Detailed Rationale CRISIL Ratings has removed its ratings on the long-term and short-term bank facilities of Shree Venkateshwara Electrocast Pvt Ltd (SVEPL) from ‘Watch developing’ due to availability of amended corporate guarantee executed by the parent, Shyam Sel & Power Ltd (SSPL) -- in line with the recent guidelines of the Reserve Bank of India and the criteria of CRISIL Ratings on rating instruments backed by guarantees -- while reaffirming its ‘CRISIL A/Stable’ rating on the proposed long-term bank facilities of the company.
CRISIL Ratings has also converted its provisional rating assigned to the bank facilities availed from Axis Bank to a final rating of ‘CRISIL AA (CE)/Stable/CRISIL A1+’ on receipt of the final executed corporate guarantee document. Further, CRISIL Ratings has reaffirmed its ‘CRISIL A1+’ rating on the short-term bank facility and assigned its ‘CRISIL AA (CE)/Stable’ rating to the long-term bank facilities availed from IDFC First Bank.
Furthermore, the unsupported ratings reflect the standalone business and financial risk profiles of SVEPL. CRISIL Ratings has factored in the support SVEPL is likely to receive from its parent, SSPL, since both the companies have strong financial and managerial linkages. These strengths are partially offset by average financial risk profile of SVEPL and sensitivity of the rating of SVEPL to that of the guarantor.
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Analytical Approach For corporate guarantee-backed facilities, CRISIL Ratings has applied its criteria on rating instruments supported by guarantees. The suffix CE reflects the payment structure that is designed to ensure full and time-bound payment to lenders.
For non-guaranteed instruments, CRISIL Ratings has applied its parent notch-up framework to factor in the aid extended by the parent, SSPL. SVEPL will continue to receive support from the parent due to its strategic importance to the parent and their strong financial and managerial linkages. |
Key Rating Drivers & Detailed Description Strengths Unconditional and irrevocable corporate guarantee by the parent and payment mechanism The credit quality of the guaranteed bank facilities reflects the credit quality of the guarantor. CRISIL Ratings understands that SSPL will ensure timely payments against the letter of credit and cash credit facilities. According to the payment mechanism, SSPL will pay the amount due in relation to the facilities as per the defined timeline structure, on the due date, irrespective of the bank(s) invoking the guarantee.
Benefits derived from being part of the Shyam group SVEPL will receive strong managerial and financial support from its parent, SSPL, which is a part of the Shyam group. The management has articulated to extend support to assets during adversities. Change in the support philosophy of the parent will be a key monitorable.
Weaknesses Average financial risk profile; expected to improve with enhanced performance following change in management Prior to acquisition, SVEPL was under stress and entered into a one-time settlement with its erstwhile lenders. Subdued operating performance owing to modest operating margin (led by the inherent nature of the job work business) constrained the financial risk profile. Also, continued losses led to networth erosion, which continues to be negative.
SSPL acquired controlling stake of 90% in SVEPL through the execution of a share purchase agreement (SPA) on August 31, 2021, for consideration of Rs 22.28 crore. This resulted in change in management at SVEPL.
The production volume of the company remained weak over the past few years owing to lack of direct orders as the entire production was being utilised for job work; this led to modest profitability. Following acquisition by SSPL, the company is focusing on sourcing direct orders on business-to-business basis, along with existing job work contracts. Thus, earnings before interest, tax, depreciation and amortisation (Ebitda) rose to Rs 5.8 crore during the first nine months of fiscal 2023, compared with Rs 2.5 crore in fiscal 2022. Also, the company has secured working capital bank lines from the lenders on the strength of the corporate guarantee extended by SSPL, which has enabled efficient operations and liquidity management.
Susceptibility to guarantor’s rating and non-adherence to payment mechanism The rating primarily reflects the credit strength of the guarantor, SSPL. Hence, adverse movement in the rating on the guarantor may result in a similar rating action on this facility. Also, non-adherence to the agreed payment mechanism will be a credit weakness. |
Liquidity Liquidity for guaranteed facilities: Strong The rating for the guaranteed facilities is driven by the corporate guarantee from SSPL, which has healthy liquidity.
Liquidity for non-guaranteed facilities: Adequate SVEPL is dependent on SSPL, which has strong liquidity, to cover shortfalls in debt obligation. Liquidity will remain adequate, supported by cash accrual of over Rs 3 crore in fiscal 2023 and cash balance of around Rs 3 crore as on September 30, 2022, against no major debt obligation and capital expenditure (capex). |
Outlook: Stable (for unsupported ratings) The outlook is based on the outlook of CRISIL Ratings on the debt instruments and bank facilities of SSPL. |
Rating Sensitivity factors (for guaranteed facilities) Upward factors
Downward factors
Rating sensitivity factors (for non-guaranteed facilities) Upward factors
Downward factors
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Adequacy of credit enhancement structure The guarantee provided by SSPL is unconditional and irrevocable and covers the entire existing facility amount. Trustee/lender-monitored payment mechanism is in place to ensure timely payment of the interest and principal obligations on the rated facilities. The payment mechanism provides adequate timeline for the guarantor to make full and timely payments in case of a default by the borrower.
To assess SSPL, CRISIL Ratings has combined the business and financial risk profiles of SSPL and its subsidiaries, including SVEPL. CRISIL Ratings believes the instruments will have a high degree of safety regarding timely meeting of financial obligation. |
Unsupported ratings CRISIL A CRISIL Ratings has introduced the suffix CE for instruments having an explicit credit enhancement feature in compliance with the SEBI circular dated June 13, 2019. |
Key drivers for unsupported ratings For arriving at the unsupported ratings, CRISIL Ratings has considered the standalone business and financial risk profiles of SVEPL. It has also factored in the expected support SVEPL will receive from its parent, SSPL, as the two companies have strong business and operational linkages. |
Risks associated with the provisional rating: The 'Provisional' prefix indicates that the rating is contingent on occurrence of certain steps or execution of certain documents by the issuer, as applicable. If the documents received and/or completion of steps deviate significantly from the expectations, CRISIL Ratings may take an appropriate action, including placing the rating on watch or changing the rating/outlook, depending on the status of progress on a case to case basis. In the absence of the pending steps / documentation, the rating on the instrument would not have been assigned ab initio. |
About the Company Incorporated in 2005, SVEPL started manufacturing aluminum foils. In 2014, the company began manufacturing pharmaceutical foils, house foils and semi-rigid container foils for the packaging industry.
SSPL acquired 90% stake in SVEPL through the execution of an SPA on August 31, 2021, for consideration of Rs 22.28 crore.
As on December 31, 2022, Ebitda of SVEPL was Rs 5.8 crore on revenue of Rs 74.2 crore, as against Rs 2.5 crore on Rs 46.1 crore for fiscal 2022. |
About the Group/Guarantor SSPL was incorporated in 1991 and started commercial production in 1996 with steel-melting shops. It has added rolling mills, ferroalloy furnaces, sponge iron kilns, billet and ingot capacities and a captive power plant to ensure operational and business integration. Its manufacturing units are at Raniganj and Jamuria in West Bengal. |
Key Financial Indicators (standalone*)
*CRISIL Ratings-adjusted numbers **Due to negative networth |
List of covenants
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Any other information: Not applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
*Interchangeable with fund-based limit up to Rs 15 crore |
| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Annexure - Details of Bank Lenders & Facilities | ||||||||||||||||||||||||
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Criteria Details
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