Rating Rationale
September 30, 2020 | Mumbai
Bajaj Steel Industries Limited
Ratings upgraded to 'CRISIL A-/Stable/CRISIL A2+' 
 
Rating Action
Total Bank Loan Facilities Rated Rs.116 Crore (Enhanced from Rs.63.58 Crore)
Long Term Rating CRISIL A-/Stable (Upgraded from 'CRISIL BBB/Positive')
Short Term Rating CRISIL A2+ (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 A-/Stable/CRISIL A2+' from 'CRISIL BBB/Positive/CRISIL A3+'. 
 
The upgrade reflects improvement in the credit risk profile, backed by healthy execution of high-margin export orders. There was sustained improvement in operating performance through the first quarter of fiscal 2021, supported by healthy revenue growth and improved probability. Revenue, on a consolidated basis, grew by 10% fiscal-on-fiscal in fiscal 2020 despite the lockdown imposed to contain the Covid-19 pandemic in March 2020.  The growth was backed by strong contribution from export orders. Furthermore, revenue for the first quarter of fiscal 2021, which only includes sales for May and June 2020 given the lockdown, stood at Rs 82 crore which is 25% higher than the revenue for May and June 2019. The share of exports in total sales increased from only about 14% in fiscal 2016, to 49% in fiscal 2020 and to more than 55% in the first quarter of fiscal 2021, indicating the ability to successfully cater to international markets. The company has been able to grow its order book by securing orders in new geographies, thereby significantly reducing the dependence on domestic cotton production. Present order book is the highest till date and provides healthy revenue visibility. More than 90% of these orders were received after April 1, 2020, post the Covid-19 outbreak.
 
Prior to fiscal 2018, when the company had limited presence in the global market, the operating margin was constrained due to high competition in the domestic market from the unorganised sector and has seen significant fluctuation given the dependence on domestic cotton production and government regulations and subsidies. With geographical diversification, the company has been able to improve its scale (resulting in higher fixed-cost absorption) and secure high-margin export orders and thereby sustain the operating margin at over 9% from fiscal 2018 against 1.4% in fiscal 2017. Revenue had declined significantly in fiscal 2017 due to demonetisation and other factors. The operating margin improved further to 10.8% in fiscal 2020 and to over 13% in the first quarter of fiscal 2021. The margin is expected to be sustained at over 9% over the medium term, backed by healthy revenue supported by export orders.
 
The ratings also factor in an established market position, improved geographical diversity, the extensive experience of the promoters in the cotton ginning machinery business, and an above-average financial risk profile. These strengths are partially offset by susceptibility to economic downturns and to volatility in cotton demand-supply and prices, and moderate working capital requirement.

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 38.96 crore as on March 31, 2020) extended by the promoters and related parties have been treated as debt.  That's because these loans bear interest, which is being paid.
 
Annexure - List of entities consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description
Strengths
* Established market position and extensive experience of the promoters
The company 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, Government of India. 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, the US, Southeast Asia, Africa, Australia and Europe and has been able to secure several new international clients.
 
Furthermore, benefits from the extensive experience of the promoters (members of the Bajaj family), who have been in the cotton business for around 60 years, continue. 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
Over the past few years, the company has been increasing its international footprint due to high competition from the unorganised sector in the domestic market and to safeguard itself from the cyclicality of domestic cotton production. The high proportion of fixed operating costs had resulted in a significant dip in the operating margin during a slowdown in the domestic market. In fiscal 2017, the margin dropped to 1.4% as revenue was adversely impacted by demonetisation. However, with increased geographical diversification, the company has been able to improve the scale despite a slowdown in domestic cotton production. While domestic cotton production is estimated to have declined by 16% in cotton season 2019 (August- July 2019), revenue grew by a healthy 53% and 10% in fiscals 2019 and 2020, respectively, backed by strong contribution from export orders. Exports, which accounted for only about 14% of sales in fiscal 2016, accounted for 49% in fiscal 2020 (55% in the first quarter of fiscal 2021), indicating the ability to successfully cater to international markets. The operating margin improved to over 9% in fiscal 2018 from 1.4% in fiscal 2017. The margin improved further to 10.8% in fiscal 2020 and to over 13% in the first quarter of fiscal 2021, and is expected to be sustained at over 9% in the medium term. Furthermore, the order book is well diversified across multiple clients, thereby reducing counterparty risk.
 
* Above-average financial risk profile
Outstanding debt was low at about Rs 60 crore as on June 30, 2020, of which about Rs 39 crore comprised unsecured loans from the promoters and related parties. The networth grew to over Rs 100 crore as on March 30, 2020, from Rs 56 crore as on March 31, 2017, supported by steady improvement in cash accrual since fiscal 2018. Consequently, the total outside liabilities to tangible networth ratio and gearing were healthy at 1.60 times and 0.68 time, respectively, as on March 30, 2020. The interest coverage ratio is expected to remain healthy at around 4.5 times over the medium term.
 
Weaknesses
* Susceptibility to economic downturns and to volatility in cotton demand-supply and prices
Demand for the company's products 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 as it is linked to monsoons and is also impacted by various other factors such as pest infestations and farmers switching to more 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 global cotton production. The US is a key export market and production there has been impacted in the recent past due to storms. Additionally, economic growth and policy changes may impact capital expenditure plans of customers, as seen during demonetisation and reduced subsidies or minimum support prices from the government authorities in the past. The impact of these factors is reflected in the weak performance in fiscals 2016 and 2017. However, the company's susceptibility to a slowdown in any specific geography has reduced significantly in the past 2-3 years.
 
* Moderate working capital requirement
The company operates mainly in two divisions: steel and related products (largely manufacture of ginning machinery) and masterbatches. It enjoys favourable payment terms in the 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 there have been some delays in payment from dealers. Gross current assets stood at 142 days as on March 31, 2020, which has improved from over 200 days as on March 31, 2018, largely due to lower revenue from the masterbatches segment, where revenue has reduced from 28% of total revenue in fiscal 2018 to 14% in fiscal 2020. The receivables cycle is expected to improve as the proportion of revenue from the steel division should grow while that from the masterbatches segment is expected to reduce. However, the impact of higher execution of export orders on the working capital cycle will remain a key monitorable.
Liquidity Adequate

Liquidity is supported by healthy cash accrual, moderate unutilised bank lines, and cash and cash equivalents. Expected cash accrual of Rs 25-30 crore, should be sufficient to meet maturing debt of Rs 1-2 crore, per fiscal over fiscals 2021 and 2022. Average utilisation of the fund-based bank limit was moderate at 40% during the 12 months through July 2020.  Also, the unencumbered cash and bank balance was Rs 15 crore as on August 25, 2020. However, the non-fund-based limit of Rs 4.5 crore has been fully utilised and the amount is in the process of being enhanced. Timely enhancement of this limit is a key monitorable given that any delay will impact the ability to secure new orders.
 

Outlook: Stable

CRISIL believes BSI will maintain its established position in the cotton ginning machine manufacturing business. The financial risk profile should remain stable, backed by steady operating performance and moderate debt.
 
Rating Sensitivity Factors
Upward factors
* Sustained revenue growth of more than 15% per fiscal in fiscals 2021 and 2022, with an operating margin of more than over 10%
* Continued growth in revenue from exports
* Sustenance of the financial risk profile and working capital cycle
 
Downward factors
* Sustained decline in the operating margin to below 8%
* Sustained fall in revenue from exports
* A significant increase in the working capital cycle or higher-than-expected debt.

About the Company

BSI, incorporated in 1961, manufactures cotton ginning automation and bale pressing machinery, spare parts, and plastic masterbatches. 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, Maharashtra. The steel and plastic divisions contributed around 86% and 14%, respectively, to revenue in fiscal 2020.
 
In 2012, BSI set up Bajaj Coneagle LLC as its wholly owned subsidiary in US. 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. 
 
For the first quarter of fiscal 2021, profit after tax (PAT) was Rs 5.9 crore on income of Rs 81.9 crore, as against Rs 2.9 crore and Rs 96.7 crore, respectively, for the corresponding period of the previous fiscal.

Key Financial Indicators
Consolidated financials as on/for the period ended March 31 Unit 2020 2019
Revenue Rs crore 419 380
PAT Rs crore 24 14
PAT margin % 5.6% 3.6%
Adjusted debt/adjusted networth Times 0.68 0.94
Interest coverage Times 5.36 3.69

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments and are included (where applicable) in the Annexure -- Details of Instrument in this Rating Rationale. For more details on the CRISIL complexity levels, please visit www.crisil.com/complexity-levels.
Annexure - Details of Instrument(s)
ISIN Name of instrument Date of allotment Coupon rate (%) Maturity date Issue (Rs.Cr) Complexity level Rating outstanding with Outlook
NA Bank guarantee NA NA NA 4.5 NA CRISIL A2+
NA Cash credit^ NA NA NA 30 NA CRISIL A-/Stable
NA Cash credit! NA NA NA 15 NA CRISIL A-/Stable
NA Proposed bank guarantee NA NA NA 35.5 NA CRISIL A-/Stable
NA Proposed overdraft facility NA NA NA 18.0 NA CRISIL A-/Stable
NA Loan Equivalent Risk Limits NA NA NA 3.0 NA CRISIL A2+
NA Proposed bill discounting facility NA NA NA 10.0 NA CRISIL A2+
^Includes sublimit of loan equivalent risk (LER) of Rs 1 crore
!Includes sub limits of letter of credit of Rs 4 crore, bank guarantee limit of Rs. 0.5 crore and LER limit of Rs 2 crore
 
Annexure - List of Entities Consolidated
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 2020 (History) 2019  2018  2017  Start of 2017
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund-based Bank Facilities  LT/ST  76.00  CRISIL A-/Stable/ CRISIL A2+      27-12-19  CRISIL BBB/Positive  15-05-18  CRISIL BBB-/Stable  15-11-17  CRISIL BBB-/Negative  CRISIL A-/Negative 
            02-01-19  CRISIL BBB/Stable      07-03-17  CRISIL BBB/Negative   
Non Fund-based Bank Facilities  LT/ST  40.00  CRISIL A-/Stable/ CRISIL A2+      27-12-19  CRISIL A3+  15-05-18  CRISIL A3  15-11-17  CRISIL A3  CRISIL A2+ 
            02-01-19  CRISIL A3+      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 4.5 CRISIL A2+ Bank Guarantee .5 CRISIL A3+
Cash Credit^ 30 CRISIL A-/Stable Cash Credit@ 30 CRISIL BBB/Positive
Cash Credit! 15 CRISIL A-/Stable Cash Credit 14 CRISIL BBB/Positive
Loan Equivalent Risk Limits 3 CRISIL A2+ Letter of Credit 6 CRISIL A3+
Proposed Bank Guarantee 35.5 CRISIL A-/Stable Letter of credit & Bank Guarantee# 7 CRISIL A3+
Proposed Bill Discounting Facility 10 CRISIL A2+ Proposed Term Loan 1.83 CRISIL BBB/Positive
Proposed Overdraft Facility 18 CRISIL A-/Stable Term Loan* 4.25 CRISIL BBB/Positive
Total 116 -- 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 loan equivalent risk (LER) of Rs 1 crore
!Includes sub limits of Letter of Credit limit to the tune of Rs. 4 Cr., Bank Guarantee limit of Rs. 0.5 Cr. & Loan Equivalent Risk limit of Rs.2 Cr

 
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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