Detailed Rationale

CRISIL Ratings has reassigned its ‘CRISIL A-/Stable’ rating to the long-term bank facility of OCL Iron and Steel Ltd (OCL; part of the SM group) and upgraded its rating on the company’s short-term bank facility to ‘CRISIL A2+’ from ‘CRISIL A3’.

 

The ratings reflect the amalgamation of S M Niryat Pvt Ltd, Praful Enterprises Pvt Ltd, Nilachal Iron and Power Ltd (NIPL), Disha Realcon Pvt Ltd and Samriddhi Metals Pvt Ltd with OCL with effect from February 28, 2024, through a National Company Law Tribunal (NCLT) order dated January 30, 2024, with appointed date of amalgamation of April 1, 2022.

 

The upgrade reflects the improvement in the market position and scale of operations of the SM group backed by strong operating performance in fiscal 2024 resulting in healthy accretion to reserve aiding financial flexibility. The revenue growth of 27% in fiscal 2024 was driven by timely ramp-up at the group’s manufacturing facility at Jharkhand (earlier belonging to NIPL), mitigating project risk, resulting in manufacturing turnover of ~Rs 1,595 crore (Rs 1,220 crore in fiscal 2023). Also, higher-than-expected trading volume resulted in revenue of Rs 2,838 crore (Rs 2,368 crore in fiscal 2023) from this segment. The overall revenue is estimated at Rs 1,459 crore in the first half of fiscal 2025 and the revenue growth is expected to sustain over the medium term with improvement in production and sales at the Jharkhand plant and commencement of sponge iron manufacturing at the Odisha plant in October 2024.

 

Investments in backward integration and prudent inventory policies helped sustain the operating margin over 10% in fiscal 2024 (8-13% in the three fiscals ended March 31, 2023). Furthermore, OCL earned extraordinary income comprising custom duty of Rs 466 crore in fiscal 2024 (Rs 37 crore in fiscal 2023), leading to healthy accretion to reserve, thereby curtailing external working capital debt. The surplus has been deployed in the capital expenditure (capex) for revamping the manufacturing unit at Odisha. The excess funds, along with healthy internal accrual of OCL, will aid the ongoing capex in S M Steels and Powver Ltd (SMSPL; ‘CRISIL BBB-/Stable/CRISIL A3’) for lease of coal block and setting up of coal washery in Dumri, Jharkhand.

 

The group had proposed capex of Rs 450-500 crore during fiscals 2024-2027 for revamping the Odisha unit. Partial expenditure has concluded, and the sponge unit was commercialised in October 2024. Aside from this, the group has ongoing capex for leasing a coal block and setting up coal washery in Dumri under SMSPL. Despite the large capex, funded through a proposed term loan of Rs 150 crore, the gearing was healthy at 0.2 time as on March 31, 2024, and should sustain over the medium term. Healthy operating performance also resulted in sustenance of comfortable interest coverage of 9.8 times for fiscal 2024, against 10.1 times in the previous fiscal. Sustained improvement in the business risk profile, driven by timely capex progress lowering project risk, will be closely monitored.

 

The ratings reflect the extensive experience of the promoters in the steel industry, the group’s improving market position and healthy financial risk profile. These strengths are partially offset by susceptibility of the operating margin and revenue to volatility in commodity prices, changes in regulatory policies, and vulnerability to cyclicality in the steel sector and risks associated with the ongoing capex.

Analytical Approach

For arriving at the ratings, CRISIL Ratings has combined the business and financial risk profiles of OCL and SMSPL, as the two companies, together referred to as the SM group, have significant operational and financial linkages.

 

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:

• Extensive experience of the promoters and strengthening market position: The promoters have experience of around two decades in the coal and iron ore trading industry. This has helped them understand the market dynamics and establish a market position for the SM group. The group’s product basket is diversified — it trades coal, iron ore fines and lumps, sponge iron, sponge pellet, mild steel (MS) billets, among other products. Through the acquisition of the sponge iron plant in fiscal 2018, the group entered the manufacturing space. It undertook capex for expansion of sponge iron production capacity and to set up of MS billet and thermo-mechanically treated (TMT) rebar production capacity. Its products are marketed under its own brand, Govvinda TMT. To strengthen its market position and brand visibility, the group acquired another integrated plant for manufacturing TMT rebars under NCLT in the first quarter of fiscal 2024 and commercialised the unit partially in October 2024. It is also leasing a coal block and will set up coal washery in SMSPL which is expected to become partially operational by October 2025. While timely revamp of the units and rise in production capacity is crucial, the promoters’ extensive experience and the diversified product base will be instrumental in strengthening the business risk profile over the medium term.

 

• Healthy financial risk profile: Strong networth of Rs 3,090 crore as on March 31, 2024, and healthy cash generation ability have limited the group’s exposure to external borrowings, despite moderately working capital-intensive operations. This is reflected in healthy gearing and total outside liabilities to total networth ratio of 0.2 time and 0.4 time, respectively, as on March 31, 2024. The debt protection metrics have also been healthy due to low leverage and healthy profitability. The interest coverage and net cash accrual to adjusted debt ratios were 9.8 times and 1.6 times, respectively, for fiscal 2024. Acquisition of the Jharkhand plant in fiscal 2018 and capex of about Rs 550 crore during fiscals 2022 and 2023 were largely funded through internal accrual and funds from the promoters. Moreover, the acquisition of the Odisha plant for around Rs 288 crore in fiscals 2023 and 2024 was funded through profit generated by the group. Furthermore, despite the ongoing capex (over fiscals 2022 to 2027) for revamping the Odisha plant and setting up a unit at Dumri, the leverage is expected to remain low backed by sustenance of healthy profitability over the medium term.

 

Weaknesses:

• Susceptibility of the operating margin and revenue to volatility in commodity prices and changes in regulatory policies, and vulnerability to cyclicality in the steel sectors: The operating performance remains susceptible to volatility in the prices of coal, iron ore and other commodities and to fluctuations in foreign exchange (forex) rates. The group is an exporter and importer of minerals/ores and there is a natural hedge for its forex exposure to some extent. Its revenue and profitability are also susceptible to regulatory policies and are linked to the fortunes of the inherently cyclical steel industry, which has strong correlation with the gross domestic product. Sound risk management practices are crucial for sustenance of healthy operating performance and return on capital employed.

 

• Risks associated with ongoing capex: The group had proposed capex of Rs 450-500 crore during fiscals 2024-2027 for revamping the Odisha unit. Partial expenditure has concluded, and the sponge unit was commercialised in October 2024. Aside from this, the group has ongoing capex for leasing a coal block and setting up coal washery in Dumri under SMSPL. The proposed capex of ~Rs 300 crore during fiscals 2022-2027 is expected to be funded through external debt and promoters’ contribution in the ratio of 1:1. Timely progress of the capex will be closely monitored.

Liquidity: Adequate

Bank limit utilisation was moderate at 59% on average for the 12 months through July 2024. Cash accrual is expected at Rs 320-260 crore against term debt obligation of Rs 15-40 crore per fiscal. The current ratio was adequate around 1.8 times on March 31, 2024. The promoters are likely to extend support in the form of unsecured loan to meet working capital requirement and capex. Healthy cash and bank balance and fair value of investments in equity shares of around Rs 253 crore and Rs 511 crore, respectively, as on March 31, 2024, support liquidity. Low gearing and strong networth support the group’s financial flexibility and will provide financial cushion during adverse conditions or downturn in the business.

Outlook: Stable

OCL will continue to benefit from the extensive experience of its promoters, diversified product portfolio and strong networth, which will lend financial flexibility. 

Rating sensitivity factors

Upward factors

• Sustenance of healthy operating performance with operating margin of 8% resulting in healthy accretion to reserve
• Track record of operations and lower project risk
• Sustenance of the financial risk profile and prudent working capital cycle

 

Downward factors

• Significant decline in revenue or in operating margin leading to net cash accrual less than Rs 150 crore
• Larger-than-expected, debt-funded capex or stretch in the working capital cycle or huge dividend payout or significant increase in loans and advances or investments to group companies affecting financial flexibility

About the Group

OCL was incorporated in 2001 and acquired by the SM group from NCLT in 2023. The company has an integrated TMT rebar manufacturing plant with installed capacity for billets, sponge iron, coal washery, iron ore crusher and mines. The commercial operations started partially in October 2024.

 

SMSPL was incorporated on April 11, 2022, for leasing the Dumri coal block for 46 years. The 45 million tonne coal will be excavated, washed and sold over 30 years, starting fiscal 2026. 

 

S M Niryat Pvt Ltd, Praful Enterprises Pvt Ltd, NIPL, Disha Realcon Pvt Ltd and Samriddhi Metals Pvt Ltd were amalgamated with OCL with effect from February 28, 2024, through an NCLT order dated January 30, 2024, with appointed date of amalgamation of April 1, 2022.

 

The SM group is promoted by Mr Manish Khemka and his family members , ably supported by line of executives.

Any other information: Not Applicable