Rating Rationale
January 02, 2019 | Mumbai
Bajaj Steel Industries Limited
Ratings upgraded to 'CRISIL BBB/Stable/CRISIL A3+'
Rating Action
Total Bank Loan Facilities Rated Rs.63.58 Crore
Long Term Rating CRISIL BBB/Stable (Upgraded from 'CRISIL BBB-/Stable')
Short Term Rating CRISIL A3+ (Upgraded from 'CRISIL A3')
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has upgraded its ratings on the bank facilities of Bajaj Steel Industries Limited (BSI) to 'CRISIL BBB/Stable/CRISIL A3+' from 'CRISIL BBB-/Stable/CRISIL A3'.
The upgrade reflects strengthening of BSI's overall credit risk profile through sustained improvement in operating performance in the first half of fiscal 2019 (H1'19), supported by strong ramp up in revenue and stable probability. Operating income, on a consolidated basis, grew more than 50% in H1'19 from the corresponding period the previous fiscal, backed by strong contribution from export orders (more than 40% to the overall operating income). Operating margin also sustained at 9%, backed by healthy margin from export orders and contained operational costs.
Financial risk profile has also improved, with gearing improving to 1 time as on September 30, 2018, from 1.19 times as on March 31, 2018, backed by healthy accretion to reserve and sustained debt of Rs 80 crore. Operating performance is expected to remain stable over the medium term, driven by its moderate outstanding orders to be executed in the next 4-5 months. Furthermore, accrual should remain moderate in the absence of any larger-than-expected debt-funded capital expenditure (capex).
The ratings continue to reflect BSI's established market position and the extensive experience of its promoters in the cotton ginning machinery business, and above-average financial risk profile. These strengths are partially offset by susceptibility to economic downturns and to volatility in cotton demand-supply and price metrics, and moderate working capital cycle.

Analytical Approach

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.

Unsecured loans (outstanding at Rs 35.58 crore as on September 30, 2018) from the promoters and related parties have been treated as debt, as they bear interest and are not subordinated to bank debt, though withdrawals have been minimal over the past three years.

Please refer Annexure - Details of Consolidation, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description
* Established market position and extensive experience of the promoters
BSI is one of the very few integrated ginning machinery manufacturer in India and has a significant market share, reflecting high acceptability of its products. Besides a strong domestic presence, the company also exports to several countries in the Indian subcontinent, USA, South East Asia, Africa, Australia, and Europe.
BSI collaborated with Continental Eagle Corporation (CEC), USA, in 2009, to introduce the saw-ginning technology-based machinery. Till then, BSI manufactured only the double-roller technology-based machinery, which was commonly used in India and some parts of Africa. In 2012, BSI acquired CEC and set up Bajaj Coneagle LLC as its wholly owned subsidiary in the USA, mainly to serve the customers in USA. CEC was a 180-year-old company that manufactures machinery for ginning, processing, and handling cotton, and has marketing offices across the world, and a strong clientele in major cotton-growing nations. Currently, BSI is one of the few companies in the world which owns all the four technologies in cotton ginning machinery industry.
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 financial support as and when necessary. Over the past few years, the management has expanded its direct exports to countries across Africa, America and Australia, and has been able to secure several new clientele gradually.
* Above-average financial risk profile
Outstanding debt was Rs 79.4 crore as on September 30, 2018. Networth grew to around Rs 80 crore as on September 30, 2018, from Rs 56 crore as on March 31, 2017, supported by steady improvement in accrual since fiscal 2018. Consequently, gearing improved to 1 time from 1.44 times. Unsecured loans from the promoters and related parties form nearly 45% of the total debt, reflecting low dependence on external borrowings. Total outside liabilities to tangible networth is estimated to be around 2.1 times as on September 30, 2018.
Operating performance has improved in the past 18 months, backed by strong contribution from export orders: more than 30% and 40% of operating income in fiscal 2018 and H1'19, respectively. Steady improvement in accrual to Rs 17 crore in fiscal 2018, and to around Rs 14 crore in H1'19, from negative accrual in fiscal 2017 has resulted in healthy debt protection metrics: interest coverage and net cash accrual to total debt ratios improved to over 3 times and 0.20 time, respectively.
The company plans to undertake capex of around Rs 15 crore in fiscals 2020 and 2021 towards expanding its plant operations, which would be funded through debt of Rs 7-8 crore. Despite the capex, capital structure is expected to remain adequate over the medium term, supported by expected sustenance in profitability.
* 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. Domestic demand has been volatile in the past three years due to subdued cotton production and profitability in the market. Cotton production, which grew 5% in cotton season (CS) 2018 (October 2016-September 2017), is estimated to have declined by 3%, to around 356 lakh bales in CS19, due to pest attacks and farmers switching to other profitable crops. On the global front, too, cotton production is estimated to have declined in major cotton production economies, USA and China, caused by the drought situation in USA and subdued demand in China. Additionally, economic growth and policy changes may also impact capex 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. Though the company has been diversifying into different regions across the world since then to mitigate the risks, growth in business will continue to be constrained by the volatility in the industry. Furthermore, BSI's ability to absorb fixed cost during low demand determines its profitability, and remains a key rating sensitivity factor.
* Moderate working capital cycle
Working capital cycle, which was healthy till fiscal 2015, has gradually deteriorated in the past three fiscals, with gross current assets at over 200 days as on March 31, 2018, from around 150 days as on March 31, 2015. This was largely driven by increase in receivables to around 70 days from below 50 days. Furthermore, debtors greater than six months (including doubtful receivables) form a significant portion, constraining operational efficiency. Though these debtors have improved to 30% of the total debtors as on September 30, 2018, from more than 40% in the past three fiscals, due to gradual improvement in receivables from the plastic division, they continue to remain high. Inventory has also marginally increased to around 90 days as on March 31, 2018, from 80 days as on March 31, 2015. Given the expected increase in revenue contribution from exports over the medium term, inventory could increase further. Sustenance in working capital cycle will remain a key rating sensitivity factor.
Outlook: Stable

CRISIL believes BSI will maintain its established position in the cotton ginning machine manufacturing business. Financial risk profile should remain stable, backed by steady operating performance and moderate debt. The outlook may be revised to 'Positive' in case of sustained improvement in operating performance, largely supported by increase in export clientele, while maintaining financial risk profile. Conversely, the outlook may be revised to 'Negative' in case of deterioration in operating performance due to subdued demand in the industry, or in case of weaker-than-expected working capital cycle, or in case of larger-than-expected debt-funded capex resulting in deterioration of debt protection metrics.

Liquidity is adequate, supported by annual cash accrual of more than Rs 15 crore expected over the medium term against annual debt obligation of Rs 1-3 crore over fiscals 2019 and 2021. Cash and cash equivalents remained more than Rs 20 crore as on September 30, 2018, and included around Rs 5 crore of unencumbered cash balances. The company primarily uses fund-based facilities for meeting working capital requirement. Utilisation of the bank limit averaged a high 95% in fiscal 2017, but moderated to 77% in the 12 months through October 2018; average utilisation of non-fund based facilities remained less than 60%. Debtors greater than six months, which improved to 41.7% as on March 31, 2018, from over 45% as on March 31, 2016 and March 31, 2017, further improved to 30% as on September 30, 2018, due to further improvement in receivables from the plastic division.

About the Company

Incorporated in 1961, BSI 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. The registered office and four manufacturing units are in Nagpur. The steel and plastic divisions contributed around 70% and 30%, respectively, to revenue in fiscal 2018.
In 2012, BSI acquired CEC to set up Bajaj Coneagle LLC as its wholly owned subsidiary in USA. The company owns another wholly owned subsidiary in Uganda, namely Bajaj Steel Industries (U) Ltd, which sells cotton ginning machines to cotton development organisations in the country. 
On a standalone basis, for the first half of fiscal 2019, profit after tax was Rs 8.6 crore on net sales of Rs 149 crore, as against Rs 2.2 crore and Rs 101 crore, respectively, for the previous corresponding period.

Key Financial Indicators
Consolidated financials as on / for the period ended March 31   2018 2017
Revenue Rs crore 248.5 238.9
Profit after tax Rs crore 11.5 -10.0
PAT margin % 4.6% -4.2%
Adjusted debt/adjusted networth Times 1.19 1.44
Interest coverage Times 2.83 0.48

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)
ISIN Name of instrument Date of allotment Coupon rate (%) Maturity
(Rs Cr)
Rating outstanding
with Outlook
NA Bank guarantee NA NA NA 0.5 CRISIL A3+
NA Cash credit@ NA NA NA 30 CRISIL BBB/Stable
NA Cash credit NA NA NA 14 CRISIL BBB/Stable
NA Letter of credit NA NA NA 6 CRISIL A3+
NA Letter of credit & Bank Guarantee# NA NA NA 7 CRISIL A3+
NA Term loan* NA NA 02-May-19 4.25 CRISIL BBB/Stable
NA Term loan NA NA 18-Nov-18$ 1.83 CRISIL BBB/Stable
@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
$Term loan has been fully repaid. Documents awaited for withdrawal

Annexure - Details of consolidation
Entity consolidated Extent of consolidation Rationale for consolidation
Bajaj Coneagle LLC, USA Full Strong operational and financial linkages with BSI
Bajaj Steel Industries (U) Ltd., Uganda Full Strong operational and financial linkages with BSI
Annexure - Rating History for last 3 Years
  Current 2019 (History) 2018  2017  2016  Start of 2016
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund-based Bank Facilities  LT/ST  50.08  CRISIL BBB/Stable      15-05-18  CRISIL BBB-/Stable  15-11-17  CRISIL BBB-/Negative  11-07-16  CRISIL A-/Negative  CRISIL A/Stable 
                07-03-17  CRISIL BBB/Negative       
Non Fund-based Bank Facilities  LT/ST  13.50  CRISIL A3+      15-05-18  CRISIL A3  15-11-17  CRISIL A3  11-07-16  CRISIL A2+  CRISIL A1 
                07-03-17  CRISIL A3+       
All amounts are in Rs.Cr.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Bank Guarantee .5 CRISIL A3+ Bank Guarantee .5 CRISIL A3
Cash Credit@ 30 CRISIL BBB/Stable Cash Credit@ 30 CRISIL BBB-/Stable
Cash Credit 14 CRISIL BBB/Stable Cash Credit 14 CRISIL BBB-/Stable
Letter of Credit 6 CRISIL A3+ Letter of Credit 6 CRISIL A3
Letter of credit & Bank Guarantee# 7 CRISIL A3+ Letter of credit & Bank Guarantee# 7 CRISIL A3
Term Loan* 4.25 CRISIL BBB/Stable Term Loan^ 4.25 CRISIL BBB-/Stable
Term Loan 1.83 CRISIL BBB/Stable Term Loan 1.83 CRISIL BBB-/Stable
Total 63.58 -- Total 63.58 --
@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 10.0 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
^ Includes sublimit of standby letter of credit/letter of undertaking to an extent of Rs 2.84 crore
Links to related criteria
CRISILs Approach to Financial Ratios
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating criteria for manufaturing and service sector companies
Rating Criteria for Cotton Textile Industry
CRISILs Approach to Recognising Default
CRISILs Bank Loan Ratings
CRISILs Criteria for Consolidation
CRISILs Criteria for rating short term debt

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