CRISIL has upgraded its ratings on Shivam India Ltd (SIL, part of the Shivam group) to ‘BB/Stable/P4+’ from ‘B+/Stable/P4’. The upgrade reflects the improved backward integration of operations within the Shivam group because of the setting up of a sponge iron plant under Shivam Dhatu Udhyog Pvt Ltd (SDUPL). This is expected to lead to improved profitability for the group and make it less vulnerable to cyclicality in the prices of steel.

The ratings reflect the Shivam group’s small scale of operations in the steel industry and sizeable debt-funded capital expenditure (capex) plans. These rating weaknesses are partially offset by the Shivam group’s expected improvement in sales volumes and profitability because of gradual stabilisation of operations and by the backward integration.

For arriving at its ratings, CRISIL has combined the business and financial risk profiles of SIL and SDUPL. This is because the two companies, together referred to as the Shivam group, are under a common management team, are in similar lines of business, and have operational and financial linkages.

Outlook: Stable
CRISIL believes that the Shivam group’s operating profitability will gradually improve over the medium term because of backward integration. However, the group will remain a minor entity in the steel industry. The outlook may be revised to ‘Positive’ if the Shivam group significantly improves its profitability and secures linkages for raw material procurement. Conversely, the outlook may be revised to ‘Negative’ if the group undertakes larger-than-expected debt-funded capex, or if its profitability is strained.

About the Group
SIL was incorporated in December 1999 as Shivam India Pvt Ltd, which manufactured coke. The company was reconstituted as a public limited company in 2004-05 (refers to financial year, April 1 to March 31), and discontinued its coke business and started producing steel products in 2005-06. SIL has installed capacity of 108,000 tonnes per annum (tpa) for billets and installed capacity of 100,000 tpa for thermo-mechanically treated (TMT) steel bars, rods, wires, and coils.

SDUPL was set up in 2004 and is engaged in manufacturing of sponge iron and has set up sponge iron manufacturing unit with capacity of 60000 MTPA with two kilns of 100 TPD each at Jamuria Industrial Area, Jamuria, Burdwan, West Bengal, in 2009-10.

The Shivam group reported a profit after tax (PAT) of Rs.32 million on operating income of Rs.2940 million for 2008-09, against a PAT of Rs.34 million on operating income of Rs.2339 million for 2007-08.