| Shri Rathi Steel (Dakshin) 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+/Negative/CRISIL A2' ratings on the bank facilities of Shri Rathi Steel (Dakshin) Limited (SRSDL; part of the Shri Rathi group). |
| Analytical Approach |
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* CRISIL has combined the business and financial risk profiles of SRSDL and Shri Rathi Steel Ltd (SRSL). This is because the two companies, collectively referred to as the Shri Rathi group, are in the same line of business and have common products, brands and management teams. They also have the same customer and supplier bases, with miniscule intra-group transactions. |
| Key Rating Drivers & Detailed Description |
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Strengths: * Well-established brand and a strong distribution network: The Rathi brand was established in the 1940s, when the late Mr Govardhan Das Rathi set up a rolling mill in Delhi. Thereafter, Mr Anil Rathi, the main promoter, set up Rathi Eurotherm as the flagship brand. This brand continues to have strong recall among intermediaries and end users, as reflected in the large turnover and penetration in the North Indian market. The management has set up another brand, 7 Star, with the objective of a slightly premium positioning, leading to higher realisations. The products are sold through an extensive distribution network comprising around 500 traders and retailers and more than 50 institutional customers across Rajasthan, Haryana, Uttar Pradesh, Punjab, Madhya Pradesh and Delhi. The three-decade-long experience of the promoters, healthy relationships with suppliers and customers and the group's strong market position in the industry should continue to support the business. * Prudent working capital management: Operations are prudently managed, with gross current assets estimated at 78 days as on March 31, 2020 (70-130 days in past fiscals) driven by modest inventory of 17 days and debtors of 49 days. Furthermore, adequate payables support working capital. However, sustenance of efficient working capital management will remain a monitorable. Weaknesses: * Average financial risk profile: The interest coverage ratio is estimated at 2.03 times in fiscal 2020 (2.67 times the previous fiscal), while net cash accrual to total debt is estimated at 0.11 time. High reliance on external debt should keep the financial risk profile moderate over the medium term. However, the capital structure is healthy, backed by substantial cash accrual and moderate capex, with healthy networth and low gearing, estimated at Rs 95.0 crore and 0.83 time, respectively, as on March 31, 2020. * Exposure to risks inherent in the steel industry: The steel industry is inherently cyclical and is exposed to risks such as volatility in raw material cost and reduced price realisations. The group has limited bargaining power with suppliers and customers due to intense competition from domestic and international players. The earnings before interest, tax, depreciation and amortisation margin has been declining, as any increase in raw material cost could not be passed on to large customers. Revenue has been stagnant over the five fiscals through 2020 due to fall in the prices of steel products. Moreover, demand for products, such as TMT bars, is linked to the capex of end users, such as real estate, civil construction and engineering industries, which are cyclical. Slowdown in capex in these segments due to economic downturns and expected gradual recovery will continue to constrain the revenue. * Low operating margin and RoCE: The operating margin remained low due to intense competition and high power tariff in Uttar Pradesh. Also, there is limited product differentiation and value addition in the steel products industry, along with an inability to pass on the increase in input prices. The margin remains low due to increased focus on marketing and branding, for example, change in distribution and marketing strategies resulted in reduced operating margin. The margin stood at 1.95%, leading to a modest RoCE of 6.8%, in fiscal 2020. These metrics are likely to remain low over the medium term. |
| Liquidity Adequate |
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Net cash accrual, expected at Rs 7.0-9.0 crore per fiscal, should support liquidity in the absence of any major capex over the medium term; (debt obligation was around Rs.1.46cr in fiscal 2021, Rs 3.3 crore per annum in fiscal 2022 and 2023). Utilisation of the working capital limit of Rs 54.0 crore averaged 91.45% over the 12 months through September 2020. The group also maintains Rs 1.0-2.0 crore in the form of cash and equivalents. A capacity expansion was to be taken up under both the plants, however, it has been deferred due to the Covid-19 pandemic. |
| Outlook: Negative |
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CRISIL believes the Shri Rathi group's revenue, profitability and cash accrual could remain constrained by the fall in demand in the construction industry, leading to stretched liquidity. |
| Rating Sensitivity factors |
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Upward factors * Sustenance of operating income, with operating margin improving to more than 2% * Efficient working capital management strengthening the financial risk profile in the absence of any major debt-funded capex Downward factors * Fall in cash accrual or any debt-funded capex weakening the financial risk profile, with interest coverage ratio reducing to less than 2.50 times * Sharp decline in the operating performance, with margin dropping to below 1.8% |
| About the Group |
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SRDL, a closely held public limited company, was incorporated in 1992 as Baldev Investments Pvt Ltd and was renamed in 2007; it started operations in 2008. SRSL, also a closely held public limited company, was incorporated in 1992 as Static Holdings Pvt Ltd; the name was changed in 2002 and operations began in 2003. Mr Anil Rathi, Mr Gopal Rathi and Mr Dhruv Rathi manage the companies. The group manufactures and markets TMT bars under the Rathi Eurotherm 500 and 500+, and 7 Star brands. SRSL's manufacturing facility is in Ghaziabad, Uttar Pradesh, while SRDL's unit is in Bhiwadi, Rajasthan. The group manufactures and markets TMT bars under the Rathi Eurotherm 500 and 500+, and 7 Star brands. SRSL's manufacturing facility is in Ghaziabad, Uttar Pradesh, while SRDL's unit is in Bhiwadi, Rajasthan. |
| Key Financial Indicators - (Consolidated) | ||||||||||||||||||||||||
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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 - List of entities consolidated | ||||||||||||||||||||||||||||||||
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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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