| Shree Electromelts Limited | ||||||
| Ratings Reaffirmed | ||||||
| Rating Action | ||||||
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| 1 crore = 10 million | ||||||
| Refer to annexure for Details of Instruments & Bank Facilities |
| Detailed Rationale |
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CRISIL has reaffirmed its 'CRISIL BBB-/Stable/CRISIL A3' ratings on the bank facilities of Shree Electromelts Limited (SEL). |
| Key Rating Drivers & Detailed Description |
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Strengths:
* Extensive experience of the promoters and healthy relationships with customers and suppliers: SEL's promoters have been in the steel industry for about three decades. They began manufacturing ingots in 1992 by setting up SEL and have undertaken various businesses after that through other group companies. The promoters' extensive experience in the business has helped them to form healthy relationships with customers and suppliers, which should continue to benefit the business over the medium term. * Moderate financial risk profile: Capital structure was marked by moderate networth of Rs 25.49 crore and low total outside liabilities to adjusted networth ratio of 0.87 time ended March, 2020. Debt protection metrics were healthy, with interest coverage and net cash accrual to adjusted debt ratios of 4.01 times and 1 time, respectively, in fiscal 2020. This is largely because of its reliance on utilising non-fund-based facility such as letter of credit (LC) to support its working capital requirement, over fund-based facility such as debt or cash credit. This should continue to benefit SEL over the medium term. * Prudent working capital management: SEL usually extends low credit of 30 days to its customers and maintains moderate inventory of 60 days, resulting in gross current assets (GCAs) of 92 days ended March , 2020. SEL needs to maintain large inventory for its coking coal division as it imports inventory from Australia. It maintains low inventory for ingots, thereby moderating inventory levels to two months. SEL's working capital is supported by large credit of more than 180 days with LC-based imports and hence, it does not rely on fund-based facility. Weaknesses: * Susceptibility of operating margin to volatility in coke prices and cyclicality in the steel industry: SEL entirely imports its raw material (coal) for its coking coal division from Australia, on furnishing LCs. With long transit times of 90-120 days, the company usually furnishes an LC of 180-210 days to import coal. Since its coking division is a major contributor to sales and profitability, it exposes SEL to high inventory risks as it maintains a large stock on account of long transit time. The cyclicality in the steel industry also exposes the players to sudden changes in prices. SEL's margin will remain susceptible to fluctuations in coke prices and sales realisation for mild steel ingots over the medium term. * Average scale of operations and margins in highly fragmented industry: SEL presently operates in the highly fragmented ingot manufacturing and coking coal industry. SEL had revenue of Rs 94 crore for fiscal 2020. Given that it operates in a highly fragmented industry with intense competition, players such as SEL have limited pricing and bargaining power and are price takers, leading to low margin. During fiscal 2020, SEL's operating margin moderated to 2% amidst decline in average realization and overhead cost. |
| Liquidity Adequate |
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Liquidity is marked by adequate cash accrual and bank limit utilisation is low. Expected cash accrual of around Rs 2.5 crore against which it has no term debt obligation currently. Bank limit utilisation was low, averaging 26% for the 12 months ended June, 2020.The company is undertaking capital expenditure of Rs 3 crore to change its existing steel machinery in the ingot division, it will be funded through a term loan of Rs 2 crore and the balance will be through internal accruals. Current ratio was also moderate at 1.46 times ended March, 2020. |
| Outlook: Stable |
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CRISIL believes SEL will continue to benefit from the extensive experience of the promoters in the coal and consumable industry and its moderate financial risk profile. |
| Rating Sensitivity factors |
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Upward factors: * Stable growth in revenue and operating margin, leading to cash accrual of Rs 5 crore * Sustenance of the working capital cycle Downward factors: * Stretch in the working capital cycle, with GCAs increasing to 180 days * Steep decline in the operating margin |
| About the Company |
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SEL was set up in 1992 by Mr RK Jain and his family members. The company is based in Bhavnagar, Gujarat, and manufactures low-ash metallurgical coke and mild steel ingots. |
| Key Financial Indicators | ||||||||||||||||||||||||
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Any other information: Not applicable |
| Note on complexity levels of the rated instrument: CRISIL complexity levels are assigned to various types of financial instruments and are included (where applicable) in the Annexure -- Details of Instrument in this Rating Rationale. For more details on the CRISIL complexity levels, please visit www.crisil.com/complexity-levels. |
| Annexure - Details of Instrument(s) | |||||||||||||||||||||
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| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||
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| All amounts are in Rs.Cr. | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annexure - Details of various bank facilities | ||||||||||||||||||||||||||||||
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| For further information contact: | ||||||
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