Rating Rationale
July 18, 2022 | Mumbai
Madhav KRG Limited
Rating outlook revised to 'Positive'; Ratings Reaffirmed
 
Rating Action
Total Bank Loan Facilities RatedRs.243 Crore
Long Term RatingCRISIL BBB+/Positive (Outlook revised from 'Stable'; Rating Reaffirmed)
Short Term RatingCRISIL A2 (Reaffirmed)
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 revised its outlook on the long-term bank facilities of Madhav KRG Limited (MKL; part of Madhav group) to ‘Positive’ from ‘Stable’ while reaffirming the rating at ‘CRISIL BBB+’; the short term rating has been reaffirmed at ‘CRISIL A2’. 

 

The outlook revision reflects the expectation that timeline extension for execution of debt-funded capital expenditure (capex) in the company’s wholly owned subsidiary, Madhav KRG HRC Pvt Ltd (MKHPL), to March 2024 from March 2023 earlier will likely result in improved liquidity for the Madhav group. The extended timeline gives the company up to 12 more months to infuse the required equity, which can be met via internal accrual in the extended timeframe.

 

MKHPL is undertaking a greenfield project to set up a hot roll coil plant, to which MKL will contribute Rs 205.7 crore, while the remaining Rs 302.7 crore will be funded through debt. The group has received financial closure for the required debt. The project will provide synergies in the long term in the form of backward integration, which is expected to increase the operating efficiency of the group. Successful implementation of this without any time or cost overruns will remain a key monitorable.

 

The outlook revision also reflects improvement in the Madhav group’s business risk profile, as indicated by 62% growth in net sales to Rs 1,840.95 crore in fiscal 2022, with 27% growth in volume. The growth trajectory is expected to continue in fiscal 2023, as reflected in ~Rs 630 crore of sales in the first quarter of fiscal 2023 compared with Rs 405 crore in the corresponding period of the previous fiscal. The financial risk profile improved too, as reflected in increase in networth to an estimated Rs 300.0 crore as on March 31, 2022, from Rs 239.5 crore a year earlier. Liquidity remains comfortable.

 

The ratings continue to factor in the Madhav group’s established market position and the strong market presence of its ‘Jyoti’ brand in Punjab. The ratings also consider the healthy financial position of the group, supported by strong networth and efficient working capital management.

 

These strengths are partially offset by project risks, such as those related to implementation and financing, considering the sizeable contribution required for the capex. The ratings are also constrained by exposure to intense competition and susceptibility to volatility in raw material prices.

Analytical approach

CRISIL Ratings has combined the business and financial risk profiles of MKL and its wholly owned subsidiary, MKHPL. This is because both the entities, together referred to as the Madhav group, have significant business and financial linkages and a common management .

 

Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key rating drivers and detailed description

Strengths:

  • Established market position: The group has a strong market presence in Punjab, Haryana and Jammu and Kashmir through its Jyoti brand. A widespread network of over 500 dealers and distributors ensures strong brand presence in the market. To further enhance its market position, the group has already installed capacities of continuous galvanised lines for the production of zinc-coated products and down-stream value-added products, such as galvanised plain coils, galvanised pipes and tubes, cold rolled close annealed coil and zinc coated thermo mechanically treated (TMT) bars. The total installed capacity of the group is now 10.8 lakh tonne per annum, covering all lines of manufacturing for TMT bars, billets, wire rods and pipes and tubes. Moreover, the 15-year-long experience of the promoters, their strong understanding of the local market dynamics and healthy relationships with customers and suppliers will continue to support the business.

 

  • Healthy financial risk profile: The financial risk profile is likely to remain strong over the medium term. Gearing, total outside liabilities to tangible networth ratio and networth are estimated at 0.48 time, 0.70 time and Rs 300 crore respectively, as on March 31, 2022. Low debt and adequate cash accrual have led to healthy debt protection metrics, as indicated by interest coverage and net cash accrual to total debt ratios of 9.6 times and 0.57 time, respectively, in fiscal 2022.

 

  • Efficient working capital management: Operations of the group are prudently managed, as reflected in gross current assets of 40-58 days over the three fiscals through March 2022 and 56 days as on March 31, 2022, driven by receivables of 17 days and efficient inventory management.

 

Weaknesses:

  • Exposure to project-related risks: MKHPL, the wholly owned subsidiary of MKL, is undertaking capex of Rs 508 crore in fiscals 2023 and 2024, to be funded via debt of Rs 302.7 crore and contribution from MKL of Rs 205.7 crore. The group is exposed to risks associated with the project, such as those related to implementation. However, the financial risk is mitigated by the group having received financial closure for the required debt and having invested Rs 62.9 crore as on date, with Rs 38 crore of liquid investments available for further infusion. While the capex will result in synergies in the form of backward integration increasing the operating efficiency of the group in the long term, timely completion of the project without time or cost overruns remains a key monitorable. 

 

  • Susceptibility to fluctuations in raw material prices: Raw material accounted for 83.5% of the group’s manufacturing expense; therefore, the operating margin remains susceptible to volatility in raw material prices. This resulted in decrease in the operating margin to 5.7% in fiscal 2022 from 8.1% in fiscal 2021. However, as the group is in the secondary steel industry, this risk is mitigated by the ability to pass on a part of the price fluctuations to customers. The group is also exposed to risks related to fluctuations in foreign exchange rate, as it imports part of its raw material; this risk is mitigated by the hedging policy.

Liquidity: Adequate

Bank limit of Rs 60 crore was utilised at 32.8% on average over the 12 months through June 2022. Cash accrual, expected at Rs 88 crore per annum, will sufficiently cover yearly debt obligation of Rs 12.4 crore over the medium term. Current ratio was healthy at 1.95 times on March 31, 2022. However, liquidity will remain a key monitorable in the face of significant capex over the current fiscal and the next.

Outlook: Positive

MKL will continue to benefit from the promoters’ extensive experience.

Rating Sensitivity Factors

Upward factors

  • Implementation progress of the project within expected cost and scheduled timelines
  • Sustained increase in revenue and operating margin leading to cash accrual of over Rs 90 crore

 

Downward factors

  • Decline in profitability by 100 basis points leading to fall in cash accrual
  • Time or cost overruns in project implementation weakening liquidity

About the Group

MKL, incorporated in 2003, manufactures TMT bars, billets, blooms, pipes and tubes; the products are sold via the distributor network in Punjab. Mr Sudhir Goyal and Mr Sanjeev Kumar manage the business.

 

MKHPL, incorporated in 2020, is a wholly owned subsidiary of MKL. It is currently setting up a plant to produce hot rolled coils. The project cost is Rs 508.4 crore, and it is funded via debt of Rs 302.7 crore and equity of Rs 205.7 crore. The plant is expected to commence operations in fiscal 2024.

Key Financial Indicators

As on/for the period ended March 31

Unit 

2022*

2021

Operating income

Rs.Crore

1840.95

1151.51

Reported profit after tax (PAT)

Rs.Crore

59.62

52.50

PAT margin

%

3.19%

4.54%

Adjusted debt / adjusted networth

Times

0.48

0.55

Interest coverage

Times

9.60

7.06

*Provisional financials

Any other information: Not applicable

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
rate (%)		 Maturity
date		 Issue size
(Rs.Crore)		 Complexity 
levels		 Rating assigned
with outlook
NA Cash Credit NA NA NA 2 NA CRISIL BBB+/Positive
NA Cash Credit NA NA NA 10 NA CRISIL BBB+/Positive
NA Cash Credit NA NA NA 27.5 NA CRISIL BBB+/Positive
NA Cash Credit NA NA NA 23 NA CRISIL BBB+/Positive
NA Letter of Credit NA NA NA 35 NA CRISIL A2
NA Letter of Credit NA NA NA 30 NA CRISIL A2
NA Letter of Credit NA NA NA 30 NA CRISIL A2
NA Long Term Loan NA NA Feb-26 18 NA CRISIL BBB+/Positive
NA Long Term Loan NA NA May-27 40.24 NA CRISIL BBB+/Positive
NA Long Term Loan NA NA Jan-26 3.95 NA CRISIL BBB+/Positive
NA Proposed Fund-Based Bank Limits NA NA NA 23.31 NA CRISIL BBB+/Positive

Annexure – List of entities consolidated

Names of entities consolidated

Extent of consolidation

Rationale for consolidation

Madhav KRG Ltd

Full

MKHPL is a wholly owned subsidiary of MKL. The companies have significant business and financial linkages and a common management.

Madhav KRG HRC Pvt Ltd
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 148.0 CRISIL BBB+/Positive   -- 29-11-21 CRISIL BBB+/Stable 24-08-20 CRISIL A-/Stable 17-05-19 CRISIL A-/Stable Suspended
      --   --   --   -- 28-01-19 CRISIL A-/Stable --
Non-Fund Based Facilities ST 95.0 CRISIL A2   -- 29-11-21 CRISIL A2 24-08-20 CRISIL A2+ 17-05-19 CRISIL A2+ --
      --   --   --   -- 28-01-19 CRISIL A2+ --
All amounts are in Rs.Cr.
Annexure - Details of Bank Lenders & Facilities
Facility Amount (Rs.Crore) Name of Lender Rating
Cash Credit 23 Axis Bank Limited CRISIL BBB+/Positive
Cash Credit 10 HDFC Bank Limited CRISIL BBB+/Positive
Cash Credit 2 ICICI Bank Limited CRISIL BBB+/Positive
Cash Credit 27.5 State Bank of India CRISIL BBB+/Positive
Letter of Credit 30 Axis Bank Limited CRISIL A2
Letter of Credit 30 HDFC Bank Limited CRISIL A2
Letter of Credit 35 State Bank of India CRISIL A2
Long Term Loan 3.95 Axis Bank Limited CRISIL BBB+/Positive
Long Term Loan 40.24 HDFC Bank Limited CRISIL BBB+/Positive
Long Term Loan 18 ICICI Bank Limited CRISIL BBB+/Positive
Proposed Fund-Based Bank Limits 23.31 Not Applicable CRISIL BBB+/Positive

This Annexure has been updated on 27-Feb-23 in line with the lender-wise facility details as on 14-Feb-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
CRISILs Criteria for rating short term debt
CRISILs Criteria for Consolidation

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