| Bajaj Steel Industries Limited | ||||||
| Rating outlook revised to 'Positive'; ratings reaffirmed | ||||||
| Rating Action | ||||||
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| 1 crore = 10 million | ||||||
| Refer to annexure for Details of Instruments & Bank Facilities | ||||||
| Detailed Rationale |
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CRISIL has revised its rating outlook on the long-term bank facilities of Bajaj Steel Industries Limited (BSI) to 'Positive' from 'Stable', and reaffirmed the ratings on BSI's bank facilities at 'CRISIL BBB/CRISIL A3+'. |
| Analytical Approach |
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For arriving at the ratings, CRISIL has fully consolidated the business and financial risk profiles of BSI and its wholly owned subsidiaries-Bajaj Coneagle LLC, USA, and Bajaj Steel Industries (U) Ltd, Uganda-because of strong financial and operational linkages. |
| Key Rating Drivers & Detailed Description |
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Strengths: * Established market position and extensive experience of the promoters BSI has been manufacturing cotton ginning machinery since 1961 and in 2008 was awarded the 'Largest and Modern Cotton Ginning & Pressing Machinery Manufacturer in India' by the Ministry of Textiles. BSI is one of the very few integrated ginning machinery manufacturers in India and has more than 60% market share in the country. It is also the only company in the world that manufactures cotton ginning machinery based on all the four technologies available in the industry. Besides a strong domestic presence, the company also exports to several countries in the Indian subcontinent, USA, South East Asia, Africa, Australia, and Europe and has been able to secure several new international clientele. Furthermore, benefits from the extensive experience of the promoters (Bajaj family), who have been in the cotton business for more than 55 years, persists. The current promoters, led by Mr Rohit Bajaj (managing director), are actively involved in operations and extend timely, need-based financial support. * Improving geographical diversification providing stability to profitability The company over the last few years has been increasing its international footprint to safeguard itself from the cyclicality of domestic cotton production. BSI has a high proportion of fixed operating costs as a result of which margins in the past have witnessed significant dip during a slowdown in the domestic market. In fiscal 2017, operating margins dropped to 1.4% as revenues during the year were adversely impacted due to demonetisation. However, with increased geographical diversification, the company has been able to improve its scale despite a slowdown in domestic cotton production. While domestic cotton production de-grew in fiscal 2019, BSI's revenues grew by a healthy 53%, backed by strong contribution from export orders. Exports, which accounted for only about 22% of sales in fiscal 2016, accounted for more than 60% of the sales in H1'FY20 indicating BSI's ability to successfully cater to international markets. ROCE improved to 22% in fiscal 2019 from -3% in fiscal 2017. Operating margin improved to over 9% in fiscal 2019 and 2018 from 1.4% in fiscal 2017 and is expected to sustain at 9% over the medium term, backed by healthy revenue supported by export orders. * Above-average financial risk profile The financial risk profile remains healthy, supported by low external debt. Outstanding debt was about Rs 74 crore as on September 30, 2019, of which more than 50% were the unsecured loans extended by the promoters and related parties. Networth grew to around Rs 90 crore as on September 30, 2019, from Rs 56 crore as on March 31, 2017, supported by steady improvement in accrual since fiscal 2018. Consequently, total outside liabilities to tangible networth ratio and gearing moderated to 2.26 times and 0.82 time, respectively, as on September 30, 2019, from 2.56 times and 1.44 times as on March 31, 2017. Interest coverage ratio is expected to remain healthy at over 3.5 times over the medium term. Weaknesses: * Susceptibility to economic downturns and to volatility in cotton demand-supply and price metrics Demand for BSI comes from new ginning capacities being set up, and replacement demand from current ones and is linked to cotton production levels. Domestic production of cotton has been volatile in the past since the same is linked to monsoons and is also impacted by various other factors such as pest infestations and farmers switching to other profitable crops. Though the company has been diversifying into different regions across the world to mitigate these risks, growth in business will continue to be constrained by the volatility in cotton production around the world. USA is a key export market for the company and production in USA has been impacted in the recent past due to drought situations. Additionally, economic growth and policy changes may impact capital expenditure plans of the customers, as seen during demonetisation and reduced subsidies or minimum support prices from the government authorities in the past. Impact of these factors was seen in the weak performance in fiscals 2016 and 2017. * Moderate working capital requirement While there has been improvement in the working capital cycle in fiscal 2019 and H1'FY20, operations remain working capital intensive. Gross current asset days stood at around 170 days as on March 31, 2019, which has improved from over 200 days as on March 31, 2018. The company operates mainly in two divisions: steel and related products (largely manufacture of ginning machinery) and masterbatches. The company enjoys favourable payment terms in its steel division, where it receives a significant amount of advance payment at the time of booking. Receivables are hence largely related to the masterbatches division, where the company has been experiencing some payment delays from the dealers. Going forward, the receivable cycle is expected to improve as revenue from the steel division should grow while that from the masterbatches segment is expected to remain at current levels. |
| Liquidity Adequate |
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Liquidity is adequate, supported by healthy cash accrual, moderate unutilised bank lines, and cash and cash equivalents. Annual cash accrual of more than Rs 20 crore expected over the medium term will be sufficient to meet maturing debt of Rs 1-3 crore over fiscals 2020 and 2021. Utilisation of the fund-based bank limit was moderate and averaged 71% during the 12 months through October 2019. Also, unencumbered cash and bank balance were Rs 10.5 crore as on December 13, 2019. |
| Outlook: Positive |
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CRISIL believes BSI will continue to benefit from an established position in the cotton ginning machine manufacturing business and from expansion into newer geographies. |
| Rating Sensitivity factors |
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Upward factors * Revenue grows by more than 25% in fiscal 2020, with an operating margin of more than over 9% * Continued growth in revenue from export orders, with the company securing consistent orders from at least 2-3 different geographies Downward factors * Operating margin reduce below 8-9% * Decline in revenue from export orders * Deterioration in working capital cycle or higher than expected debt |
| About the Company |
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BSI, incorporated in 1961, manufactures cotton ginning automation and bale pressing machinery, spare parts, and plastic master batches. The company is one of the few players with operations across the entire ginning process value chain. It also sells pre-engineered buildings and electrical panels. It has a registered office and four manufacturing units in Nagpur. The steel and plastic divisions contributed around 80% and 20%, respectively, to revenue in fiscal 2019. |
| Key Financial Indicators | ||||||||||||||||||||||||
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Any other information: Not applicable |
| Note on complexity levels of the rated instrument: CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments. |
| Annexure - Details of Instrument(s) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
@Includes sublimit for packing credit/post-shipment credit/export packing credit/pre-shipment credit in foreign currency/foreign bill purchase/post-shipment credit in foreign currency to an extent of Rs 10 crore #Includes sublimit of bank guarantee of Rs 5.0 crore * Includes sublimit of standby letter of credit to an extent of Rs 2.84 crore | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annexure - List of entities consolidated | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| All amounts are in Rs.Cr. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annexure - Details of various bank facilities | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
@Includes sublimit for packing credit/post-shipment credit/export packing credit/pre-shipment credit in foreign currency/foreign bill purchase/post-shipment credit in foreign currency to an extent of Rs 10 crore #Includes sublimit of bank guarantee of Rs 5.0 crore * Includes sublimit of standby letter of credit to an extent of Rs 2.84 crore | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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