Rating Rationale
September 04, 2019 | Mumbai
Jyoti Industries (Unit-II)
Ratings Reaffirmed
 
Rating Action
Total Bank Loan Facilities Rated Rs.24 Crore
Long Term Rating CRISIL BBB+/Stable (Reaffirmed)
Short Term Rating CRISIL A2 (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
 
Detailed Rationale

CRISIL has reaffirmed its 'CRISIL BBB+/Stable/CRISIL A2' ratings on the bank facilities of Jyoti Industries (Unit-II) (JI; part of the Arora group).
 
The ratings continue to reflect the promoters' healthy relationships with their customers and the group's comfortable financial risk profile. These strengths are partially offset by susceptibility to fluctuations in raw material prices and foreign exchange (forex) rates and cyclicality in end-user industries.

Analytical Approach

For arriving at its ratings, CRISIL has combined the business and financial risk profiles of JI and Arora Iron and Steel Rolling Mills Pvt Ltd (AISPL). This is because the two entities, together referred to as the Arora group, have strong operational, managerial, and business linkages. A bulk of the ingots manufactured by JI are sold to AISPL.
 
Unsecured loans of Rs 77.5 crore extended to the group by the promoters and their associates were earlier treated as 75% equity and 25% debt. The loans are now being treated as neither debt nor equity as their interest is higher than bank rates, and Rs 5 crore is expected to be withdrawn annually for the next two years. However, these loans should remain in the business in the near term, and interest payment may be delayed in times of stress.

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:
* Healthy relationships with customers
Supported by the two-decade-long experience of the promoters, the group has established healthy relationships with its customers. The group got its manufacturing facilities approved from 24 auto original equipment manufacturers (OEMs) over the three fiscals through March 31, 2019, including Ashok Leyland, TVC Motors, Volvo Construction Equipment, and ABC Bearing. These approvals helped the group optimally utilise its billet manufacturing capacity, installed in 2015, by catering to increased orders from auto OEM suppliers, such as GNA Axes Ltd, GNA Gears Ltd, GS Auto International Ltd, and Kay Jay Forgings Pvt Ltd.
 
Consequently, revenue has continued to grow at a healthy compound annual growth rate of 57% (Rs 1114 crore in fiscal 2019 from Rs 787 crore in fiscal 2018 and Rs 478.89 crore in fiscal 2017). The Arora group's business risk profile should continue to benefit from the promoters' strong relationships with customers.
 
* Comfortable financial risk profile
Financial risk profile is comfortable: networth is estimated at Rs 123 crore and gearing at 1.22 times as on March 31, 2019. Debt protection metrics are moderate, with adjusted interest coverage and net cash accrual to adjusted debt ratios of 3.6 times and 0.2 time, respectively, in fiscal 2019. Despite ongoing debt-funded capital expenditure (capex) for expansion of capacities, financial risk profile should remain strong, supported by healthy accretion to reserve.
 
Weaknesses
* Susceptibility to fluctuations in raw material prices and forex rates
Material cost comprises over 70% of the revenue. Thus, any sharp fluctuations in raw material prices could adversely impact profitability. Moreover, the group imports scrap steel as a raw material for manufacturing billets. This exposes profitability to volatile forex rates.
 
* Susceptibly to cyclicality in end-user industry
The group provides hot-rolled products, primarily to OEM suppliers. The automobile industry is susceptible to economic cyclicality and monetary tightening measures, such as increase in interest rates. These factors can substantially affect demand for vehicles, thereby adversely impacting the Arora group's business.
 
Liquidity: Adequate
Liquidity is adequate: cash accrual, which stood at around Rs 30 crore in fiscal 2019 and is expected to remain stable in fiscal 2020, should sufficiently cover yearly maturing debt of Rs 12 crore and capex of Rs 71 crore. Utilisation of fund-based limit of Rs 70 crore (Rs 20 crore of non-fund-based limit interchangeable with fund-based limit) averaged 86% over the 12 months through June 2019. The group has also availed of vendor financing limit of Rs 30 crore, which is almost fully utilised. Liquidity is further supported by unsecured loans provided by the promoters.
Outlook: Stable

CRISIL believes the Arora group will continue to benefit from the promoters' experience and healthy relationships with customers.
 
Rating Sensitivity Factors
Upward factors:
* Moderate growth in scale of operations, stable operating margin of 5.8-6.2%, and liquidity being maintained with adequate cushion in bank lines
* Completion of the planned capacity expansion without any time and cost overruns
 
Downward factors:
* Significant deterioration in profitability, with operating margin dropping to less than 5.5%, thus impacting cash accrual
* Slower-than-anticipated offtake in sales from new customers impacting the business risk profile
* Stretch in the working capital cycle impacting liquidity, with bank limit almost fully utilised

About the Group

The group has integrated operations for manufacturing of hot-rolled products to be used in the automobile industry. Furthermore, the operations are backward-integrated with manufacturing facilities of ingots and billets. The group is based in Ludhiana, Punjab, and is managed by the director, Mr Raminder Pal Singh. AISPL was incorporated in 1995, while JI was established as a partnership firm in 1997.

Key Financial Indicators
Particulars Unit 2019 2018
Revenue Rs crore 208.5 154.8
Profit after tax (PAT) Rs crore 1.9 2.6
PAT margin % 0.9 1.7
Adjusted debt/adjusted networth Times 2.8 1.9
Interest coverage Times 2.0 2.5
 

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 crore) Rating assigned with outlook
NA Cash Credit* NA NA NA 14 CRISIL BBB+/Stable
NA Letter of Credit* NA NA NA 10 CRISIL A2
*The sanctioned letter of credit limit is Rs 15 crore and sanctioned cash credit limit is Rs 14 crore. However, there is a ceiling of Rs 24 crore as maximum bank exposure.

Annexure - List of entities consolidated
Names of Entities Consolidated Extent of Consolidation Rationale for Consolidation
Arora Iron and Steel Rolling Mills Limited Full Both entities have strong operational, managerial, and business linkages
Jyoti Industries (Unit-II) Full Both entities have strong operational, managerial, and business linkages
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  14.00  CRISIL BBB+/Stable      27-09-18  CRISIL BBB+/Stable  10-07-17  CRISIL BBB-/Stable  22-11-16  CRISIL BB+/Stable  CRISIL BB/Stable 
                    21-10-16  CRISIL BB+/Stable   
Non Fund-based Bank Facilities  LT/ST  10.00  CRISIL A2      27-09-18  CRISIL A2  10-07-17  CRISIL A3  22-11-16  CRISIL A4+  CRISIL A4+ 
                    21-10-16  CRISIL A4+   
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
Cash Credit* 14 CRISIL BBB+/Stable Cash Credit# 14.5 CRISIL BBB+/Stable
Letter of Credit* 10 CRISIL A2 Letter of Credit# 9.5 CRISIL A2
Total 24 -- Total 24 --
#The sanctioned letter of credit limit is Rs 12.5 crore and sanctioned cash credit limit is Rs 14.5 crore. However, there is a ceiling of Rs 24 crore as maximum bank exposure
*The sanctioned letter of credit limit is Rs 15 crore and sanctioned cash credit limit is Rs 14 crore. However, there is a ceiling of Rs 24 crore as maximum bank exposure.
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 rating short term debt
Criteria for rating entities belonging to homogenous groups
The Rating Process
Understanding CRISILs Ratings and Rating Scales

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