L?ong track record of operations and experienced promoters
The group has long operational track record in the iron and steel industry for around one and a half decade. Further, the Promoters have more than two decades of experience in the field of trading of iron ore and coal products and more than a decade of experience in manufacturing of steel and steel related products. Acuité believes that the long operational track record of the group coupled with the long experience of the management might continue to benefit the group going forward.

Moderation in business risk profile albeit improvement in overall operating performance
The operating income of the group increased significantly and stood at Rs. 1264.97 Cr. in FY24 as compared to Rs. 776.72 Cr. in FY23 reflecting a Y-O-Y growth of 62.86%, the growth in FY24 is mainly due to the increase in the orders for export of iron ore in KAIIPL. however, the company booked revenue of Rs. 404.63 Cr. (after adjusting inter-company transactions) out of which Rs. 97.28 Cr. is booked by KAIIPL and Rs. 347.97 Cr. is booked by BSFAPL till Q3FY25, decline in revenue of KAIIPL is due to reduced demand of iron ore and coal in Chinese markets. There was a decline in the turnover of BSFAPL, during FY24, primarily due to the reduction in realization. However, going forward the group is majorly going to focus on BSFAPL.

The operating margin of the group moderated to 4.39 per cent in FY24 as against 5.31 per cent in FY23 due to increase in material cost. However, the operating margin improved significantly and stood at 10.30 per cent in Q3FY25 on account of cost saving due to captive power plant. Also, the PAT margin moderated 2.36 per cent in FY24 as against 2.68 per cent in FY23. PAT margin increased to 4.64 per cent in Q3FY25. Acuite believes that with the planned capex towards expansion of existing DRI, SMS plant, captive power plant and forward integration of its unit, the profitability of the group is likely to improve in the medium term.

Semi integrated nature of operations with captive power plant and ongoing capex towards full integration
The sponge iron produced is used as a raw material for production of billets in BSFAPL and iron ore fines, coal, etc required for the production of sponge iron is procured from KAIIPL, thereby enabling the company to reap the benefits of semi-integrated nature of operations. Further, the company has a captive power plant of 22MW, which is the requirement of the plant in its full capacity, hence the entire power is captively sourced, and the group saves significantly on the power and fuel cost. Further, the group is undergoing a capex to make the unit fully integrated by setting up a rolling mill which is expected to start commercial production from Q1FY2026.

Healthy financial risk profile
The group’s financial risk profile is healthy marked by healthy net worth base, low gearing and strong debt protection metrics. The tangible net worth of the group increased to Rs.286.52 Cr. as on March 31, 2024 from Rs.215.37 Cr. as on March 31, 2023, due to accretion of profits and increase in equity share capital. Previously Acuite had considered an unsecured loan of Rs. 26.62 Cr as Quasi Equity but now Acuite has considered an unsecured loan of Rs.13.41 Cr. as Quasi Equity as there was no requirement for KAIIPL to maintain Quasi Equity due to lower utilisation of its working capital limits, also management has undertaken to maintain this amount in the business over the medium term.
Gearing stood low at 0.59 times as on March 31, 2024 as against 0.47 times as on March 31, 2023. The Total Outside Liabilities/Tangible Net Worth (TOL/TNW) stood at 1.09 times as on March 31, 2024 as against 1.75 times as on March 31, 2023. Moreover, the strong debt protection metrics is marked by Interest Coverage Ratio of 5.05times as on March 31, 2024 as against 5.24 times as on March 31, 2023; and Debt Service Coverage Ratio at 3.04 times as on March 31, 2024 as against 2.55 times as on March 31, 2023.

BSFAPL is undergoing a capital expenditure to expand its existing units and enhance its manufacturing facilities by installing additional 71,280 MTPA of Billet Unit & 1,62,000 MTPA of Rolling Mill. 2 furnaces of billet will start operations in Q4FY25 which will cost Rs. 23.00 Cr. funded through promoters’ contribution and internal accruals. Post stabilization of the billet unit the TMT unit will commence operations in the first quarter of FY26. The total project cost for Setting of Rolling Mill with capacity of 162000 MTPA is Rs.43.00 which will be funded through Rs.30.00 Cr. of term loan and Rs.13.00 Cr. of promoters contribution. During the previous capex, it was decided that the total term loan infusion would be Rs. 120.00 Cr. and rest would be through promoters’ contribution and internal accruals. The term loan infusion for funding project remained same despite the increase in the total cost.

Acuité believes that going forward the financial risk profile of the group is likely to be sustained despite debt funded capex plan backed by steady accruals and healthy net worth.

Moderately intensive working capital operations
The group has moderately working capital nature of operations marked by GCA days of 73 days in FY2024 as against 180 days in FY2023. K A I International Limited (KAIIPL) has paid significant advances to suppliers amounting to Rs. 140.47 Cr. in FY2023 to ensure regular availability the goods, which contributed to high GCA days in FY2023. However, the debtor collection period improved and stood comfortable at 06 days in FY2024 as against 10 days in FY2023. Also, the inventory period has improved to 29 days in FY2024 as compared to 62 days in FY2023.

Acuite believes that, the working capital operations of the group would remain moderately intensive over near to medium term owing to expected change in business mix with more focus on manufacturing than trading in the group.
 

Inherent cyclical nature of the steel industry
The group's performance remains vulnerable to cyclicality in the steel sector given the close linkage between the demand for steel products and the domestic and global economy. The end-user segments such as real estate, civil construction and engineering also display cyclicality. Further, operating margins are vulnerable to volatility in the input prices (sponge iron, iron ore and coal) as well as realisation from finished goods. The prices and supply of the main raw material, sponge iron, directly impacts the realisations of finished goods. Any significant reduction in the demand and prices adversely impacting the operating margins and cash accruals of the group will remain a key monitorable.