­Established track record and Experienced management
The Partners, Mr. Mahendra Gupta and Mr. Vishal Gupta are seasoned players in the Iron and Steel industry having an experience of four decades and two decades, respectively. The partners longstanding experience helped SH in securing repeated business orders from corporate clients for the value added products of ‘cut-to-size’ and wide product range within flat products. The firm’s client segment spans across automotive, engineering and agricultural equipment manufacturers among others and includes entities like Mitsubishi Lelvator India Private Limited, Buhler India Limited and Miltech Machinery Private Limited majority of whom have been engaged with the firm for over a decade.

Acuite believes that Steel House will continue to gain from the partners’ long-standing presence in the market.

Improvement in Operating Performance
The operating performance of the revenue improved in FY2022 as the total revenue of the firm stood at Rs.547.13 crore for FY2022 as against Rs.353.31 crore in FY2021 registering a growth of 53 percent year on year. Further, the firm has already achieved revenue of Rs. 380.82 crore till October 2022. The improvement in the revenue is on account of new orders and higher realisation. At the same time the operating margin of the firm remained stable at 8.95% in FY2022 against 8.42% in FY2021. The PAT margin stood at 7.16% in FY2022 as against 7.05% in FY2021. Also, SH deals with diversified customer base in various segments including automobile, heavy engineering ,electrical equipment, medical equipment , textile machineries and top ten customers contribute less than 20 percent of total revenue.

Acuite believes that the firm will be able to maintain the operating performance over the medium term on account of the diversified customer base and stable operating profit margin.

Healthy Financial Risk Profile
SH has a healthy financial risk profile with low gearing, moderate net worth and comfortable coverage ratios. The net worth of the firm stood at Rs.103.95 crore in FY2022 as against Rs.81.19 crore in FY2021. The gearing of the firm is low and further reduced to 0.61 times in FY2022 as against 0.98 times in FY2021. The total outside liabilities to total net worth ratio stood below unity at 0.62 times in FY2022 against 0.97 times in FY2021. The coverage ratios are comfortable, the interest coverage ratio stood at 6.86 times for FY2022 as against 5.23 times for FY2021. The DSCR stood at 4.42 times for FY2022 as against 4.29 times for FY2021. The total debt outstanding of Rs.62.95 crore as on March 31, 2022 includes working capital borrowings of Rs.58.73 crore and term loan obligations of Rs.4.22 crore.

Acuite believes that the financial risk profile of the firm will continue to remain healthy on account of absence of any debt-funded capex plan.

­Working Capital Intensive Nature of Operations
The operations of the company are of working capital-intensive in nature, marked by moderate GCA days of 100 days in FY2022 as against 144 days in FY2021. The moderate GCA days are on account of moderate receivable days of 65 days in FY2022 as against 97 days in FY2021 and low inventory days of 39 days in FY2022 as against 50 days in FY2021. The entity gives a credit period of 45 to 60 days to its customers and has to pay in advance to its suppliers. The average utilisation of working capital limits is around 58.43% for ten months ended October 2022.

Highly fragmented, cyclical and competitive iron and steel industry
The Iron & Steel industry comprises numerous unorganized players at different levels of the value chain. In addition to intense competition, the firm witnesses low value addition, which leads to low profitability margins. The inherent cyclical nature of the steel industry exposes the firm to adverse steel price fluctuations and inventory loss. However, the firm has been able to mitigate this risk to a large extent by passing on the costs to its customers.

Partnership nature of business
The firm is exposed to risk of capital withdrawal considering its partnership nature of constitution of the business. There have been instances in past for capital withdrawal but the promoters have maintained the funds required for operations of the business. Acuite believes, the management will maintain the capital required for proper functioning of the business.