| Shyam Metalics and Energy Limited | ||||||
| Ratings Reaffirmed | ||||||
| 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 ‘CRISIL AA/Stable/CRISIL A1+’ ratings on the bank facilities and commercial paper programme of Shyam Metalics and Energy Limited (SMEL; part of the Shyam Metalics group).
The ratings continue to reflect the established market position of the group in the steel sector, diversified product and customer profiles, healthy operating efficiency supported by integrated operations and strategic locations of manufacturing units, and the longstanding experience of promoters in the steel sector. The ratings also factor in the comfortable financial risk profile backed by healthy debt protection metrics.
Consolidated revenue grew by 20.4% in fiscal 2023, backed by rise in average realisation (blended realisation grew ~17%) and modest volume growth (~3%). Consolidated operating margin, however, declined to 11.8% from 24.5% in fiscal 2022 (21.8% in fiscal 2021) owing to steep rise in energy costs and iron ore prices, which more than offset the rise in realisations; also, fiscal 2022 was a historical high for the steel industry. While consolidated Ebitda (earnings before interest, taxes, depreciation, and amortisation) per tonne (on blended volumes) fell to Rs 4,462 from Rs 8,264 in fiscal 2022, this was broadly in line with the long-term average of Rs 4,500-4,700 per tonne for the company. Rise in the share of finished steel in sales mix to ~48% from ~38% in fiscal 2022 also supported operating profitability.
The group incurred capital expenditure (capex) of ~Rs 1,580 crore and acquired Ramsarup Industries Ltd (Ramsarup), which led to an outgo of ~Rs 380 crore. Moderated cash accrual and continued capex resulted in debt rising to ~Rs 1,152 crore as on March 31, 2023, from Rs 590 crore as on March 31, 2022.
That said, operating profitability remained robust with consolidated Ebitda of Rs 1,486 crore in fiscal 2023 (Rs 2,570 crore in fiscal 2022 and Rs 1,379 crore in fiscal 2021) supporting healthy credit risk profile, while balance sheet remained net cash positive; in line with expectations. The ratings also factor in the adequate liquidity, backed by cash and equivalent of ~Rs 1,500 crore as on March 31, 2023.
The group has announced the acquisition of Mittal Corp, a manufacturer of stainless steel long products with a total capacity of 150,000 tonne per annum. Total outgo in fiscal 2024 towards completion of the acquisition is ~Rs 351 crore. It is awaiting final order from the National Company Law Tribunal (NCLT) for the legal process to complete.
Healthy demand, increased contribution from the recently enhanced capacities, better product diversity, improving sales realisations driven by higher share of value-added products and moderating input prices (especially energy prices) are expected to improve operating profitability and will remain key monitorables over the medium term.
The group has sizeable capex plans of ~Rs 2,500 crore over the next couple of fiscals, which include capex to operationalise the acquired plant of Ramsarup, outgo towards acquisition of Mittal Corp and other organic capex. The capex is likely to be supported by internal accrual, expected cash accrual of Rs 1,500-Rs 1,800 crore per annum, and healthy liquidity. CRISIL Ratings understands the company is expected to maintain strong debt metrics with sustenance of net cash positive position over the medium term as well. Any material debt-funded capex or acquisition impacting debt protection metrics will remain a key monitorable.
These strengths are partially offset by vulnerability to fluctuations in raw material and finished goods prices, exposure to inherent cyclicality as well as competitive and capital-intensive nature of the steel industry. |
Analytical Approach CRISIL Ratings has combined the business and financial risk profiles of SMEL and its subsidiaries because these companies, together referred to as the Shyam Metalics group, are in the same business and under a common management and have significant operational and financial linkages.
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:
The Shyam Metalics group is one of the largest players in the steel and steel intermediates industry in eastern India. The promoters have been associated with the steel industry for over three decades and have established forward as well as backward integrated operations. Combined capacities increased to 12.7 million tonnes per annum (MTPA) in fiscal 2022 from 2.3 MTPA in fiscal 2017. Diversified product mix includes pellets (~8% of sales in fiscal 2023), sponge iron (~15%), billets (~8%), TMT (thermo mechanically treated) bars and structural products (~48%), ferro alloys (14%) and aluminum foils (~4%).
Revenue growth is expected to continue over the medium term given the recent capacity expansion, planned capacity addition (taking total capacity to 14.4 MTPA), and operationalisation of acquired capacities over the next couple of fiscals. Furthermore, contribution from TMT bars, structural products and ferro alloys is expected to rise as the group is focusing on increasing the share of finished/value-added products in the sales mix. Clientele is also diversified, with no single customer accounting for more than 5% of revenue.
Operations are integrated with presence across the steel value chain (from pellets to long products). This provides the group flexibility to sell intermediate products and also use them for captive consumption. Moreover, the facilities are supported by captive power and waste heat recovery plants, coal washery and railway sidings, which result in cost efficiency. Profitability will be supported by low power cost of Rs 2.5-3 per unit (captive power to contribute ~80% of its requirement over the medium term), improving product mix and healthy proportion of high-margin ferro alloys, and moderated input prices. CRISIL Ratings expects operating margin to remain healthy over the medium term with Ebitda per tonne of Rs 5,500-6,000.
Working capital management has been prudent. The group sells mainly on advance/letter of credit basis, leading to low receivables of 15-30 days. Inventory, at 70-90 days, mainly comprises raw materials. While the group does not have captive iron ore mines, its proximity to raw material sources gives it access to iron ore at competitive rates because of lower logistics cost, thereby supporting profitability.
Despite lower cash flows, balance sheet strength continues to sustain, with consolidated networth of Rs 7,547 crore against consolidated debt of Rs 1,152 crore, as on March 31, 2023, along with sizeable cash surplus of ~Rs 1,500 crore. Adjusted gearing stood at 0.15 time against 0.1 time as on March 31, 2022. Debt/Ebitda rose to 0.8 time in fiscal 2023 against 0.23 time previous fiscal.
Financial risk profile is expected to remain stable despite large capex over the medium term. Capex of ~Rs 2,500 crore over the next couple of fiscals is likely to be funded largely through annual cash accrual of Rs 1,500-1,800 crore. This should continue to support healthy debt protection metrics and strong capital structure. Also, CRISIL Ratings notes the management articulation that the gearing will remain below 0.5 time even in case of any sizeable capex. Larger-than-expected debt-funded capex or acquisition, resulting in higher debt levels and weakening of debt metrics and capital structure, will remain a key rating sensitivity factor.
As per listing norms, the company needs to reduce promoter stake to 75% by June 2024. CRISIL Ratings understands that the management intends to do this through a mix of fresh capital raise and promoter equity dilution. Any incremental cash inflows from the proposed capital raise will be used to support capex plans and incremental working capital requirement.
Weaknesses:
The group's performance remains vulnerable to cyclicality in the steel sector given close linkage between demand for steel products and the domestic and global economies. End-user segments such as real estate, civil construction and engineering are also cyclical.
Furthermore, operating margins are vulnerable to volatility in input prices (iron ore and coal) as well as realisation from finished goods. For instance, margin fell to 11.8% in fiscal 2023 from 24.5% in fiscal 2022 owing to rise in input prices. Price and supply of the main raw material, iron ore, directly impacts the realisations of finished goods. The steel sector also remains exposed to steel prices globally, as was seen in fiscal 2016 when steel prices declined significantly and had impacted realisations and operating profitability (the group’s operating margin fell to 9.4%). To maintain market share, industry participants have to routinely carry out capacity expansion and debottlenecking activities.
Any significant reduction in demand and prices adversely impacting operating margin and cash accruals of the group will remain a key monitorable. |
Liquidity: Strong Liquidity is supported by consolidated cash and equivalent of ~Rs 1,500 crore as on March 31, 2023. Annual cash accrual of Rs 1,500-1,800 crore should suffice to meet capex and debt obligation. Moderate utilisation of fund-based working capital limit (about 56% as on April 30, 2023) also supports liquidity. The group has limited repayment obligation over the next few fiscals. |
Outlook: Stable The Shyam Metalics group will continue to benefit from its established market position in key long steel products, diversified revenue streams, robust demand and integrated nature of operations, thereby ensuring healthy cash generation. Financial risk profile is likely to remain healthy, driven by prudently funded capex plans and strong liquidity. |
Rating Sensitivity factors Upward factors
Downward factors
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About the Group The Shyam Metalics group has diversified businesses comprising production of iron and steel, ferro alloys, and power. SMEL was established in 2002 as Shyam DRI Power Ltd when the group expanded its operations to Odisha; the company got its present name in January 2010. It manufactures sponge iron, billets, TMT steel bars, and ferro alloys and has captive power plants supporting ~80% of its power requirements.
Shyam Sel and Power Ltd, a wholly owned subsidiary of SMEL, was incorporated in 1991 and started commercial production in 1996 with steel-melting shops. Over the years, it added rolling mills, ferro alloy furnaces, sponge iron kilns, billet and ingot capacities, and a captive power plant and capital railway sidings to ensure operational and business integration. Manufacturing units are in Raniganj, Pakuria and Jamuria in West Bengal. |
Key Financial Indicators - SMEL (consolidated) – CRISIL Ratings-adjusted numbers
*based on abridged financials |
Any other information: Not applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
*Capex LC |
Annexure – List of entities consolidated
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| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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