Rating Rationale

Key rating drivers and detailed description

Strengths:

Established market position and longstanding relationships with customers in multiple industries: The business risk profile is healthy with an established customer base and diverse product portfolio leading to repeat orders from major customers. Operating income increased to Rs 800.9 crore in fiscal 2022 from Rs 534.6 crore in fiscal 2021, driven by increasing realisations and ~13% increase in volumes of cold rolled (CR) sheets. The margins are expected to be sustained over the medium term owing to consistent management efforts to reduce cost of goods sold, and modification in the manufacturing process. In recent fiscals, the company has set up additional capacity for high tensile CR sheets and has made efforts to diversify its end-user industries with the addition of customers in the automobile, furniture and fan manufacturing industries. This is likely to mitigate the impact of any downturns or adverse conditions in a particular industry on its operating income and margin.

Healthy financial risk profile: Steady accretion to reserve should ensure the financial risk profile remains robust. The total outside liabilities to adjusted networth ratio is estimated to have been low at 0.72 time as on March 31, 2022. Debt protection metrics are adequate: interest coverage and net cash accrual to adjusted debt ratios are estimated at 6.99 times and 0.25 time, respectively, for fiscal 2022, and should remain comfortable over the medium term.

Weaknesses:

Exposure to risks inherent in the steel industry and moderate production capacity: The steel industry is inherently cyclical and remains vulnerable to volatility in raw material prices and price realisations. Nonetheless, CRISIL Ratings notes that the company is able to pass on raw material price fluctuations to its customers to an extent. The company’s scale of operations is expected to remain at similar levels over the medium term constrained by its moderate capacity and intense competition in the industry, which could also restrict its operating margin. Operating margin stood at 6.9% in fiscal 2022.

Working capital intensive operations: Gross current assets (GCAs) were sizeable at an estimated 148 days as on March 31, 2022, driven by debtors of 100 days, though inventory was low at 21 days. Working capital is supported by payables against letters of credit of 90 days and fund-based bank lines. Operations are expected to remain working capital intensive over the medium term because of credit offered to customers.