CRISIL has revised its rating outlook on the long-term loan of Shree Vaishnav Casting Pvt Ltd (SVCPL) to ‘Positive’ from ‘Stable’ while reaffirming the rating at ‘BB’, and has assigned its ‘BB/Positive’ rating on SVCPL’s cash credit facility.

The outlook revision reflects CRISIL’s belief that SVCPL, given the successful commissioning and stabilisation of its operations and the ‘Mega Project’ status awarded to its Nashik facility by the Governmant of Maharashtra, will reap the benefits of several subsidies and duty exemptions, which will boost its profitability over the medium term. The company, which is already operating at more than 80 per cent capacity utilisation, is likely to undertake large capacity expansion programme over the next few years to reap maximum benefits from the subsidies and duty exemptions.

CRISIL believes that if SVCPL judiciously funds its capital expenditure (capex) for the expansion project without weakening its current capital structure, then the company’s credit risk profile is expected to improve over the medium term. Timeliness in realisation of subsidy and proportion of debt in funding-mix of future capex remain rating sensitivity factors.

The rating continues to reflect in the pressure on SVCPL’s operating margin because of its presence in the highly fragmented steel cast industry, exposure to volatile raw material prices and foreign exchange rates, and its below-average financial risk profile, marked by small net worth and high gearing. These rating weaknesses are partially offset by SVCPL’s healthy growth prospects because of revival in its end-user industries, and the benefits it derives from its promoters’ industry experience.

Outlook: Positive
CRISIL believes that SVCPL’s business and financial risk profiles will improve over the medium term on the back of increasing scale of operations and realisation of capital subsidies under its ‘Mega Project’ status. The rating may be upgraded if SVCPL scales up its operations as planned without resulting in a decline in its profitability and capital structure. Conversely, the outlook may be revised to ‘Stable’ if the company contracts more-than-expected debt to fund its proposed capex, thereby leading to deterioration in its capital structure, or if it faces time and cost overrun in its expansion project.

About the Company
SVCPL is part of the Shree Vaishnav group, which was set up by Mr. Shersingh Agarwal in 1975. The company is a 50:50 joint venture of Mr. Shersingh Agarwal and family, and Mr. Bhagwandas Agarwal and family. SVCPL manufactures mild-steel (MS) billets at its plant in Nashik (Maharashtra) which has capacity of 75,000 tonnes per annum (tpa); the plant commenced operations in November 2009. SVCPL has plans to add another 25-tonne induction furnace towards the end of 2010-11 (refers to financial year, April 1 to March 31), which is expected to double its existing capacities.

The Shree Vaishnav group comprises nine companies, of which Shree Vaishnav Alloys Pvt Ltd, Shree Vaishnav Industries Pvt Ltd, and Shree Vaishnav Ispat Pvt Ltd are rated ‘BBB-/Stable/P3’ by CRISIL. These companies manufacture thermo-mechanically treated bars, TOR bars, MS beams, channels, and angles, for use in the construction industry. The other companies in the group trade in steel and iron, or are investment firms.

Mr. Bhagwandas Agarwal and family are into automotive ancillary business through Narasinha Engineering Pvt Ltd. The family is also into real estate business in Nashik.

For 2009-10, SVCPL reported net profit of Rs.8.1 million on net sales of Rs.700.3 million.