Rating Rationale
January 13, 2022 | Mumbai
Hariom Pipe Industries Limited
Ratings upgraded to 'CRISIL BBB+ / Stable / CRISIL A2 '
 
Rating Action
Total Bank Loan Facilities RatedRs.86.73 Crore
Long Term RatingCRISIL BBB+/Stable (Upgraded from 'CRISIL BBB / Stable')
Short Term RatingCRISIL A2 (Upgraded from 'CRISIL A3+ ')
Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings.
1 crore = 10 million
Refer to Annexure for Details of Instruments & Bank Facilities

Detailed Rationale

CRISIL Ratings has upgraded its ratings on the bank facilities of Hariom Pipe Industries Ltd (HPIL) to ‘CRISIL BBB+/Stable/CRISIL A2’ from ‘CRISIL BBB/Stable/CRISIL A3+’.

 

The upgrade reflects the sustained improvement in the business risk profile supported by higher sales volumes and better price realizations leading to substantial increase in revenue and cash accrual. Revenue grew by 59% in fiscal 2021 and is estimated to grow 75-80% in fiscal 2022 also to over Rs 450 crore. The capex proposed by the company will result in incremental capacities (furnace & pipe mill) which will in turn reflect in the revenue growth from FY 2023 onwards. HPIL plans to diversify its product portfolio and add further capacities which will further strengthen its market position and pricing flexibility.

 

Further healthy operating efficiencies resulting from integrated nature of operations, savings in power cost from hot charging process and improvement in working capital cycle should result in healthy operating margin (in the range of 13-15%) and improvement in return on capital employed over the medium term.

 

Financial risk profile and liquidity are also expected to improve driven by improved operating performance resulting in a better capital structure and debt protection metrics. The company has also filed a DRHP and is planning to come out with its Initial Public Offering (IPO) in the near term, which will remain a key monitorable.

 

The ratings also reflect the established presence of HPIL in the steel industry, integrated operations leading to healthy operating efficiency, and comfortable financial risk profile. These strengths are partially offset by exposure to intense competition and susceptibility to volatility in input cost and cyclicality in the steel industry.

Key Rating Drivers & Detailed Description

Strengths:

  • Established presence in the industry: The promoters have been in the steel industry for over three decades. Their experience and understanding of market dynamics has helped diversify the product profile and integrate operations. Over the years, they have established healthy relationships with steel traders and manufacturers spread across Maharashtra, Kerala, Andhra Pradesh and Tamil Nadu. Consequently, revenue grew at a healthy compound annual rate of 35% over the three fiscals through 2021.

 

  • Integrated operations support operating efficiency: The company started with a furnace unit to manufacture mild steel (MS) billets and over the years, has forward integrated into hot-rolled (HR) strips, MS tubes and scaffoldings. Integrated operations led to high operating margin of 12-13.4% in the past two fiscals. Furthermore, the company has backward integrated and started manufacturing MS sponge iron in fiscal 2021, which is expected to support further improvement in the operating margin over the medium term.

 

  • Above-average financial risk profile: HPIL’s has comfortable financial risk profile marked by moderate gearing and TOL/ TNW and adequate debt protection metrics. Despite debt-funded capital expenditure (capex), capital structure is expected to remain comfortable with networth at Rs 107 crore and gearing at 0.67 times as on March 31, 2022. With accretion to reserve and repayment of debt obligation, gearing is expected to improve over the medium term. Debt protection metrics are adequate, with interest coverage and net cash accrual to total debt ratios expected to improve to 7.27 times and 0.63 time, respectively, for fiscal 2022. TOL/TNW is estimated at 0.88 times for March 31, 2022.

 

Weakness:

  • Exposure to intense competition and cyclicality in the steel industry: The Indian steel industry is highly competitive due to low entry barriers and limited product differentiation. Moreover, the industry is inherently cyclical and strongly correlated to the economic environment. Further, large scale players benefit from the economies of scale while power costs and limited ability to control market prices constrain the profitability for small sized players. HPIL is expected to mitigate these risks to a certain extent on account of the backward integrated nature of its operations.

 

  • Susceptibility to volatility in steel prices: Operating profitability is susceptible to volatility in input cost, such as sponge iron, steel scrap and power costs and steel prices. The prices are market driven and individual players are price takers. Hence, any sharp fluctuation in steel price can impact the operating margin, as HPIL has no price contracts with suppliers or customers.

Liquidity: Adequate

Bank limit utilisation is moderate at around 58 percent for the past twelve months ended 30th September 2021. Despite sharp increase in sales in fiscal 2022, HPIL had been able to manage its working capital requirements efficiently without relying much on external debt as majority of the incremental working capital requirements are funded by internal accruals.

 

Cash accrual are expected to be over Rs 40 cr which are sufficient against term debt obligation of Rs 12-14 cr over the medium term. In addition, it will act as cushion to the liquidity of the company.

 

Current ratio was comfortable at 1.61 times on March 31, 2021 and is likely to remain comfortable over the medium term.

Outlook Stable

CRISIL Rating believes HPIL will continue to benefit from established presence and relationships with clients.

Rating Sensitivity factors

Upward factors

* Increase in revenue and stable operating margin, leading to cash accrual of over Rs 40 crore

* Strengthening of the financial risk profile driven by better working capital management

 

Downward factors

* Debt-funded capex or stretch in the working capital cycle, weakening the financial risk profile resulting in gearing of over 1.5 times

* Decline in revenue and profitability, leading to lower cash accruals.

About the Company:

Incorporated in 2007 by Mr Rupesh Kumar Gupta and family members, HPIL manufactures MS sponge, MS billets, HR strips, MS tubes and scaffolding systems. It sells its products under the brand Hariom Pipes. The manufacturing unit is located in Mahbubnagar, Telangana.

Key Financial Indicators

As on / for the period ended March 31

 

2021

2020

Operating income

Rs crore

256.30

160.78

Reported profit after tax

Rs crore

16.51

6.22

PAT margins

%

5.90

3.57

Adjusted Debt/Adjusted Net worth

Times

1.13

1.73

Interest coverage

Times

4.56

2.86

Status of non cooperation with previous CRA:

HPIL has not cooperated with Brickwork Ratings India Private Limited, Credit Analysis & Research Ltd and Acuite Ratings and Research Limited which has classified it as non-cooperative vide release dated 31-Aug-2017, 16-Jul-2019 and 29-Jan-2021 respectively. The reason provided by Brickwork Ratings India Private Limited, Credit Analysis & Research Ltd and Acuite Ratings and Research Limited is non-furnishing of information for monitoring of ratings.

Note on complexity levels of the rated instrument:
CRISIL Ratings` 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.

CRISIL Ratings will disclose complexity level for all securities - including those that are yet to be placed - based on available information. The complexity level for instruments may be updated, where required, in the rating rationale published subsequent to the issuance of the instrument when details on such features are available.

For more details on the CRISIL Ratings` complexity levels please visit www.crisilratings.com. 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 %

Maturity date

Issue Size (Rs Crore)

Complexity Level

Rating assigned with outlook

NA

Bank Guarantee

NA

NA

NA

0.5

NA

CRISIL A2

NA

Cash Credit/ Overdraft facility

NA

NA

NA

40

NA

CRISIL BBB+/Stable

NA

Letter of Credit

NA

NA

NA

9

NA

CRISIL A2

NA

Long Term Loan

NA

NA

Dec-24

26.12

NA

CRISIL BBB+/Stable

NA

Term Loan

NA

NA

Dec-24

9.67

NA

CRISIL BBB+/Stable

NA

Working Capital Demand Loan

NA

NA

NA

1.44

NA

CRISIL A2
Annexure - Rating History for last 3 Years
  Current 2022 (History) 2021  2020  2019  Start of 2019
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund Based Facilities LT/ST 77.23 CRISIL BBB+/Stable / CRISIL A2   --   -- 08-10-20 CRISIL BBB/Stable 30-09-19 CRISIL BBB/Stable Suspended
Non-Fund Based Facilities ST 9.5 CRISIL A2   --   -- 08-10-20 CRISIL A3+ 30-09-19 CRISIL A3+ Suspended
All amounts are in Rs.Cr.
Annexure - Details of Bank Lenders & Facilities
Facility Amount (Rs.Crore) Name of Lender Rating
Letter of Credit 9 Canara Bank CRISIL A2
Long Term Loan 16.82 Canara Bank CRISIL BBB+/Stable
Cash Credit/ Overdraft facility 40 Canara Bank CRISIL BBB+/Stable
Long Term Loan 9.3 Canara Bank CRISIL BBB+/Stable
Term Loan 9.67 Canara Bank CRISIL BBB+/Stable
Working Capital Demand Loan 1.44 Canara Bank CRISIL A2
Bank Guarantee 0.5 Canara Bank CRISIL A2

This Annexure has been updated on 23-Mar-23 in line with the lender-wise facility details as on 10-Mar-23 received from the rated entity.

Criteria Details
Links to related criteria
CRISILs Approach to Financial Ratios
Rating criteria for manufaturing and service sector companies
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating Criteria for Steel Industry
Understanding CRISILs Ratings and Rating Scales

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