| JSW Severfield Structures Limited | ||||||
| Rated amount enhanced | ||||||
| Rating Action | ||||||
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| 1 crore = 10 million | ||||||
| Refer to annexure for Details of Instruments & Bank Facilities | ||||||
| Detailed Rationale |
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CRISIL has reaffirmed its 'CRISIL A-/Stable/CRISIL A2+' ratings to bank facilities of JSW Severfield Structures Limited (JSSL), a joint venture between JSW Steel Ltd and Severfield Mauritius Ltd. |
| Analytical Approach |
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CRISIL has consolidated the financials of JSSL and its subsidiary- JSW Structural Metal Decking Ltd (JSWSMD). |
| Key Rating Drivers & Detailed Description |
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Strengths: * Established market position in the steel business and experienced management JSSL is a 50:50 JV of JSW Steel Ltd. and Severfield Mauritius Limited - a wholly owned subsidiary of Severfield Plc. Technical competency and strong operational support is provided by Severfield. JSSL thus enjoys the benefits of a strong brand, relationships with key market players, assured supply of key raw materials, sizeable consumption of the finished product, and corporate governance practices, being associated with JSW Steel Ltd. JSSL has demonstrated its capabilities by executing large projects, across sectors such as power and energy, oil and gas, and real estate, since it commenced operations in 2010. * Prudent risk management practices JSSL manufactures fabricated steel structures (FSS) for both industrial and commercial segments, on a customised basis. For large contracts, JSSL procures bulk of raw material (steel) upfront, to mitigate exposure to price volatility. JSSL is also shielded from any delay in design specifications provided by customers. The company also enters into contracts where adequate compensation is factored in case of delays in construction, by the engineering, procurement and construction (EPC) contractor. CRISIL also notes that JSSL follows prudent risk management policies and deals with well-established customers, having a strong credit profile, thereby mitigating counterparty risk. JSSL follows a standard operating procedure (SOP) for each project and timely project reviews are conducted by management to foresee any risk of project delays. The professional and experienced management team should support risk management practices at the company, strategic initiatives and governance. * Healthy and diversified order book The company has orders worth Rs 1148 crore as of September 2019, to be executed over the next 2-3 years. Of this, nearly 34% orders were from the industrial segment, mainly from JSW Steel Ltd, while the rest were from the commercial segment. In the industrial segment, JSW Steel Ltd plans to undertake large capex of over Rs 30000 crore in the medium term, and and this may result in incremental work orders for JSSL depending on the ability of JSSL to win tenders. However, the latter has been diversifying its order pipeline, over the past three years, and envisages an increase in quantum of more remunerative commercial orders. Nearly 66% of the total order book as on September 2019 was from commercial segment. CRISIL expects the industrial segment would continue to support optimal capacity utilization at JSSL's plants, as the company ramps-up its presence in the commercial segment. Diversification of the order book will remain a monitorable in the medium term. * Above average financial risk profile Financial risk profile is marked by healthy networth estimated at Rs 268 crore as on March 31, 2019. Both the JV partners had infused Rs 90 crore in fiscal 2018 to pare debt and Rs 75 crore in fiscal 2019 to fund the capex. While gearing is negligible in absence of any major external debt, total outside liabilities to adjusted networth (TOLANW) stood at 2.57 times as on March 31, 2019. The company has sizeable letters of credit acceptances and creditors. Capex of Rs 110-120 crore is to be funded via a debt equity ratio (DER) between 1:3 and 2:3 times. With limited reliance on fund based working capital bank debt, and controlled long term debt, overall gearing should remain below 0.5 time in the medium term. Debt protection metrics were also healthy with interest coverage ratio of 3.16 times for fiscal 2019. Weaknesses: * Working capital intensive operations Operations remain working capital-intensive, as reflected in gross current assets of 324 days as on March 31, 2019, mainly led by large work-in-progress inventory, given the nature of business (contracts) leading to high unbilled revenue. Unbilled revenue accounted for 38% of total operating income in fiscal 2019. Majority of the billing is usually done post-dispatch of orders for erection and commissioning, thereby leading to an accumulation. Average billed receivables stood at 93 days as on March 31, 2019. Working capital is managed via mobilization advances (nearly 20% of total order book value as on March 31, 2019), and payables of 90-180 days from the suppliers. Management of working capital cycle, along with rising scale of operations, is a key monitorable. * Susceptibility to moderately low acceptance of FSS over Reinforced Cement Concrete (RCC) FSS has an advantage over RCC, as these are prefabricated components that can be produced and assembled at the site. Also, FSS structures are lighter in weight (40% lighter than RCC), offering more usable space, with greater tensile strength and earthquake resistance. FSS structures can be constructed faster than RCC structures. However, FSS is costlier than RCC, and is a pretty new concept in India. The pace at which FSS finds acceptance in domestic markets will determine the pace of growth for players like JSSL. * Exposure to risks related to project execution and inherent cyclicality in the industry Given the strong order pipeline, any delay in project execution could weaken JSSL's reputation. Exposure to risks and cyclicality inherent in the industrial capex or real estate sector may lead to volatility in realizations, and cash flows. The residential and commercial real estate segments have been under pressure due to sluggish demand, new regulations, and bearish consumer sentiment, in recent years. JSSL's ability to diversify beyond the real estate sector will be critical from its long-term growth perspective. |
| Liquidity Adequate |
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Liquidity remains adequate, marked by healthy cash generation, low bank limit utilization, and absence of any major term debt obligation. Net cash accrual of Rs 45.71 crore was reported in fiscal 2019, against no maturing debt. Expected net cash accrual of Rs 40-55 crore, should also comfortably cover the maturing debt of Rs 5-10 crore in the medium term expected to arise out of the fresh debt which is expected to be availed for the CAPEX. Fund-based bank limit of Rs 185 crore was utilized only at an average of 13-30% for the 15 months through October 2019. Part of the limit is interchangeable with the non- fund based limit, which is utilized at 84% on average for the 15 months ending October 2019. Of the unencumbered cash and bank balance of Rs 88.81 crore as on March 31, 2019, about Rs 50 crore will be utilized for funding the capex plans in the near term. Current ratio was low at 1.08 times as on March 31, 2019 largely driven by high LC creditors, yet limited utilization of fund based facilities (working capital bank lines) provides comfort. |
| Outlook: Stable |
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CRISIL believes JSSL will continue to benefit from its strong market position and brand, demonstrated project execution capabilities, experienced management team, healthy order pipeline and comfortable financial risk profile. |
| About the Company |
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JSSL is a 50:50 JV between JSW Steel Ltd and Severfield Mauritius Ltd, a wholly-owned subsidiary of Severfield Plc. JSSL was incorporated in 2009, and is one of the leading domestic players, offering complete structural steel building solutions, with an annual capacity of ~60,000 MTPA. JSSL manufactures heavy fabricated steel structures for the commercial and industrial segments. |
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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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