| Experienced management and long track record of operations of the group in steel sector
The group has a long track record of operations around three decades in the steel manufacturing industry. The promoters started with trading of steel since 1990 under Ajay Steels Private Limited and ventured into manufacturing of TMT bars in 2002 through the acquisition of Gourav Krishna Ispat Private Limited. The Group has been successful in turning around loss making companies through inorganic and brownfield expansion in a very short time frame. Currently, the group is managed by Mr. Rajesh Agrawal, Mr. Ramesh Agrawal and Mr. Umesh Agarwal, who possess business experience of around three decades in the steel industry, supported by second generation directors.
Acuité believes that the vast experience of the promoter and the long track record has enabled the group to establish strong market position in Chhattisgarh and build healthy acceptability of its brand ‘GK TMT’ among large institutional clients as well as retail consumers
Integrated steel player along with locational advantage
The group is an integrated steel player that manufactures sponge iron, MS Billets, wire and TMT bars having a total installed capacity of 360,000 MTPA, 648,400 MTPA, 245,250 MTPA and 745,250 MTPA respectively. The group also has a 45.5 MW power plant for captive consumption. The units are located in proximity to the sources of key raw materials, iron ore and coal, leading to relatively lower landed cost. Real Group has linkages with the National Mineral Development Corporation (NMDC) and the South Eastern Coalfields Limited (SECL) for procurement of iron ore and coal, respectively. In addition, a significant portion of the total requirement of non- coking coal is procured from Ajay Steels, which is involved in trading of imported coal.
Acuité believes that the vertical integration in operations will lend considerable operational efficiency going forward. Further, apart from supporting the operating profitability, the backward integration will also ensure smooth raw material availability.
Sustained operating performance
The revenue of the group improved to Rs. 3827.66 Cr. in FY2023(prov.) from Rs. 3385.34 Cr. in FY2022 registering a growth of 13% y-oy basis. The operating profit margin of the group improved to 9.91% in FY2023(prov.) as against 7.74% in FY2022. The increase in the revenue of the group is on account of the increase in the prices of the products, which has also resulted in better realisation leading to increase in operating margins.
Healthy Financial Risk Profile
The group’s robust financial risk profile is marked by healthy net worth base, low gearing and robust debt protection metrics. The tangible net worth of the group improved to Rs.1406.38 Cr as on 31st March, 2023(prov.) as against Rs.1161.25 Cr as on 31st March, 2022 due to healthy accretion to reserves. The group follows a conservative leverage policy as reflected in its peak gearing of 0.11 times as on March 31, 2023(prov.) and as on March 31, 2022. The Total outside Liabilities/Tangible Net Worth (TOL/TNW) stood at 0.28 times as on March 31, 2023(prov.) as against 0.40 times as on March 31, 2022. The debt protection metrics of the group continued to remain strong marked by Interest Coverage Ratio at 90.86 times and Debt Service Coverage Ratio (DSCR) at 64.21 times as on March 31, 2023(prov.). The NCA/TD stood at comfortable 1.78 times in FY2023(prov.)
Acuité believes that the financial risk profile of the group is expected to remain at similar levels backed by steady accruals and no major debt funded capex plans.
Efficient Working Capital Management
The group’s working capital operations are efficiently managed marked by low Gross Current Asset (GCA) days and low working capital utilisation. The GCA days stood at 85 days as on March 31, 2023(prov.) as against 106 days as on 31st March 2022. The inventory days stood efficient at 36 days as on 31st March, 2023(prov.) as against 47 days as on 31st March 2022. The debtor days stood efficient at 20 days as on 31st March, 2023(prov.) as against 31 days as on 31st March 2022. The average utilisation of the fund-based limit is lower and stood at 13.86% and of non-fund based limits stood at 27.66% for twelve months ended as on April 2023.
Acuité believes that the working capital of the group would be managed efficiently over the medium term backed by efficient collection mechanism and inventory management.
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| Susceptibility of profitability to volatility in raw material prices, fragmented industry
The group’s profitability is highly susceptible to volatility in prices of the key raw material. Any sharp upward movement in the raw material prices and the inability of the group to pass on the increased cost of raw materials may result in further dip in operating margins. The group is operating in a competitive and fragmented nature of industry especially in primarily steel producing industry. There are several players who are engaged in the sponge iron and billets manufacturing business in organized and unorganized sector. Moreover, the profit margins of the group remain exposed to inherent cyclicality in the steel industry and volatility in raw material prices
Timely completion of the backward integration capex plan
The group has planned a greenfield capex of around Rs.600 Cr. for setting up an iron ore pellet capacity of 0.8 million MTPA, sponge iron capacity of 0.76 million MTPA, ferro alloys of 9 MVA and a captive power plant of 20 MW in Bhatapara, Chhattisgarh on a land already owned by RIPL. While there is project execution risk, the capex is unlikely to have any material impact on the group’s capital structure and liquidity, considering its high net worth and strong cash accruals. The capex is expected to increase the cost competitiveness of the group’s end products.
Acuité believes that the Group’s ability to execute the project within the budgeted cost and time will remain key monitorable.
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