Detailed Rationale

CRISIL Ratings has revised its rating outlook on the long-term bank facilities of Ramsarup Industries Ltd (RIL; part of the Shyam Metalics group) to ‘Positive’ from ‘Stable’, and reaffirmed the rating at ‘CRISIL A+’; the short-term rating has been reaffirmed at ‘CRISIL A1’.

 

RIL was acquired by Shyam Sel and Power Ltd (SSPL; part of the Shyam group; rated 'CRISIL AA/Positive/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+').

 

The rating action for RIL is in line with the rating action on the debt facilities of its parent, SSPL. This is because the ratings of RIL factor in the strong operational, financial and managerial support from its parent, given its high significance to the diversification and forward integration plans of the parent and to the group overall. This remains a key rating sensitivity factor.

 

RIL is restarting its operations after few years, and will begin production in two phases. The company has commenced production of sponge iron through direct reduced iron (DRI), while those of other products such as pig iron via mini blast furnace is expected to commence by the end 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 continue to reflect the strong parental support that RIL receives and its financial flexibility, low funding risk for project, healthy industry outlook, and integrated nature of business operations with the group entities. These strengths are partially offset by exposure to execution and stabilisation risks associated with the ongoing project set up under RIL, and 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 monitorable.

Analytical Approach

CRISIL Ratings has applied its parent notch-up framework to factor in the support from SSPL. The parent and RIL are in the same business with significant operational and financial linkages, while SSPL has strong managerial oversight.

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, with which it has 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. CRISIL Ratings has also taken note of the shortfall undertaking provided by SSPL towards the debt facilities (Capex Letter of Credit) of RIL to ensure timely loan repayment and to infuse funds/capital necessary to ensure sufficient liquidity to meet debt obligation 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. It is restarting its operations in two phases. Total project cost is estimated at around Rs 1,375 crore. The management will try to fund the planned capex through parent support, though 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, while the remaining requirement for phase 2 will be tied up in a timely manner over the medium term. CRISIL Ratings understands that the bulk of the plant and machinery for phase 1 has already been ordered and significant construction has also been completed. These factors mitigate the execution and funding risks for the project.

 

• Furthermore, the stabilisation risk associated with the project is expected to be offset 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 monitorable.

 

Weaknesses:

• Exposure to risks related to project commissioning and stabilisation of operations: RIL has only commenced operations of its DRI sponge iron capacity as a part of phase 1, amounting to ~Rs 750 crore (~55% of total capex), while the rest is expected to be commissioned by the end of this fiscal. The second phase of the project is expected to be completed in fiscal 2027. 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 lends comfort.

 

• Vulnerability to inherent cyclicality in the steel sector and volatility in raw material and finished goods prices: 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 margin and cash accrual will remain monitorable.

Liquidity: Strong

Liquidity is backed by that of the parent, SSPL. As on August 31, 2024, the company had unutilised fund-based limit of Rs 33 crore for working capital purposes. Furthermore, the parent has healthy liquidity to support the funding requirement for RIL’s capex as well as any other operational needs.

Outlook: Positive

RIL may benefit from improvement in operational performance and integrated nature of operations, thereby improving overall cash generation. Strong liquidity and improvement in the rating outlook of the parent, coupled with measured capex plans, will keep financial risk profile strong over the medium term.

Rating sensitivity factors

Upward factors:

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

 

 Downward factors:

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

About the Company

Incorporated in 1979, RIL manufactures steel, thermo-mechanically treated (TMT) bars and steel wires at its four units in Kalyani, Shyamnagar, Kharagpur and Durgapur (all in West Bengal), all of which have lay defunct for the last 10 years.

 

RIL was admitted under the Corporate Insolvency Resolution Process by the National Company Law Tribunal (NCLT). The acquisition by SSPL will synergise the Shyam 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 began manufacturing steel products through SSPL 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 among 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	2024	2023
Operating income	Rs crore	NM	NM
Reported profit after tax (PAT)	Rs crore	(8.5)	16
PAT margin	%	NM	NM
Adjusted debt/adjusted networth	Times	0.0	0.54
Interest coverage	Times	NM	NM

NM: not meaningful 

The company was acquired via NCLT in fiscal 2023. The capacities are being restarted and operations began in fiscal 2023

Any other information: Not Applicable