Rating Rationale
October 31, 2019 | Mumbai
Haq Steels Private Limited
'CRISIL BBB/Stable/CRISIL A3+' assigned to bank debt
 
Rating Action
Total Bank Loan Facilities Rated Rs.42.38 Crore
Long Term Rating CRISIL BBB/Stable (Assigned)
Short Term Rating CRISIL A3+ (Assigned)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has assigned its rating at 'CRISIL BBB/Stable/CRISIL A3+' on the bank facilities of Haq Steels Private Limited (HSPL; a part of Iraki group).
 
The ratings 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 ramp up and stabilization of operations at newly acquired plant, low operating margin and geographical concentration of revenues.

Analytical Approach

For arriving at its ratings, CRISIL has combined the business and financial risk profiles of HSPL, Iraki Trading Company (ITC), Tarun Enterprises (TE), Haq Steels and Metaliks Private Limited (HSML) and Iraki Enterprise Limited (IEL). 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, ITC, TE and trading activity of HSML is expected to be merged under IEL.

The unsecured loans (USL) of Rs. 65.13 crore as on March 31, 2019 have been treated as 75% equity and 25% debt as these are interest free loans from promoters, and are expected to remain in the business over a period of time.

Please refer 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: The extensive experience of the promoters and their presence in the industry since past 4 decades has benefited the group as reflected in CAGR in the revenue of 22% for in past 4 years, group total revenue at Rs.738 cr in fiscal 2019. 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).
 
* Moderate working capital cycle: IG's working capital is well managed as reflected in the gross current asset (GCA) days of 63 days in fiscal 2019. Further, the GCA has improved over the period from 120 days in fiscal 2016. This has also led to lower incremental working capital debt and has supported the overall business and financial risk profile of the group.
 
* Healthy financial risk profile: IG has a net worth and gearing of Rs.51 cr and 1.58 times respectively as on March 31, 2019. Its lower reliance on external borrowing and funding support from promoters with USL of Rs.65 cr as on March 31, 2019 has led to healthy financial risk profile despite major capital expenditure (capex) in past 2 years. RoCE has also remained healthy at 25.6% for fiscal 2019. Further, the debt protection measures have also remained healthy with interest coverage and net cash accrual/ adjusted debt at 5.7 and 0.30 times respectively for fiscal 2019. 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.
 
Weakness
* Ramp up and stabilization of operations at newly acquired plant: The IG has newly acquired plant towards manufacturing of TMT bars and billets in HSML. Operation have already started here from April 2019, however the unit is current operating on a single shift. Going forward, IG is expected to remains exposed to risk associated with ramp up in scale of the unit and stabilization of operations.
 
* Susceptibility of margin to volatility in raw material prices and low value addition: 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 (4.1% in fiscal 2019 as against 5.5% in fiscal 2017) Further, due to limited value addition the margins have also remained low in the manufacturing segment.
 
* End user industry cyclicality and geographical concentration:
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
IG has adequate liquidity driven by expected cash accruals in the range of Rs.16-18 cr in FY20. The cash and cash equivalents stood at Rs.3.6 cr as on March 31, 2019. IG also has access to combined fund based limits of all the entities of Rs.54 cr, utilized to the tune of 56% on an average over the 12 months ended August 31st, 2019. The company has long term repayment obligation of around Rs.4.13 cr in FY 20. CRISIL believes that in absence of any major debt funded capex and moderate working capital requirement, the internal accruals, cash & cash equivalents and unutilized bank lines will be sufficient to meet its repayment obligations as well as incremental working capital requirements

Outlook: Stable
CRISIL believes, IG group will continue to benefit from the extensive experience of the promoters and established relations.
 
Rating Sensitivity Factors
Upward factors
* Healthy revenue growth of over 20% coupled with sustained improvement in operating margins
* Improving financial risk profile driven by strengthening of TOLTNW
 
Downward factor
* Stretch in working capital cycle on account of delayed receivable or slowdown in sales leading to GCA of over 100 days
* Deterioration of operating margin
About the Group

Iraki group (IG) is involved in trading of pig iron and iron scrap and manufacturing of TMT. The group was started in 1970 by Mr. Samsul Haq Iraki and comprises of Iraki Trading Company (ITC), Tarun Enterprise (TE), Iraki Enterprise Limited (IEL), Haq Steel 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.

S.no. Companies Formed Promoters Activity
1 Iraki Trading Company (ITC) 1985 Mr. Inamul Haq Trading of Iron and Steel scrap; sole distributor of pig iron for Jindal Saw Ltd for Gujarat region since 2004
2 Tarun Enterprise (TE) 1990 Mr. Abdul Haq Trading of Iron and Steel scrap; sole distributor of pig iron for Tata Metaliks Ltd for gujarat region since 2010
3 Iraki Enterprise Limited (IEL) erstwhile, Ganadhyaksha Hospitalities Ltd (GHL) 1998 Mr. Abdul Haq & Mr. Inamul Leased out 3 star hotel in Ahmedabad
4 Haq Steel and Metaliks Ltd (HSML) 2008 Mr. Samsul Haq & Mr. Abdul Haq Till FY19 : Trading of Iron and Steel scrap; From FY20 : Manufacturing of TMT bars, sponge iron and billets
5 Haq Steels Pvt Ltd (HSPL) 2013 Mr. Inamul Haq & Mr. Abdul Haq Manufacturing of TMT bars
Key Financial Indicators
Combined
As on / for the period ended March 31  Units 2019 2018
Operating income Rs crore 777.29 568.00
Reported profit after tax (PAT) Rs crore 16.47 9.88
PAT margins % 2.12 1.74
Adjusted Debt/Adjusted Net worth Times 2.02 2.40
Interest coverage Times 5.69 3.84
 
Standalone
As on / for the period ended March 31  Units 2019 2018
Operating income Rs crore 470.85 333.61
Reported profit after tax (PAT) Rs crore 4.45 4.21
PAT margins % 0.9 1.3
Adjusted Debt/Adjusted Net worth Times 1.88 1.70
Interest coverage Times 4.1 3.2

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 date Issue size (Rs Cr) Rating assigned with outlook
NA Cash Credit NA NA NA 26 CRISIL BBB/Stable
NA Term Loan NA NA Aug-20 10.38 CRISIL BBB/Stable
NA Bank Guarantee NA NA NA 6.0 CRISIL A3+
 
Annexure - List of entities consolidated
Names of Entities Consolidated Extent of Consolidation
Iraki Trading Company Full
Tarun Enterprises Full
Haq Steel Private Limited Full
Haq Steel and Metaliks Limited Full
Iraki Enterprise Limited Full
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  36.38  CRISIL BBB/Stable    --    --    --    --  -- 
Non Fund-based Bank Facilities  LT/ST  6.00  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
Term Loan 10.38 CRISIL BBB/Stable -- 0 --
Bank Guarantee 6 CRISIL A3+ -- 0 --
Cash Credit 26 CRISIL BBB/Stable -- 0 --
Total 42.38 -- Total 0 --
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 Steel Industry
CRISILs Bank Loan Ratings
CRISILs Criteria for Consolidation
The Rating Process
Understanding CRISILs Ratings and Rating Scales

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