- Promoter's extensive experience in the steel fabrication industry
The promoters, Mr. MSRV Prasad and Mr. R Basavaiah, have spent over three decades in the industry through association with other companies engaged in the manufacturing and installation of steel prefabricated structures. The experience has enabled the promoters to establish strong relationships with key customers and suppliers, resulting in repeat orders and steady growth in scale. VGSPL has maintained healthy relationships with established customers, which include Tata Steel Ltd, Larsen & Toubro Ltd, Nuclear Power Corporation Ltd, and Indian Oil Corporation Ltd, among others. Acuité believes that the company will continue to derive benefits from the extensive experience of the promoters.
- Improvement in scale of operations and moderate order book position
The company has recorded YOY growth of 12.87 percent in FY2024 as compared to the previous year, which stood at Rs. 92.02 crore in FY2024 as compared to Rs. 81.53 crore in FY2023. The improvement in revenues is on account of steady inflow of orders and orders executed on time. The operating margin improved to 10.20 percent in FY2024 from 9.01 percent in FY2023. The improvement in the operating margin is mainly due to the introduction of defence products with a higher margin and moderation in raw material cost. The outstanding order book as on October 2024 stood at Rs. ~137.54 crore, which is expected to be completed in the next one year. Acuité believes that the ability to get new orders and ramp up its scale will remain a key monitorable.
- Moderate financial risk profile
The financial risk profile of the company has remained moderate with moderate capital structure, gearing, and debt protection metrics. The net worth of the company stood at Rs. 35.32 crore and Rs. 21.67 crore as on March 31, 2024, and 2023, respectively. The improvement in the net worth is mainly on account of equity infusion of Rs. 4.50 crore and quasi equity of Rs. 16.90 crore in FY2024. The gearing of the company stood at 1.65 times as on March 31, 2024 and improved against 2.60 times as on March 31, 2023. The reason for improvement in the gearing is on account of improvement in net worth. Debt protection metrics: interest coverage ratio and debt service coverage ratio stood at moderate, 1.26 times and 1.03 times as on March 31, 2024, respectively, as against 1.32 times and 1.07 times as on March 31, 2023, respectively. Tol/TNW stood at 2.67 times as on March 31, 2024, as against 4.54 times as on March 31, 2023. The debt to EBITDA of the company has improved in comparison to previous fiscals and stood at 5.85 times as on March 31, 2024, as against 7.04 times as on March 31, 2023. Acuité believes that in the absence of any major debt-funded capital expenditure, the financial risk profile is expected to remain at similar levels over the medium term.
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- Intensive working capital operations
The company’s working capital cycle is intensive, as reflected by its GCA days at 427 days in FY2024, as against 438 days in FY2023. GCA days are mainly affected by high inventory days and debtor days. Inventory days stood at 215 days in FY2024, as against 179 days in FY2023. The reason for the increase in inventory days is on account of defence orders, where the process of handing over the defence orders is different and the timing taking process is different. Before delivering the product to customers, they do quality checking, which takes time and needs approvals as well. This entire process takes time, hence inventory days are high (mostly it is finished goods). The debtor day stood at 188 days in FY2024, as against 252 days in FY2023. Subsequently, the payable period stood at 154 days in FY2024, as against 158 days in FY2023, respectively. Further, the average bank limit utilization for fund-based limits stood at ~97 percent for the last six months ended October 24.
- Susceptibility of operating margin to competitive pressure and volatility in raw material prices
Operations are highly susceptible to cyclicality in demand as well as competitive pressure in the steel fabrication industry. Operations are highly susceptible to cyclicality in demand as well as competitive pressure in the steel fabrication industry. The operating margins, however, improved to 10.20 percent in FY2024 from 9.01 percent in FY2023 on the back of the execution of a few high margin orders and various cost-cutting measures undertaken by the company. The prices of steel are volatile and linked to the fortunes of key end-user industries. Inability to pass on sharp fluctuations has led to volatile margins, and hence, stability in profitability will remain key monitorable.
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