| Extensive experience of promoters in the steel industry
The Group has an experience of more than three decades in the steel manufacturing. The key promoter of the group is Mr. Vinod Garg, who possess experience of more than three decades in the iron and steel industry. The extensive experience of the promoter has helped the company in establishing long term relationships with its customers and suppliers for repeat orders. The senior management team is ably supported by a strong line of mid-level managers who have extensive experience in their respective fields. Over the years of operations, the group has gradually increased its capacities and has increased its integration level benefiting their day to day operations. The steel manufacturing facilities of the group are located in proximity to the sources of key raw materials.
Acuité believes that extensive experience of the promoters with strong understanding of market dynamics, healthy relations with customers and suppliers, positive domestic demand outlook will continue to benefit the business profile of the group over the medium term.
Improved business profile supported by integrated nature of operations
The strong business risk profile of the Group is supported by the integrated nature of operations enhancing the operating efficiencies and mitigates the risks arising from the cyclical nature of steel industry to some extent. The Group's manufacturing facilities are integrated with manufacturing of sponge iron, Ingots/Billets and TMT Bars. The integration in operations lends to considerable operational efficiency and flexibility of changing the product mix as per market demand. The revenue from operations of the group has improved from Rs.1042.67 Cr in FY2021 as compared to revenues of Rs.1, 361.17 Cr in FY2022. The revenues of the group further improved to Rs.1972 Cr in FY2023 (Provisional). However, the operating profit margin of the group deteriorated marginally from 4.85 percent in FY2021 to 4.75 percent in FY2022 on account of increase in raw material prices. On the other hand, the PAT margins improved from 1.12 percent in FY2021 to 1.32 percent in FY2022 and ROCE improved from 7.98 percent in FY2021 to 8.48 percent in FY2022.
Acuité believes the revenue from operations of the group will continue to improve over medium term backed by backward integration, rise in capacity utilization and buoyancy in the steel industry.
Healthy financial risk profile
The Group’s financial risk profile is healthy marked by a healthy net worth, low gearing and comfortable debt protection metrics. The Group’s net worth improved to Rs.292.22 Cr as on March 31, 2022 as against Rs. 241.20 Cr as on 31 March, 2021 on account of accretion of profits to reserves during the same period. The gearing level of the group deteriorate and remain moderate at 1.07 times as on 31 March 2022 compared against 0.99 times same period last year. The deterioration is majorly on account of increase in outstanding debt levels of the group. Furthermore, the total outside liabilities to tangible net worth (TOL/TNW) stood at 1.38 times as on 31 March, 2022 respectively vis-à-vis 1.32 times as on 31 March, 2021. The debt protection metrics remain comfortable marked by interest coverage ratio and net cash accruals to total debt (NCA/TD) at 3.03 times and 0.12 times, respectively, in FY2022 as against at 2.69 times and 0.12 times, respectively, in FY2021. Also, the debt service coverage ratio of 1.93 times for FY2022 compared to 1.59 times for FY2021.
Acuité believes that the group’s financial risk profile will remain healthy on account of no major debt funded capex over the medium term.
|
Working capital intensive nature of operations
The Group’s operations are working capital intensive in nature as reflected by its gross current asset (GCA) days of 110-125 days during last three years ended 31st March 2022. The inventory days ranged between 64-71 days and debtor’s days ranged between 41-55 days during the last three years ended March 31, 2022. To support the working capital, the group stretches the creditors to an extent of about 23-46 days during the last three years ended March 31, 2022. Its bank limits are utilised at 72 percent during past 12 months through January, 2023.
Acuité believes that the working capital management of the group for the operations will remain a key rating sensitivity going ahead.
Susceptibility to cyclicality in the steel industry and end-user industry
The domestic steel sector is characterised by demand cyclicality, volatility in raw material and metal prices, high regulatory risk, and the risk of imports. Group operates in the cyclical steel industry thus making it vulnerable to downturns in industry demand, leading to decline in realizations and profitability. Moreover, the bulk of its revenue is derived from cyclical domestic end use industry, the demand depends on the economic growth and consumer sentiments, and thus any decline in demand can also have adverse impact on sales and profitability of group. Demand for steel products depends on the level of construction and infrastructure activities and any movement in economic cycles. Furthermore, the steel industry remains exposed to global steel prices. While the cost-efficient and integrated domestic steel operations of the company partially cushion profitability against cyclical downturns, it shall remain exposed to inherent price and demand volatility in the steel industry. Acuité believes that the domestic consumption growth to continue in FY2024 and FY2025, underpinned by demand growth from construction, real estate, automobiles and consumer durables segments. A high government spending on infrastructure, private sector capex and the availability of credit will support demand growth in the end-user segment.
Susceptibility to fluctuations in raw material prices or changes in government regulations
The Group’s operating profitability remained volatile at 4.21 percent to 4.85 percent for the three years ended March 31, 2022, as it is susceptible to fluctuations in raw material prices. The sector participants typically have high operating and financial leverage, large working capital requirements, and large-sized debt capital funding of the capex. Domestic steel producers are substantially dependent on imports of coking coal, and hence, any supply-side issue could have a material impact on utilisations and profitability. In addition, the metal prices are heavily dependent on international prices, as the domestic market is open for imports. China has been a key exporter in international market and accounts for about 50% of the global production. Hence, any changes in its economic policies that could impact infrastructure spending or easing of environmental norms can materially impact the metal prices. Acuité believes that increasing scale would result in better absorption and result in higher margins which would remain key rating monitorable.
|
