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| Product | Quantum (Rs. Cr) | Long Term Rating | Short Term Rating |
| Bank Loan Ratings | 98.40 | ACUITE BBB- | Stable | Reaffirmed | - |
| Total Outstanding Quantum (Rs. Cr) | 98.40 | - | - |
| Rating Rationale |
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Acuité has reaffirmed the long-term rating of ‘ACUITE BBB-’ (read as ACUITE triple B minus) on the Rs.98.40 Cr bank facilities of Shah Sponge and Power Limited (SSPL). The outlook remains ‘Stable'.
Rationale for rating reaffirmation The rating takes into account the healthy business risk profile of the company, marked by sustained improvement in scale of operations backed by an increase in realisations of sponge iron and the semi integrated nature of operations. The rating factors in established operations with experienced management in the steel industry. The rating also draws comfort from the healthy financial risk profile and adequate liquidity position of the company. Acuité also takes note of the ongoing capex plan to increase the manufacturing capacities of the company, which is being funded through both long-term debt and internal accruals. The commercial operations are expected to begin in April 2024. However, the financial risk profile of the company is expected to deteriorate with the addition of new debt in the near term. Furthermore, the profitability of the company witnessed deterioration and remains susceptible to volatility in raw material prices, and the operations remain exposed to the cyclical nature of the steel industry. |
| About the Company |
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Based in Jharkhand, Shah Sponge and Power Limited (SSPL) is incorporated in 2005 and is promoted by Ms. Sumitra Kumar Shah, Mr. Shyam Sunder Shah and Mr. Raj Kumar Shah. SSPL has a semi-integrated steel plant, engaged in the manufacturing of sponge iron and billets having an installed capacity of 1,20,000 MTPA and 88,000 MTPA respectively. The manufacturing facility of the company is located in the village Juri (Hata, near Jamshedpur). The company purchases coal and crude iron as its raw material for manufacturing of sponge iron.
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| Analytical Approach |
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Acuité has considered the standalone business and financial risk profile of SSPL while arriving at the rating.
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Key Rating Drivers
| Strengths |
| Established track record of operations aided by a semi-integrated manufacturing facility
SSPL has established a long track record of operations spanning over a decade in the iron and steel industry. The company is managed by Shri Shyam Sunder Shah and Shri Raj Kumar Shah, who have extensive industry knowledge of more than four decades. Acuité believes that the extensive experience of the management and the long track record of operations at SSPL will continue to benefit the company’s growth plans going forward. The company has a partially integrated steel manufacturing facility engaged in the manufacturing of sponge iron, billets, and eco-friendly fly ash brick. The sponge iron required for the production of billets is met entirely through the in-house production of sponge iron. The surplus production of sponge iron is sold to other billet manufacturers in the market. Acuité believes the semi integrated nature of operations of the company provides efficiency in terms of operations and mitigates the risks arising from the cyclical nature of steel industry to some extent. Improvement in scale of operations The company registered an improvement in scale of operations and achieved revenues of Rs.522.80 Cr in FY2023 (provisional) as against Rs.519.01 Cr in FY2022 and Rs.283.13 Cr in FY2021, thereby, registering a CAGR of 35.94 percent over the two years. The upsurge in operating income is on account of an increase in average realisations supported by a favourable demand scenario for sponge iron and the semi-integrated nature of operations. The growth in revenues was also supported by healthy demand and growth in production levels at the company during the period. The company has undertaken a capex plan to install one DRI Klin of 350 TPD and one Waste Heat Recovery Boiler (WHRB) of 45 TPH which will likely enhance the production capacity of the sponge iron from the existing 1,20,000 MTPA to 2,25,000 MTPA and is also expected to reduce the power cost of the company. The project already commenced in April, 2023 and is expected to be completed by March, 2024 with trial runs starting in the same month. The commercial operations are expected to start in April, 2024. The total cost of the project is Rs.114.35 Cr out of which, Rs.75 Cr will be funded through a term loan and the rest is to be financed by internal accruals and unsecured loans. Acuité believes that going forward, the scale of operations will remain healthy over the medium term, driven by capacity additions, an established market position, and the continued thrust on infrastructure development, along with a pick-up in real estate and construction activities by the government. Healthy financial risk profile The healthy financial risk profile of the company is marked by a healthy net worth, low gearing, and comfortable debt protection metrics. The tangible net worth of the company increased Rs.154.93 Cr as on March 31, 2023 (Provisional) from Rs.146.60 Cr as of March 31, 2022, on account of the accretion of profits. The gearing of the company remained comfortable at 0.60 as on March 31, 2023 (provisional) as compared to 0.59 as of March 31, 2022 on account of a low debt burden. However, with the ongoing capex plan and addition of new debt, the gearing level of the company is expected to deteriorate in the near term. The Total outside Liabilities/Tangible Net Worth (TOL/TNW) stood low at 0.77 times as of March 31, 2023 (provisional) as against 0.90 times as on March 31, 2022. The debt protection matrices of the company remain comfortable, marked by Interest Coverage Ratio (ICR) of 3.26 times and Debt Service Coverage Ratio (DSCR) of 1.82 times in FY 2023 (provisional). The Net Cash Accruals/Total Debt (NCA/TD) stood low at 0.19 times as on March 31, 2023 (provisional). Acuité believes that, going forward, the gearing is expected to moderate on the back of ongoing capex; however, the financial risk profile of the company will remain healthy backed by improvements in the accruals. |
| Weaknesses |
| Volatile profitability margins
The profitability margins of the company have witnessed moderation over the past two years. The operating margin marginally improved to 5.55 percent in FY2023 (provisional) from 5.36 percent in FY2022 and 9.09 percent in FY2021. The fluctuations in the margin is on account of fluctuating raw material costs. The PAT margin stood at 1.59 percent in FY2023 (provisional), against 1.29 percent in FY2022 and 5.06 percent in FY2021. Also, the profitability of the company remained susceptible to volatility in raw material prices. However, with the 15-MW captive power plant and new capex plans, the volatility in raw material prices is mitigated to some extent. Exposure to the cyclical and competitive steel sector The company'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 economies. While there has been a significant push by the government on steel-intensive sectors such as railways and infrastructure, any sustained downturn in demand will adversely impact the performance of steel companies. The competitive intensity in the Indian steel sector is significant owing to presence of large steel companies. Additionally, the domestic steel sector is fairly capital intensive. |
| 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 adequate liquidity position of the company is reflected by the healthy net cash accruals of Rs.17.28 Cr in FY2023 (provisional) as against the long term debt repayment of only Rs.5.44 Cr during the same period. The fund based limit remains moderately utilised at 84 percent over the six months ended January, 2022. The current ratio stood at 1.42 times as of March 31, 2023 (provisional) and as of March 31, 2022 as well. The cash and bank balances of the company stood at Rs.5.47 Cr as on March 31, 2023 (provisional). The working capital management of the company is efficient in nature, as evidenced by Gross Current Assets (GCA) of 94 days as of March 31, 2023 (provisional) as against 103 days as of March 31, 2022. Acuité believes that going forward, the company will maintain an adequate liquidity position on account of improving accruals.
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| Outlook: Stable |
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Acuité believes that the outlook of the company will remain 'Stable' over the medium term on account of the long track record of operations, experienced management, sound business position, and healthy financial risk profile. The outlook may be revised to 'Positive' in the case of significant growth in revenue while achieving sustained improvement in operating margins, capital structure, and working capital management. Conversely, the outlook may be revised to ‘Negative’ in the event of a decline in the company’s revenues or profit margins, a deterioration in the company’s financial risk profile, a delay in the completion of its projects, or a further elongation in its working capital cycle.
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| Other Factors affecting Rating |
| None |
| Particulars | Unit | FY 22 (Actual) | FY 21 (Actual) |
| Operating Income | Rs. Cr. | 519.01 | 283.13 |
| PAT | Rs. Cr. | 6.70 | 14.32 |
| PAT Margin | (%) | 1.29 | 5.06 |
| Total Debt/Tangible Net Worth | Times | 0.59 | 0.51 |
| PBDIT/Interest | Times | 3.63 | 6.22 |
| Status of non-cooperation with previous CRA (if applicable) |
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Not Applicable
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| Any other information |
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Not Applicable
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| Applicable Criteria |
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• Manufacturing Entities: https://www.acuite.in/view-rating-criteria-59.htm • Default Recognition: https://www.acuite.in/view-rating-criteria-52.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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