Rating Rationale
November 02, 2021 | Mumbai
Bhawani Industries Private Limited
Rated amount enhanced
 
Rating Action
Total Bank Loan Facilities RatedRs.70 Crore (Enhanced from Rs.40 Crore)
Long Term RatingCRISIL BB+/Stable (Reaffirmed)
1 crore = 10 million
Refer to Annexure for Details of Instruments & Bank Facilities

Detailed Rationale

CRISIL Ratings has reaffirmed its 'CRISIL BB+/Stable' rating on the long-term bank facilities of Bhawani Industries Private Limited (BIPL).

 

CRISIL Ratings had earlier upgraded the long-term rating of BIPL to 'CRISIL BB+/Stable' from ’CRISIL BB/Stable’ vide rating rationale dated 6th October, 2021.

 

The rating takes into account expected continued improvement in the business risk profile over the medium term. The company was taken over by its current promoters in October 2019. Since the takeover, the promoters have modernised the rolling mill, resulting in higher capacity, and plan to commence operations of its arc furnace in fiscal 2022, which should ensure higher revenue and profitability. Despite the nationwide lockdown to contain the Covid-19 pandemic in fiscal 2021, revenue was stable at Rs 360 crore. Operating margin rose to 2.8% in fiscal 2021 from negative 0.6% in fiscal 2020. Aided by higher capacity and increasing realisation, revenue is expected to grow by 30-35% over the medium term, and will be a key monitorable.   

 

The rating also factors in the improved financial risk profile, reflected in estimated networth of Rs 94.7 crore as on March 31, 2021, as against Rs 68.9 crore a year earlier, as the promoters infused equity of ~Rs 23 crore in fiscal 2021. With nil external debt as on March 31, 2021, gearing was nil. However, the company has availed short-term working capital debt in fiscal 2022. Nonetheless, with nil major debt-funded capital expenditure (capex) plans, the financial risk profile is likely to improve over the medium term.

 

Liquidity was comfortable with moderate bank limit utilisation of 56% from May 2021. Net cash accrual is expected over Rs 7 crore in fiscal 2022 against nil long-term debt obligation. Need-based funding support from the promoters by way of unsecured loans further supports the liquidity.

 

The rating reflects the extensive experience of the promoters in the steel industry and the efficient working capital management. These strengths are partially offset by susceptibility to intense competition, volatility in raw material prices and cyclicality in the end user industries.

Analytical Approach

Unsecured loan of Rs 18.28 crore as on March 31, 2021, from the promoters and group entities has been treated as neither debt nor equity as the loan will remain in the business over the medium term.

Key Rating Drivers & Detailed Description

Strengths:

  • Extensive experience of the promoters: The promoters have experience of many decades in the secondary steel manufacturing industry. This has given them an understanding of market dynamics and ensured strong relationships with suppliers and customers. Revenue remained stable and profitability improved despite the lockdown in fiscal 2021 because of efficient management of the business. The promoters have incurred capex to modernise the rolling mill and set up an arc furnace, leading to increase in capacity, which augurs well for growth. Furthermore, after taking over the company in October 2019, they have infused Rs 23.5 crore in fiscal 2021 and provided unsecured loans.

 

  • Efficient working capital management: Gross current assets (GCAs) were 69 days as on March 31, 2021, driven by efficient inventory policy and receivables collection. However, with commencement of the rolling mill and arc furnace, the receivables are likely to increase over the medium term. Nonetheless, receivables will remain comfortable.

 

Weaknesses:

  • Susceptibility of profitability to volatility in raw material prices and cyclicality in the end user industries: The profitability remains constrained owing to intense competition. Further, cost of production and profit margin are heavily dependent on raw material prices. On account of volatility in raw material prices, the operating margin is also volatile. Furthermore, profitability is linked to the fortunes of the steel industry, which has strong correlation with overall growth in gross domestic product. Performance will remain susceptible to volatility in raw material prices and offtake by key end-user sectors.

 

  • Average capacity utilisation: Because of the pandemic in fiscal 2021 and the second wave in the current fiscal, utilisation of its induction furnace was modest. Furthermore, with the rolling mill having commenced operations in fiscal 2022 and the arc furnace yet to commence operations, reaching optimum capacity and scaling up production will be key monitorables.

Liquidity: Adequate

Utilisation of cash credit was 56% on average over the four months through August 2021. Net cash accrual is expected at Rs 6.44-7.69 crore against nil debt obligation. The promoters will continue to provide funding support through equity and unsecured loans, supporting the liquidity and working capital requirement.

Outlook: Stable

CRISIL Ratings believes BIPL will continue to benefit from the extensive experience of the promoters.

Rating Sensitivity Factors

Upward factors:

  • Increase in volume-wise sales by 10% and improvement in the operating margin
  • Return on capital employed over 10% on sustained basis

 

Downward factors

  • Large, debt-funded capex weakening the capital structure
  • Increase in working capital requirement, with GCAs over 100 days.

About the Company

Incorporated in 1999, BIPL manufactures steel billets, hot rolled strips and steel pipes. Its manufacturing facility is located in Mandi Gobindgarh, Punjab. The company was taken over by new management in October 2019. Mr Sanjiv Sood had the highest shareholding in the company with 31% stake as on March 31, 2021. The promoters also operate other group companies, part of the Royal and Quality groups.

Key Financial Indicators

As on/for the period ended March 31

Unit 

2021

2020

Operating income

Rs.Crore

360.52

357.89

Reported profit after tax (PAT)

Rs.Crore

2.31

-7.04

PAT margin

%

0.64

-8.98

Adjusted debt/adjusted networth

Times

0.00

0.00

Interest coverage

Times

5.26

-1.91

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL Ratings' complexity levels are assigned to various types of financial instruments. The CRISIL Ratings' complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL Ratings' 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 date Issue size (Rs.Crore) Complexity level Rating assigned with outlook
NA Cash Credit NA NA NA 40 NA CRISIL BB+/Stable
NA Proposed Cash Credit Limit NA NA NA 30 NA CRISIL BB+/Stable
Annexure - Rating History for last 3 Years
  Current 2021 (History) 2020  2019  2018  Start of 2018
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund Based Facilities LT 70.0 CRISIL BB+/Stable 06-10-21 CRISIL BB+/Stable   --   --   -- --
      -- 13-05-21 CRISIL BB/Stable   --   --   -- --
All amounts are in Rs.Cr.
Annexure - Details of Bank Lenders & Facilities
Facility Amount (Rs.Crore) Name of Lender Rating
Cash Credit 40 Indian Bank CRISIL BB+/Stable
Proposed Cash Credit Limit 30 Not Applicable CRISIL BB+/Stable

This Annexure has been updated on 02-Nov-2021 in line with the lender-wise facility details as on 02-Nov-2021 received from the rated entity.

Criteria Details
Links to related criteria
CRISILs Bank Loan Ratings
CRISILs Approach to Financial Ratios
Assessing Information Adequacy Risk
Rating criteria for manufaturing and service sector companies

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