Experienced management
Experienced management and established track record of operations The company is managed by Mr. Sanjiv Chaudhary and his son Mr. Abhishek Chaudhary who collectively possess experience of more than 3 decades in ship breaking business. The operations are backed by availability good quality ship. The long presence of the promoters in the industry has resulted in healthy relationship with customers and suppliers. Further, the company 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. Acuité believes that SBSBPL will continue to benefit over the medium term on the back of the experience of the promoters.

Moderate financial risk profile and coverage indicators
Financial risk profile is moderate marked by a moderate Tangible Net worth, low gearing and comfortable debt protection metrics. Tangible networth of the company stood at 12.23 Cr as on 31st March, 2022 as against 12.04 Cr as on 31st March, 2021. Gearing of the company remained low at 0.24 times as on 31st March, 2022 as against 0.49 times as on 31st March, 2021. Total debt of the company stood at Rs.2.95 Cr as on 31st March 2022 as against Rs. 5.87 Cr as on 31st March 2021. Total debt of the company comprises of unsecured loans form directors and relatives. TOL/TNW of the company stood at 0.19 times as on 31st March, 2022 as against 0.43 times as on 31st March, 2021. NCA/Total Debt stood at 0.13 times in FY2022 The company has a sanctioned CC limit of 20 Cr and an LC limit of Rs. 100 Cr. Both the limits remain unutilised. Further, the company does not have any term loans. Hence the debt protection metrics remain comfortable.
Acuité believes that the financial risk profile will remain moderate in the near to medium term on account of and steady improvement in profitability and utilization of bank limits.

Deteriorating operating performance
Operating performance of Salasar Balaji Ship Breakers Pvt Ltd (SBSBPL) has seen a deterioration with a Y-o-Y degrowth of 85% in its revenue. Revenue of the company has seen a deterioration from Rs. 137.50 Cr in FY2020 to Rs.15.48 Cr in FY2021 and Rs.2.65 Cr in FY2022. SBSBPL was unable to purchase any ships for dismantling in the last two years on account of the Covid induced lockdown and high prices of the ship. SBSBPL had purchased a 37,695 MT ship in FY2020 for Rs.104.68 Cr and continued to record sale proceeds from dismantling of the ship through FY2021 and FY2022. For 1QFY2023 the company has recorded Rs.3.5 Cr of revenue. The company has signed Memorandum of Understanding with three entities for sale of Copper, Bras, Nickle, Stainless steel and other melting scraps. Such scraps will be sourced from other shipbreakers, factories or from its own dismantled inventory. However, such MOU’s are non-binding in nature. SBSBPL is currently bidding for 3 vessels ranging from 6,000 MT to 22,000 MT. Additionally, the company is also bidding for a power a solvent plant. Success achieved by the company in winning the bids might help in improving the operating performance of the company
SBSBPL recorded operating losses on account of deterioration in scale of operations. PAT margins saw an improvement form 0.89% in FY2021 to 7.43% in FY2022 on account of increase interest and other income.
Acuite believes that the improvement in scale of operations and profitability levels will remain key sensitivities factors in the medium term.

Intensive working capital operations
Working capital operations of the company are intensive marked by GCA days of 1,878 days in FY2022 as against 379 days in FY2021. High GCA days are driven by other current assets and high inventory holding period. Other current assets comprise of refundable deposit for bidding of ships of Rs.10 Cr. Further, SBSBPL has been unable to record sales on account of covid induced lockdown and absence of ships for dismantling. Hence, there is apile up of inventory.
Acuité believes that the ability of the company to efficiently manage its working capital requirements will remain key rating sensitivity

Exposure to risks related to cyclical and fragmented industry
SBSBPL is exposed to inherent cyclicality in the steel sector, which could affect both ship acquisition cost and realisation from scrap. The volatility in steel prices exposes the company to any adverse price movement on the uncut ship inventory as well as unsold inventory of steel scrap. Further, the viability of the business is inversely correlated with the international freight index. The company has to compete with small players during limited availability of vessels. Domestic players also face competition from shipbreakers of neighboring countries such as China, Bangladesh, and Pakistan. Exposure to environmental regulatory risk and volatility in foreign exchange fluctuation risk and scrap rates: SBSBPL is 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 labors and violation of human rights. Stringent environmental regulations may adversely impact the shipbreaking industry, thereby impacting the growth of the company. Further, the ship purchases are in foreign currency while realization is in domestic currency (Indian Rupees). Though the company uses forwards to hedge its forex risk, the cover is partial and taken based on management expectations on forex movement over a long duration of LC ranging from 90 to 270 days. Also, the scrap rates are volatile over the period of ship breaking which impacts the margin.