Key Rating Drivers & Detailed Description

Strengths:

Extensive industry experience of the promoters :

The promoters have an extensive experience of more than three decades in the steel industry. This have given them a strong understanding of the market dynamics and enabled them to establish healthy relationship with reputed suppliers and customers. Company is an authorized distributor (sole distributor for western Maharashtra) of Jindal Steel and Power Limited (JSPL). The same has also helped the group to grow its scale of operations over the years and establish a strong market position. The revenues have grown from Rs 372 crores in fiscal 2019 to Rs 407 Crores in fiscal 2022. Company has reported revenue of Rs 235 crore for H1 of fiscal 2023.

Comfortable financial risk profile: 

The financial risk profile is supported by comfortable capital structure, reflected in healthy net worth of Rs 81 crore, gearing of 0.60 time and total outside liabilities to adjusted net worth ratio of 0.56 time as on March 31, 2022. Debt protection metrics were adequate with interest coverage and net cash accrual to adjusted debt ratio at 5.01 times and 0.29 time, respectively, in fiscal 2022. The financial risk profile should remain comfortable backed by steady accretion to reserve as indicated by interest coverage ratio of 7.2 times and TOLANW sub 0.75  times as on September 30, 2022.

Weaknesses:

Susceptibility to volatility in raw material prices, cyclicality in demand: 

The steel sector is inherently cyclical, given its close linkage to the domestic and global economies. Though there has been a significant push by the government on steel-intensive sectors such as railways and infrastructure, any economic downturn will adversely impact demand and realizations. Profitability remains susceptible to fluctuations in steel prices and changes in government regulations regarding imports and duties. This risk is mitigated by application of the company's products in diverse end-user. Operating margins have remained volatile in the range of 2.7% to 5.1% over the past four years ending fiscal 2022. While company has reported operating margin of 7% for H1 of fiscal 2023, sustenance of same remains to be seen.

Exposure to intense competition:

The Indian steel industry is highly competitive due to low entry barriers and limited product differentiation with large number of unorganized players. Moreover, the industry is inherently cyclical and strongly correlated to the economic environment. The intense competition may continue to constrain scalability, pricing power and profitability.

Moderately working capital-intensive operations:

The working capital cycle is capital intensive, as reflected in gross current asset (GCA's) of 107 days as on March 31, 2022 driven by moderate receivable of 31 days and inventory of 67 days. Company maintains an inventory of 10000-12000 MT on an average, which is reflected from inventory of around Rs.60 crore. Inventory levels are expected to be maintained at around 50-60 days over medium term. Most of the creditors are paid on the same day or in advance. Overall working capital cycle is expected to remain efficient with GCA days of 90 - 120 days over the medium term.

Key Financial Indicators

Annexure - Details of Instrument(s)

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