| Shakambhari Ispat and Power Limited | ||||||
| Ratings reaffirmed at 'CRISIL BBB+ / Stable / CRISIL A2 '; rated amount enhanced for Bank Debt | ||||||
| Rating Action | ||||||
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| 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 reaffirmed its ratings on the bank facilities of Shakambhari Ispat and Power Ltd (SIPL) to ‘CRISIL BBB+/Stable/CRISIL A2’
The ratings continue to reflect the company’s adequate business risk profile, supported by established market position, improving scale of business and robust operating margin, driven by integrated nature of operations and longstanding experience of the promoters in the steel sector. Consolidated revenue of the Shakambhari group of industries has witnessed healthy growth for the five fiscals through 2022, driven by large capacity additions and inorganic growth. Operating margins have also improved over the years with forward integration, increasing share of value-added products and increasing scale of operational capacities.
However, the company and the group witnessed moderation in realisations and operating margins during the current fiscal as steel prices declined. Despite moderation, the reported consolidated operating margin remains healthy at ~ 11% in the first nine months of fiscal 2023 against 14-15% in fiscal 2022. Going forward, CRISIL Ratings expects utilisation rates to remain healthy on the back of robust domestic demand outlook. Furthermore, the company has commissioned enhanced pellet plant capacity during the last quarter of fiscal 2023, which will further aid operating efficiency and support steady operating margin around current levels, despite expectation of some moderation in average steel realisations over the next fiscal.
The ratings also factor in average financial risk profile on account of capital expenditure (capex) undertaken over the last 3-5 years. The capex has been towards capacity expansion (including pellet plant being set up in two phases in fiscals 2022 and 2023) and acquisitions by the group. This has resulted in increased debt levels for the group with consolidated debt increasing to Rs 2,297 crore as on December 31, 2022 (from Rs 2,168 crore as on March 31, 2022 and Rs 1,525 crore as on March 31, 2021).
For fiscal 2022, consolidated interest coverage and net cash accrual to total debt (NCATD) ratios were 4.91 times and 19%, respectively, against 2.5 times and 12.0%, respectively, in fiscal 2022. Consolidated gearing was 1.3 times as on March 31, 2022, against 1.2 times as on March 31, 2021. Furthermore, during the first nine months of fiscal 2023, the interest coverage and NCATD ratios were 3.76 times and 13%, respectively.
The group’s working capital cycle was stretched during the current fiscal mainly due to increase in inventory, which increased to 162 days as on December 31, 2022 from 115 days in March 31, 2022 (110 days as on March 31, 2021). This has also resulted in increase in debt for the group on account of increased working capital debt. However, CRISIL Ratings understands, as per management discussion, that no major capex or acquisition is to be incurred over the medium term and cash accrual is to be utilised towards debt reduction. CRISIL Ratings understands that the consolidated debt is expected to be less than Rs 2,500 crore as on March 31, 2023 and will continue to reduce going forward, along with expected moderation in inventory levels and gross current assets (GCAs), supporting expected easing of the working capital cycle for the company. Any delay in reduction of debt levels and improvement in the working capital cycle will be key rating sensitivity factors. Furthermore, the promoters are likely to continue extending timely, need-based unsecured loans to aid operations.
CRISIL Ratings has also taken note of the Central Bureau of Investigation’s (CBI) chargesheet in illegal coal mining which includes names of the group companies – SPS Steels Rolling Mills Ltd (SPS), SIPL and Eloquent Steel Pvt Ltd (ESPL; being represented through the promoter) along with various other third parties. CRISIL Ratings understands that this matter is currently sub-judice and no material impact on the operations of the group have been witnessed so far. However, further developments and any potential impact on the group’s operations and its financial flexibility will be a key monitorable.
The ratings factor in the benefits of diversification across product segments, presence of strong brand and diversified customers for the group. It has established position in East India. With acquisition of SPS in April 2019, the group acquired the brand, Elegant, for rolling mills capacity, which has strong presence in the northern and western parts of India. The credit risk profile is further supported by extensive experience of the promoters (of over two decades) and track record of support. These strengths are partially offset by vulnerability to fluctuations in prices of raw material and finished goods, exposure to inherent cyclicality as well as competitive and capital-intensive nature of the steel industry. |
Analytical Approach To arrive at its ratings, CRISIL Ratings has combined the business and financial risk profiles of SIPL with SPS, Bravo Sponge Iron Pvt Ltd (BSIPL) and ESPL. This is because these entities, collectively referred to as the Shakambhari group of industries, are in the same business and under a common management. These entities also have significant operational and financial linkages. Furthermore, loans extended by the promoters have been treated as 75% equity and 25% debt.
Unsecured loans (Rs 142 crore as on December 31, 2022) extended by the promoters are interest free and are expected to remain in the business over the medium term.
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: Established market position and operating margins to be supported by backward integration The group has an established position in the steel and steel intermediates industry in eastern India and are improving their presence in other parts of the country through inorganic growth. It has also increased its foothold in export markets, with more than 11% revenue derived from exports in the first nine months of fiscal 2023 (9% in full fiscal 2022). Revenue is expected to reach Rs 4,500 – 5,000 crore (on consolidated basis) in fiscal 2023 from ~Rs 2,000 crore in fiscal 2020, at compound annual growth rate (CAGR) of over 18%, backed by enhanced geographical reach, premium brand and backward integration through internal capacity additions over the years.
The group has implemented pellet capacity of 8.5 million tonne (MT) under BSIPL, effectively enhancing the total pellet capacities to 17 MT, which should be sufficient to cater to the group’s pellet requirement for captive consumption. This is expected to support operating efficiency at the group level in the current price moderation scenario being witnessed in the steel industry.
Extensive experience of the promoters The promoters have extensive experience of over two decades in the business. Under their guidance, the group diversified into various product segments, leading to integrated operations. The promoters have also shown competence by turning around the operations of stressed assets. In fiscal 2020, turnaround of operations of SPS, which was making losses until fiscal 2019, is attributed to the promoters’ experience - both in improving efficiency and cost reduction. The promoters have supported all the entities through unsecured loans, as and when required, and are expected to continue doing so.
Average financial risk profile due to moderately high debt on account of capex; expect to witness moderation in debt going forward: The debt protection metrics are moderate, as indicated by high leverage driven by debt-funded capex of around Rs 400 crore during the first nine months of fiscal 2023. The group has undertaken capex of around Rs 1,400 crore in the last 3-4 years, which was funded through a mix of external debt and funds extended by the promoters. Interest coverage ratio, gearing and NCATD ratio are expected to be around 3 times, 1.2 times and 0.14 time, respectively, as on March 31, 2023, vis-à-vis over 4.9 times, 1.3 times and 0.19 time, respectively, as on March 31, 2022. However, the management has plans of reducing debt, going forward, as no material capex or acquisition is to be undertaken over the medium term, which will be a key monitorable.
Weaknesses: Stretched working capital cycle, mainly due to high inventory resulting in moderately high short-term debt The company’s GCAs were high at 256 days as of December 2022, against 181 days as of March 2022. Inventory was also high at around 118 days as of December 2022 as compared to 115 days as of March 2022. This has resulted in increased reliance on short-term debt during the period. Any significant moderation in product prices could result in inventory losses which may further stretch the working capital cycle of the group. However, with expectation of operating cash to be utilised for debt reduction and working capital requirement; the company is expected to see improvement in the working capital cycle and it will be a key monitorable for the rating. Furthermore, the promoters are expected to continue extending timely, need-based funds to support financial flexibility.
Vulnerability to fluctuations in prices of raw material and finished goods Though the company has backward integrated the sourcing of raw materials, operating margin is vulnerable to fluctuations in the cost of inputs (iron ore and coal) as well as realisation from finished goods. Prices and supply of the main raw material, iron ore, directly impacts the realisations of finished goods. Any significant change in the demand-and-pricing scenario, resulting in the operating margin moderating to below 9% on a sustained basis, will remain a key monitorable.
Exposure to competition, inherent cyclicality and the capital-intensive nature of the steel sector The group's performance remains vulnerable to cyclicality in the steel sector, given the close linkage between the demand for steel products and the domestic and global economies. End-user segments such as real estate, civil construction and engineering also display cyclicality. While there has been a significant push by the government in steel-intensive sectors, such as railways and infrastructure, any sustained downturn in demand will adversely impact performance of steel companies. |
Liquidity : Adequate Cash accrual is projected at Rs 280-400 crore per annum for fiscals 2023, 2024 and 2025, against annual debt repayment of Rs 120-140 crore in fiscals 2023 and 2024. The company is expected to incur minimum need-based capex of Rs 100-150 crore over fiscals 2024 and 2025, which will be funded through internal accrual. The promoters are expected to continue extending timely, need-based funds to support financial flexibility. |
Outlook Stable The Shakambhari group of industries is expected to continue to benefit from the integrated nature of operations, improving efficiencies, extensive experience of the promoters and expected improvement in the financial risk profile. |
Rating Sensitivity factors Upward factors
Downward factors
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About the Group SIPL (erstwhile Maa Chhinnamastika Steel & Power Pvt Ltd) was incorporated in 2001. Its plant was shut down in August 2010 as it was making losses. In December 2010, the Shakambari group of industries took control of the company. The group is based in Kolkata and has established position in the eastern market.
In 2015, BSIPL was acquired from the Bhalotia group in Jamshedpur (formerly, Bhalotia Bravo Sponge Iron Pvt Ltd). Incorporated in 1997, the entity manufactured sponge iron. It was taken over by the Bhalotia group in 2002. In June 2015, the unit was shut down by the Bhalotia group and was taken over by Mr Deepak Agarwal by paying the distress sale value of around Rs 25 crore by way of purchase of share capital. In fiscal 2018, the group purchased ESPL, which was incorporated in 2012, with the objective of setting up a submerged arc furnace for production of ferro alloys and induction furnace for production of billets. However, till 2017, the company did not have any operations except trading of iron and steel items. In November 2017, ESPL was taken over by Mr Deepak Agarwal and Ms Swati Agarwal by transfer of shares. Through ESPL, two loss-making companies (Hira Concast Ltd and Impex Steel Ltd) were acquired through option bidding for setting up sub-merged electric arc furnaces to produce ferro alloys. In fiscal 2020, the promoters acquired SPS, which has an established brand, Elegant, under the rolling mill segment. In September 2022, SIPL also acquired ESS DEE Aluminum Ltd for the bid amount of Rs 103 crore.
As on December 31, 2022, revenue of the group, including interparty sales, was Rs 4,136 crore with profit after tax (PAT) of Rs 292 crore. |
Key Financial Indicators
SIPL (standalone)
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Any other information: Not applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
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Annexure – List of entities consolidated
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| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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* - Issuer did not cooperate; based on best-available information
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Criteria Details
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