| Shyam Sel and Power Limited | ||||||
| 'CRISIL AA-/Stable/CRISIL A1+' assigned to bank debt and CP | ||||||
| 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 assigned its 'CRISIL AA-/Stable/CRISIL A1+' ratings to the bank facilities and commercial paper programme of Shyam SEL and Power Limited (SSPL). |
| Analytical Approach |
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For arriving at its ratings, CRISIL has applied its parent notch-up framework to factor in the support from its holding company, SMEL. SMEL and SSPL, 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 as well as 100% shareholding of SSPL is owned by SMEL. |
| Key Rating Drivers & Detailed Description |
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Strengths: * Established market position The Shyam Metalics group is one of the largest players in the steel and steel intermediates industry in Eastern India. Over the years, it has also increased its foothold in export markets with around 15-20% revenues derived from exports. Backed by the established market position, revenue reached to about Rs 4500 crore (on consolidated basis) in fiscal 2020 from Rs 2200 crore in fiscal 2015, at a compound annual growth rate of over 15%. The promoters are associated with the steel industry for over three decades and have established forward as well as backward integrated operations. The group's capacities have increased from 2.3 MTPA in fiscal 2015 to 4.8 MTPA presently. Revenue growth will be supported over medium term given the recent capacity expansion by the group in fiscal 2020. The group has a diversified product mix with multiple points of sale across the value chain including pellets, sponge iron, billets, TMT bars and structural products as well as ferro alloys contributing ~15-20% each to overall revenues. The customer base is also fairly diversified with no single customer contributing more than 7% to revenues. * Healthy operating efficiencies driven by integrated operations The group has integrated operations with presence in steel value chain right from pellets to TMT bars. It provides the group flexibility to sell intermediate products as well as use them for captive consumption. The facilities are also supported by captive power plants, waste heat recovery plants, coal washery, and railway sidings, which result in cost efficiencies besides presence across value chain. Over the last couple of fiscals, the company has started manufacturing TMT directly from sponge iron using direct charging methods which has improved the consumption ratio of billets leading to overall improvement in operating efficiency. Additionally the working capital management has also been prudent. The group sells mainly on advance/LC basis and hence the debtor days are low at ~20-30. Inventory is maintained for around 60-70 days with majority of being the raw material i.e. iron ore and coal. In fiscal 2020, the group increased the iron ore inventory sharply ahead of mining auctions in Odisha, which led to inventory days increasing to 140 and benefitted operating margins in the first quarter of fiscal 2021. However, operating margins will gradually moderate this fiscal due to pandemic related issues and with liquidation of lower cost inventories. In absence of captive iron ore mines, steady state operating margins are likely to range between 14-20%. However, the return on capital employed (RoCE) is expected to remain healthy ranging between 12 - 15%. * Healthy financial risk profile The group has been on a capex mode since 2018 but has been prudent with use of long term debt. Benefits accruing from the capex has resulted in a steady improvement in cash accruals over time, shoring up its net worth to almost Rs.2400 crore at March 31, 2020. Besides, steady repayment and pre-payment of long term debt and a close watch on working capital levels has kept debt levels under control, resulting in healthy credit metrics. Gearing was comfortable at 0.53 time, on provisional basis, as on March 31, 2020, while other debt protection metrics too were comfortable - interest coverage and net cash accrual to adjusted debt ratios were 7.4 times and 0.43 times, respectively, in fiscal 2020. Other ratios such as gross debt to earnings before interest, depreciation, tax and amortisation (EBITDA) too have been improving over time ' 1.9 times in fiscal 2020, from 2.8 in fiscal 2015. Going ahead, the company is expected to incur annual capex of Rs 300-400 crores and no acquisitions are expected. Hence, the group's financial profile will sustain at healthy levels. Also as per the management, the group's net debt to EBIDTA is likely to remain within 1-1.5 times even in the event of sizeable capex. Higher than expected debt funded capex or acquisition will remain a key rating sensitivity factor. Weaknesses * Vulnerability to fluctuations in prices of raw material and finished goods Operating margin is vulnerable to fluctuations in the prices of inputs (such as iron ore and coal) as well as realisation from finished goods. The prices and supply of the main raw material, iron ore, directly impacts the realisations of finished goods. Further, the steel sector remains exposed to steel prices globally, which declined significantly in fiscal 2016 impacting realisations and operating profitability (group's operating margin declined to 9.4%). Any significant change in the demand and pricing scenario resulting in moderation in operating margins below 10-11% on sustained basis will remain a key monitorable. * Exposure to inherent cyclicality in steel industry and competitive & capital intensive nature of industry The group's performance remains vulnerable to cyclicality in the steel sector given the close linkage between the demand for steel products and the domestic and global economy. The end-user segments such as real estate, civil construction and engineering also display cyclicality. While there has been a significant push by the government on steel-intensive sectors such as railways and infrastructure, any sustained downturn in demand will adversely impact performance of steel companies. The competitive intensity in the Indian steel sector is significant owing to presence of large steel companies such as Tata Steel Limited, JSW Steel Limited, Jindal Steel and Power Limited (CRISIL BBB-/A3+/Watch Negative). Also steel imports from other countries, mainly China, add to the competition. Additionally the domestic steel sector is fairly capital intensive. In order to maintain/improve market share, the industry participants have been observed to routinely carry out the capacity expansion and debottlenecking activities. However, the Shyam Metalics Group has just completed a large capacity expansion, hence no sizeable capex is likely over the medium term. |
| Liquidity Strong |
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The group's liquidity remains strong, supported by healthy annual cash accruals (ranging from Rs.450 crore-600 crore), cash surpluses of over Rs.250 crore, and only moderate utilisation of working capital bank lines (~50% in past 12 months). The group has low long term debt on its balance sheet and hence repayment obligations are moderate at only Rs.70 crore in fiscal 2021 (Rs.150 crore of long term debt was prepaid between April-July 2020). Short term debt temporarily increased to Rs 877 crore as on March 31, 2020 due to large stocking of iron ore by the group ahead of Odisha coal auctions, however the same has reduced to ~Rs 550-600 crore as on June 2020, due to reduction in inventories. Limit utilisation is expected to continue to remain moderate going forward. Also, annual cash accruals are expected to suffice for capex requirements and debt repayments. Besides, in the event of material need, the group has access to funds from promoter's holding company, which has sizeable cash surpluses available. |
| Outlook: Stable |
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CRISIL believes despite the challenging business environment, the group will continue to benefit from its integrated nature of operations and diversified revenue streams. The financial risk profile is likely to remain healthy, driven by a comfortable capital structure and strong liquidity. |
| Rating Sensitivity factors |
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Upward factors * Substantial increase in scale of operations driven by improvement in product diversity with operating margins of 17-20% and RoCE above 20% * Sustenance of healthy credit metrics ' gearing of below 1 time and gross debt/EBITDA of below 1 time, even while pursuing material organic and inorganic growth opportunities * Continuation of strong liquidity position, in form of working capital bank lines and surplus cash Downward factors * Material deterioration in business performance, resulting in operating margins and RoCE of 8-10% on sustained basis * Large debt funded capex/acquisition leading to deterioration in gearing of over 1.25 times and gross debt to EBIDTA of over 2.5 times * Material decline in cash surpluses and high utilization of working capital bank lines, impacting liquidity. |
| About the Group |
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The Shyam Metalics group has diversified businesses, comprising production of iron and steel, ferroalloys, and power. SMEL was established in 2002 as Shyam DRI Power Ltd, when the Shyam group expanded its operations to Odisha. The company got its present name in January 2010. It manufactures sponge iron, billets, thermo-mechanically treated (TMT) steel bars, and ferroalloys, and has a power plant. |
| Key Financial Indicators (SMEL; Consolidated) | ||||||||||||||||||||||||
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| Key Financial Indicators (SMEL; Standalone) | ||||||||||||||||||||||||
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| Key Financial Indicators (SSPL; Standalone) | ||||||||||||||||||||||||
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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 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
#INR equivalent of USD 8.40 million ^INR equivalent of USD 1.50 million | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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