| Haq Steels and Metaliks Limited | ||||
| Rating upgraded to 'CRISIL BBB+ / Stable' | ||||
| Rating Action | ||||
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| 1 crore = 10 million | ||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL ratings has upgraded its rating on bank facilities of Haq Steels and Metaliks Limited (HSML; a part of Iraki group) to ‘CRISIL BBB+/Stable’ from ‘CRISIL BBB/Stable’
The upgrade reflects expected sustenance of improvement in IG’s business and financial risk profile. IG has consolidated its business profile on the back by rising plant capacity utilization and share of manufacturing revenue. Post the COVID-19 driven disruption, the group has healthily ramped up its utilization with all the units operating on 3 shift basis, supported by demand and receipt of necessary power supply from electricity board. This will ensure that the group clocks at least 10% revenue growth (despite the lockdown), raising the manufacturing revenue share to over 70% and supporting the profitability, in current fiscal. The financial risk profile has improved backed by the continued healthy accruals. IG is expected to generate annual accruals of Rs.20-25 cr meeting significant share of incremental funding requirements and restraining rise in external debt levels. Consequently, IG’s net worth and gearing are expected around Rs. 150 cr and 0.6 times respectively as on March 31, 2021. IG has also benefitted from unsecured loans from promoters (USL) of Rs.83 cr as on March 2020 increasing from Rs. 65 cr as on March 31, 2019. The rating action factors a continued funding support from promoters and controlled leverage ratio.
The rating reflect Iraki group’s established market position, moderate working capital cycle and healthy financial risk profile. These strength are partially offset by risk associated with low operating margin and geographical concentration of revenues. |
Analytical Approach For arriving at its ratings, CRISIL Ratings has combined the business and financial risk profiles of HSML, Haq Steels Private Limited (HSPL) and Iraki Enterprise Limited (IEL, previously known as Ganadhyaksha Hospitalities Ltd). This is because all the entities, collectively referred as Iraki Group (IG) are under same promoter and management and have operational and financial linkages. Further, Iraki Trading Company (ITC) and Tarun Enterprise (TE) have merged into IEL in fiscal 20.
The unsecured loans (USL) of Rs 83 crore as on March 31, 2020 have been treated as 75% equity and 25% debt as the interest charged on the loans from promoters are retained in the business and there is no cash outflow of funds, and are expected to remain in the business over a period of time.
Please refer Annexure - Details of Consolidation, which captures the list of entities considered and their analytical treatment of consolidation. |
Key Rating Drivers & Detailed Description Strengths:
The extensive experience of the promoters and their presence in the industry since past 5 decades has benefited the group as reflected in CAGR in the revenue of 26% for in past 3 years, group total revenue close to Rs.800 cr in fiscal 2020. The group started operations with trading business and over the years, have entered into manufacturing segment. The group has 2 revenue segments; 1st - trading (scrap and pig iron), which further comprises of exclusive tie up with Jindal Saw Ltd and Tata Metaliks Ltd and 2nd - manufacturing (TMT Bars, billets, and sponge iron).
IG’s has a moderate working capital cycle expected gross current asset (GCA) days of less than 3 months. The GCA was slightly inflated at 105 days as on March 31, 2020 owing to effect of lockdown and then enhanced full-fledged operations at HSML. The controlled working capital cycle means a lower incremental working capital debt and support to the overall business and financial risk profile of the group.
IG has a healthy capital structure with expected net worth and gearing of around Rs. 150 cr and 0.6 times respectively as on March 31, 2021. Its lower reliance on external borrowing and funding support from promoters with USL of Rs.83 cr as on March 31, 2020 has led to healthy financial risk profile despite major capital expenditure (capex) in past 2 years. Further, the debt protection measures are also expected to remain healthy with interest coverage and net cash accrual/ adjusted debt around 4 times and 0.3 times respectively for fiscal 2021. CRISIL believes that in absence any major debt funded capex and lower reliance on external borrowings, the financial risk profile will continue to remain healthy over the medium term.
Weaknesses:
The operating margins of IG are susceptible to volatility in prices of raw material, however its impact is limited on account of lower inventory levels. Since input price varies, operating margin have remained volatile (around 4% in fiscal 2020 as against 5.5% in fiscal 2017). Further, due to limited value addition the margins are expected to remain in the similar range over the medium term.
Demand for steel is derived from sectors such as real estate, construction, and infrastructure, which are linked to economic cycle. Additionally, IG’s revenue is mainly derived from the state of Gujarat which exposes group’s revenue to the risk associated with geographical concentration. Any slowdown in the economic activity, drop in investments in infrastructure and household or disruption in the state will significantly impact the IG’s scale of operation. Though the end-user industries have been witnessing a slowdown for the past couple of years, the established dealer network and customer relationships the promoters have helped partly mitigate this risk |
Liquidity: Adequate Bank limit utilisation is moderate at around 73 percent for the past twelve months ended November 2020. Cash accrual are expected to be over Rs 20 crore which are sufficient against term debt obligation of Rs 4.5-5 crore over the medium term. In addition, it will be act as cushion to the liquidity of the company. Current ratio is moderate at 1.20 times on March 31, 2020. Further, the promoters have supported the business through continuous fund infusion in the form of unsecured loans which stood at Rs 83 crore on March 31, 2020 to meet its working capital requirements and repayment obligations. The unsecured loans have further risen to over Rs.100 cr currently. |
Outlook: Stable CRISIL ratings believes, IG group will continue to benefit from the extensive experience of the promoters and established relations. |
Rating Sensitivity factors Upward factors
Downward factor
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About the Group Iraki group (IG) is involved in trading of pig iron and iron scrap and manufacturing of TMT, sponge iron, billets. The group was started in 1970 by Mr. Samsul Haq Iraki and comprises of Iraki Enterprise Limited (IEL), Haq Steels and Metaliks Ltd (HSML) and Haq Steels Pvt Ltd (HSPL). The current operations are managed by the 2nd and 3rd generation of the Iraki family. In FY 20, Iraki Trading Company (ITC) and Tarun Enterprise (TE) are merged into Iraki Enterprises Limited (IEL).
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Key Financial Indicators Standalone
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Status of non cooperation with previous CRA: HSML has not cooperated with Credit Analysis and Research Limited and India Ratings And Research Private Limited which has classified it as non-cooperative vide release dated December 17, 2020 and February 11, 2020 respectively. The reason provided by Credit Analysis and Research Limited and India Ratings And Research Private Limited is non-furnishing of information for monitoring. |
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)
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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 | ||||||||||||||||||||||||
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