Detailed Rationale

CRISIL Ratings has assigned its ‘CRISIL A+/Stable/CRISIL A1’ ratings to the bank facilities of Ramsarup Industries Limited (RIL).

 

RIL was acquired by Shyam Sel and Power Ltd (SSPL; part of the Shyam group; rated 'CRISIL AA/Stable/CRISIL A1+') under the Insolvency and Bankruptcy Code (IBC) in May 2022, through a special purpose vehicle, SS Natural & Resources Pvt Ltd (SSNRPL). SSPL owns 60% in SSNRPL (which wholly owns RIL) while the remaining 40% is owned by Super Smelters Ltd (rated 'CRISIL A-/Stable/CRISIL A2+').

 

RIL is in the process of restarting its operations, which had been halted over the past few years and will begin production in two phases. The first phase includes manufacturing of sponge iron through Direct reduced iron (DRI) and Pig iron via mini blast furnace. The DRI plant is likely to commence operations during the current quarter whereas the mini blast furnace is expected to commence operations by the second quarter of fiscal 2025. The second phase of the capital expenditure (capex) includes setting up finished products capacity in the form of ductile iron pipe and steel wires, which is likely to be completed by April 2026.

 

The ratings factor in the strong operational, financial and managerial support likely to be provided by the parent (SSPL) to RIL, given its high significance to the diversification and forward integration plans of the parent and to the group overall. This will remain a key rating sensitivity factor.

 

The ratings reflect exposure to execution and stabilisation risk associated with the ongoing project set up under RIL. The ratings also factor in the risk of susceptibility of operating margin to cyclicality associated with the steel industry in terms of realisation and raw material prices. Timely completion and ramp-up of the planned capex, without material cost overrun, will remain a key monitorable.

Analytical Approach

CRISIL Ratings has applied the parent notch-up framework to factor in support from its parent, Shyam Sel and Power Ltd (SSPL). SSPL and RIL are engaged in a similar line of business with significant operational and financial linkages along with strong managerial oversight by SSPL.

Key Rating Drivers & Detailed Description

Strengths:

Strong parental support and financial flexibility

RIL is expected to benefit by being a subsidiary of a strong parent, SSPL (part of the Shyam group) on account of strong operational, financial, and managerial linkages. Operational benefits will accrue to the proposed capacities of RIL by having operational linkages with the parent company, albeit on an arms’ length basis. Additionally, RIL is expected to receive need-based financial and managerial support from the parent company. CRISIL Ratings has also taken note of the shortfall undertaking provided by SSPL towards debt facilities of RIL, to ensure timely repayment of obligations and to infuse funds/capital necessary to ensure sufficient liquidity to meet obligations in a full and timely manner.

 

Project risk mitigated by low funding risk, healthy industry outlook, and integrated nature of business operations with the group entities

The company has adequate land parcels across four locations in West Bengal. The company is in the process of restarting its operations in two phases. Total project cost (for both phases) is estimated at around Rs 1,375 crore. CRISIL Ratings understands that the management will try to fund the planned capex mainly through parent support, however, if needed, the share of external debt in funding the planned capex shall not exceed 60%. RIL has tied up bank facilities for funding capex in phase 1 and remaining requirements for phase 2 will be tied up in a timely manner going forward. CRISIL Ratings understands that the bulk of the plant and machinery for phase 1 have already been ordered and significant construction has also been completed and is currently awaiting environmental clearance to commence operations. These factors mitigate the execution and the funding risks for the project.

 

Furthermore, the stabilisation risk associated with the project is expected to be mitigated by the integrated nature of RIL’s business operations with its parent, SSPL. Along with a healthy domestic demand outlook over the medium term, this is expected to mitigate stabilisation risk for the project. However, timely commissioning without material cost overrun and ramp-up of operations post commissioning are key monitorable.

 

Weakness:

Exposure to risks related to project commissioning and stabilisation of operations

RIL does not have operations currently, as it is in the process of restarting its operations in two phases. Phase 1, amounting to ~ Rs 750 crore (~55% of total capex), is expected to be partly commissioned in the current quarter and remaining by the second quarter of fiscal 2025. The second phase of the project is expected to be completed by April 2026. This exposes RIL to project execution risk. However, CRISIL Ratings takes comfort from the low funding and execution risk as required bank facilities have been tied up and significant execution has been completed for phase 1. Also, the presence of experienced promoters having industry knowledge and technical expertise also lends comfort.

 

RIL is likely to benefit from the integrated nature of operations between other operational entities of the group, though on an arm’s length basis. This could aid timely stabilisation of the plant post commissioning. However, any significant time or cost overrun, resulting in liquidity stress, will be a key rating sensitivity factor.

Vulnerability to inherent cyclicality in the steel sector and fluctuations in prices of raw material and finished goods

Inherent cyclicality in the steel industry exposes manufacturers to high volatility in operating margin and in turn, pressure on their debt protection metrics. The group's performance remains vulnerable to cyclicality in the steel sector, given the close linkage between demand for steel products and the domestic and global economies. End-user segments such as real estate, civil construction and engineering are also cyclical in nature. Furthermore, profitability will remain exposed to volatility in input prices and realisations from finished goods. Any significant drop in demand and prices, adversely impacting the operating margin and cash accrual of the group, remain key monitorable.

Liquidity: Strong

Liquidity is backed by that of the parent, SSPL. As on December 31, 2023, the company had capex letters of credit (LCs) worth Rs 400 crore tied up with banks to import plant and machinery of which less than 15% have been utilised and another Rs 50 crore of fund-based limit remains unutilised for working capital purposes. The capex LCs can be converted into term loans if needed. Furthermore, the parent has healthy liquidity to support the funding requirements for RIL’s capex as well as any other operational requirements.

Outlook: Stable

The rating outlook for RIL is driven by the rating outlook on the parent, SSPL.

Rating Sensitivity Factors

Upward factors

• Timely commissioning of operations with improving utilizing rates, though in phases
• Significant improvement in the credit risk profile of the parent, SSPL, resulting in an upgrade in its rating by one or more notches

 

Downward factors

• Significant weakening in the credit risk profile of the parent, SSPL, resulting in a downgrade in its rating by one notch
• Change in support philosophy of the parent towards RIL
• Significantly higher-than-expected time and cost overruns in ongoing capex, impacting business and financial risk profiles of RIL

About the Company

Ramsarup Industries Limited (RIL) was incorporated in 1979. It was in the manufacturing of steel, thermos-mechanically treated (TMT) bars and steel wires. The company has four manufacturing units at Kalyani, Shyamnagar, Kharagpur and Durgapur, all of which were under work suspension for the last 10 years.

 

The company was admitted under the Corporate Insolvency Resolution Process (CIRP) by the Hon’ble National Company Law Tribunal. The acquisition will synergise the group’s existing steel business as the horizontal integration of steel manufacturing facilities and has the potential to generate and enhance significant efficiencies.

About the parent and the group

The Shyam group, which is promoted by Kolkata-based Mr Mahabir Prasad Agarwal, started trading in steel products in 1981 and ventured into manufacturing of steel products through Shyam SEL in 1991. Over the years, it has also diversified into several core infrastructure sectors such as power (biomass, waste heat, thermal and hydel), cement, logistics and industrial parks.

 

Shyam Metalics & Energy Ltd (SMEL) and Shyam SEL & Power Ltd (SSPL) are part of the Shyam group, which is one of the major players in the iron and steel sector in eastern India and also amongst the largest ferro alloy manufacturers in India.

 

SMEL was established in 2002 as Shyam DRI Power Ltd, when the group expanded its operations to Odisha; it got its present name in January 2010. It manufactures sponge iron, billets, TMT steel bars, and ferro alloys and has captive power plants supporting around 80% of its power requirement.

 

SSPL, a wholly owned subsidiary of SMEL, was incorporated in 1991, and started commercial production in 1996, with steel-melting shops. Over the years, the company has added rolling mills, ferro alloy furnaces, sponge iron kilns, billet and ingot capacities, a captive power plant and capital railway sidings to ensure operational and business integration. Manufacturing units are in Raniganj, Pakuria and Jamuria in West Bengal.

Key Financial Indicators

As on/for the period ended March 31	Unit	2023	2022
Operating income	Rs.Crore	NM	NM
Reported profit after tax (PAT)	Rs.Crore	16	(31)
PAT margin	%	NM	NM
Adjusted debt/adjusted networth	Times	0.54	NM
Interest coverage	Times	NM	NM

NM: not meaningful 

The company was acquired via NCLT in fiscal 2023. The capacities are being restarted and is yet to commence operations.

Any other information: Not Applicable