mr. Megh Raj Garg, Mr. Rajnish Bansal, Mr. Pankaj Bansal and Mr. Ashok Kumar Singla. Based in Sirmour (Himachal Pradesh), the company is engaged in the manufacture of ingots, ERW pipes, MS bars and galvanised iron pipes.
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| Analytical Approach |
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Acuité has considered the standalone business and financial risk profile of HMSL to arrive at the rating.
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Key Rating Drivers
| Strengths |
The directors, Mr. Megh Raj Garg, Mr. Rajnish Bansal, Mr. Pankaj Bansal and Mr. Ashok Kumar Singla, possess a decade long expertise in the same line of business. The experienced management along with HMSL's two decades long presence in the industry has assisted the company’s performance by developing healthy relationships with the clientele, Jindal Supreme (India) Private Limited, Bansal Iron & Steel Rolling Mills, JLT Infra Limited, to name a few. The company achieved 65 per cent Y-o-Y growth in the operating income and has achieved revenues of Rs.560.70 Cr. in FY2022 as compared to Rs.340.29 Cr. in FY2021. Further, the company has achieved revenues of around Rs.404.36 Cr. till November, 2022 (provisional). The significant improvement in operating income is on account of increase in the production capacity utilisation along with increase in the average realizations. Acuité believes that the business risk profile of the company is expected to improve over the medium term on account of increase in the capacity utilisation and rise in the demand of steel products.
The company’s above average financial risk profile is reflected by modest net worth base, comfortable gearing and moderate debt protection metrics. The tangible net worth of the company increased to Rs.63.31 Cr as on March 31, 2022 from Rs.56.50 Cr as on March 31, 2021 due to accretion of reserves. Gearing of the company stood below unity at 0.55 times as on March 31, 2022 as compared to Rs.0.69 times as on March 31, 2021, whereas, Total Outside Liabilities/Tangible Net Worth (TOL/TNW) stood at 1.24 times as on March 31, 2022 as against 1.28 times as on March 31, 2021. However, the modest debt coverage metrics is marked by Interest Coverage Ratio (ICR) at 3.15 times as on March 31, 2022 and Debt Service Coverage Ratio at 1.03 times as on March 31, 2022. The Net Cash Accruals/Total Debt (NCA/TD) stood at 0.26 times as on March 31, 2022. Acuité believes that the financial risk profile of company will continue to remain above average over the medium term, in absence of any major debt funded capex plans.
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| Weaknesses |
The operating margin of the company marginally declined to 2.51 per cent in FY22 as against 3.15 percent in FY21 on account of increase in the raw material cost which could not be passed on to the end user. The PAT margin slightly dipped to 1.23 per cent in FY22 as compared to 1.28 per cent in FY21. The ROCE levels stood at 11.09 per cent in FY22 as compared to 9.82 per cent in FY21. Acuité believes that going forward, the firm’s ability to improve the profitability margins will be a key sensitivity factor.
The moderate working capital management of the company is marked by gross current asset (GCA) of 70 days in FY2022 as against 102 days in the previous year. The modest GCA days are primarily on account of high other current assets owing to advance paid to suppliers in order to pre-book the iron scrap to avoid material shortage. The advance to suppliers stood at Rs.21.03 Cr in FY2022 as against Rs.1.99 Cr in FY2021. However, the debtor period reduced to 25 days as on March 31, 2022 from 47 days in the previous year due to writing off the bad debts of around Rs.4.39 Cr in FY2022. The inventory period stood comfortable at 23 days as on 31st March, 2022 as compared to 19 days as on 31st March, 2021. Acuité believes that the working capital management of the company will remain moderate over the medium term as evident from the high other current assets maintained.
Steel consumption is majorly dependent on the economic activities taking place in and around the country. The end-user industry being Infrastructure and Real Estate, any significant slowdown in these industries will affect the revenues of steel players. Further, HMSL competes with various players in the organized and unorganized segments in the steel industry, thus limiting the pricing power.
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| Rating Sensitivities |
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| Material covenants |
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None
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| Liquidity position: Adequate |
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The company’s liquidity position is adequate marked by net cash accruals of Rs.9.03 Cr in FY2022 as against long term debt repayment of Rs.8.64 Cr over the same period. The current ratio stood comfortable at 1.51 times as on 31st March, 2022 as compared to 1.44 times as on 31st March, 2021. The cash and bank balances of the company stood at Rs.0.19 Cr in FY2022 as compared to Rs.0.18 Cr in FY2021. However, the fund based limit utilization is at 88 per cent over the six months ended October, 2022. The working capital management of the company is moderate marked by Gross Current Assets (GCA) of 70 days in FY2022 as compared to 102 days in FY2021 due to high other current assets owing to advance paid to suppliers. Acuité believes that going forward the company’s liquidity position will improve due to gradually increasing net cash accruals and reduction in the yearly debt repayment burden.
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| Outlook: Stable |
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Acuité believes that the outlook on HMSL will remain 'Stable' over the medium term on account of the experience of the promoters, the company’s long track record of operations and the growing revenue level. The outlook may be revised to 'Positive' in case the company continues to register consistent growth in revenues while sustaining their capital structure. Conversely, the outlook may be revised to ‘Negative’ in case of a decline in the company’s revenues, or in case of deterioration in the company’s financial risk profile and liquidity position.
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| Other Factors affecting Rating |
| None |
| Particulars | Unit | FY 22 (Actual) | FY 21 (Actual) |
| Operating Income | Rs. Cr. | 560.70 | 340.29 |
| PAT | Rs. Cr. | 6.89 | 4.35 |
| PAT Margin | (%) | 1.23 | 1.28 |
| Total Debt/Tangible Net Worth | Times | 0.55 | 0.69 |
| PBDIT/Interest | Times | 3.15 | 2.43 |
| Status of non-cooperation with previous CRA (if applicable) |
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None
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| Any other information |
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None
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| Applicable Criteria |
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• Default Recognition :- https://www.acuite.in/view-rating-criteria-52.htm • Manufacturing Entities: https://www.acuite.in/view-rating-criteria-59.htm • Application Of Financial Ratios And Adjustments: https://www.acuite.in/view-rating-criteria-53.htm |
| Note on complexity levels of the rated instrument |
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In order to inform the investors about complexity of instruments, Acuité has categorized such instruments in three levels: Simple, Complex and Highly Complex. Acuite’ s categorisation of the instruments across the three categories is based on factors like variability of the returns to the investors, uncertainty in cash flow patterns, number of counterparties and general understanding of the instrument by the market. It has to be understood that complexity is different from credit risk and even an instrument categorized as 'Simple' can carry high levels of risk. For more details, please refer Rating Criteria “Complexity Level Of Financial Instruments” on www.acuite.in
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