Detailed Rationale

CRISIL Ratings has reaffirmed its ratings on the bank facilities of Super Smelters Limited (SSL, part of the SAI group) at ‘CRISIL A-/Stable/CRISIL A2+’.

 

The ratings continue to reflect the stable business risk profile of SSL, supported by healthy scale of operations, moderate operating efficiency and cash accrual. The ratings also take into account the company’s strengthening financial risk profile. These strengths are partially offset by working capital-intensive operations, vulnerability to fluctuations in raw material and finished goods prices, and exposure to inherent cyclicality and intense competition in the steel industry.

 

Operating income in fiscal 2024 is expected to grow in single digits with operating margin expected to improve to around 12% due to improvement in profitability expected from second half of the current fiscal. For Q1 fiscal 2024, the revenue was Rs 843 crore with operating profitability in line with fiscal 2023. Improvement in operating profitability in the current fiscal will remain a key monitorable.

 

Revenue grew 20% in fiscal 2023 to Rs 3,377 crore supported by higher volume and one-off jobwork and trading income. The operating margin declined significantly to 9.2% in fiscal 2023 from 24.8% in fiscal 2022, higher than the expectation, due to correction in steel prices leading to inventory losses and volatility in raw material prices; also, fiscal 2022 was a historical high for the steel industry. The steel sector saw a strong performance in fiscal 2021 and 2022 due to upcycle and strong demand and high steel prices. The margin in these fiscals benefitted from inventory gains too. Operating efficiency is supported by vertically integrated value chain as well as benefits arising from captive power plants and railway siding. 

 

Financial risk profile has improved over the years, as seen in adjusted gearing (ratio of total debt to networth) of 0.7 time as on March 31, 2023. The ratio has been improving from 1.6 times as on March 31, 2017, owing to no major debt-funded capital expenditure (capex), high accretion to reserves and prepayments done in the recent fiscals. Debt protection metrics moderated in fiscal 2023 due to lower profitability, with adjusted interest coverage and net cash accrual to total debt (NCATD) ratios of 3.3 times and 0.21 times, respectively, in fiscal 2023 from 6.8 times and 0.32 time, respectively, in fiscal 2022. Debt metrics are expected to improve over the medium term with interest cover expected above 3.5 times.

 

While the SAI group is undertaking large capex of ~Rs 1,200 crore (funded through debt and equity) to set up capacities in group company Giridhan Metal Pvt Ltd (GMPL; ‘CRISIL BBB/Stable/CRISIL A3+’), SSL will not extend any support in the form of investments, loans and advances or corporate guarantee/letter of comfort. Almost all the phases of GMPL are now operational and the company generated estimated revenue of Rs 769 crore and earnings before interest, taxes, depreciation and amortisation (Ebitda) of Rs 114 crore for fiscal 2023. Support to group companies, if any, will remain a key monitorable.

Analytical Approach

CRISIL Ratings has considered the standalone business and financial risk profiles of SSL as the company has no financial linkages in the form of investment, support or guarantee with other group companies, and is not expected to have any in the future.

Key Rating Drivers & Detailed Description

Strengths:

Stable business risk profile backed by established market position, promoters’ experience and healthy scale of operations

The promoters have been in the steel industry for almost three decades and have integrated operations vertically. The revenue rose at a compound annual growth rate at 22% over the five fiscals through fiscal 2023. The strong brand recall for Super Shakti in eastern India (especially in Bihar, Jharkhand and West Bengal) enables the company to command a premium over peers. Revenue is expected to remain healthy over the medium term, backed by healthy domestic demand and strong market position of SSL, especially in western India.

 

Comfortable operating profitability, supported by integrated operations

The company is present across the entire steel value chain, right from pellets to long/flat products. This provides flexibility to sell intermediate products or use them for captive consumption. Moreover, captive power plants and railway siding result in significant cost efficiency. The operating profitability took a hit in fiscal 2023 owing to price correction in the steel industry leading to inventory losses. the profitability is expected to improve and stabilise over the medium term.

 

Strengthening financial risk profile

Though debt protection metrics have remained average in the past (interest coverage and NCATD ratio less than 2 times and under 0.2 time, respectively), these improved substantially in fiscal 2022 (6 times and 0.3 time, respectively). However, the ratios moderated in fiscal 2023 owing to lower profitability (impacted by correction in steel prices). The interest coverage and NCATD ratios are expected to be healthy, above 3.5 times and 0.2 time, respectively, over the medium term due to comfortable profitability, debt repayment, and no additional debt.

 

No debt-funded capex over the medium term, no support to group companies and the management policy of keeping term debt under control through prepayment (in case of healthy cash flow) will support the financial risk profile.

 

The current private equity investor is expected to remain invested in SSL at least till December 2025. Any possible share buyback before that, having a material impact on the capital structure, will remain a key monitorable.

 

Weaknesses:

Working capital-intensive operations due to large inventory

Gross current assets improved to 135 days as on March 31, 2023 (compared to over 150 days in the past), mainly due to improvement in inventory to 107 days. The inventory is expected at 100-120 days over the medium term, and will likely be at optimised due to synergies arising from group companies.

 

Vulnerability to fluctuations in raw material and finished goods prices

The prices and supply of the key input, iron ore, directly impact realisations of finished goods. For instance, operating margin fell to ~10% in fiscal 2023 from 24.8% in the previous fiscal. Any significant change in the demand and pricing scenario, resulting in moderation in the operating margin, will remain a key monitorable.

 

Exposure to inherent cyclicality and competition in the steel sector

Demand for steel products is closely linked to the domestic and global economies. The end-user segments of SSL, such as real estate, civil construction and engineering, are also cyclical. While there has been significant government push on steel-intensive sectors such as the railways and infrastructure, any sustained downturn in demand will adversely impact the performance of steel players. For instance, during the industry downcycle in fiscal 2017, SSL incurred net losses.

 

The company also faces competition from large steel players such as Tata Steel Ltd, JSW Steel Ltd and Jindal Steel and Power Ltd. Steel imports from other countries, mainly China, add to the competition. Additionally, the domestic steel sector is fairly capital intensive. To maintain/improve market share, players have to routinely undertake capacity expansion and debottlenecking activities.

Liquidity: Adequate

Bank limit utilisation was moderate at 71% on average for the 12 months through July 2023 while unutilised fund-based limit was over Rs 140 crore. Liquidity has improved significantly with prepayment of debt of around Rs 135 crore in fiscals 2022 and 2023 (equivalent to instalments of ~2 years). As on June 30, 2023, cash and equivalents were ~Rs 25 crore. However, these were encumbered towards margin money for non-funded bank facilities. Expected annual cash accrual of Rs 200-250 crore will be sufficient to meet debt obligation of around Rs 50 crore.

Outlook: Stable

The business risk profile of SSL will continue to benefit from its integrated operations and healthy operating efficiency. The financial risk profile will remain comfortable over the medium term because of prudently funded capex, gradual term debt repayment and steady cash generation.

Rating Sensitivity Factors

Upward Factors

• Healthy ramp-up in operations along with sustained operating margin of 13-14%
• Steady improvement in the financial risk profile with healthy debt metrics

 

Downward Factors

• Steep correction in realisations impacting operating margin below 10-11% on a sustained basis
• Material increase in debt to fund additional capex, acquisitions, further stretch in working capital or buyout of private equity stake, thereby impacting debt metrics
• Weakening of liquidity converting into high bank limit utilisation
• Direct or indirect support to group companies or high payout to shareholders

About the Company

Incorporated in 1995, SSL is a part of the SAI group of companies promoted by Mr Sitaram Agarwal, who manages operations along with his sons, Mr Deepak Agarwal and Mr Dilipp Agarwal. SSL is an integrated iron and steel manufacturer, with its unit in Jamuria (West Bengal) producing pellets, sponge iron, billets, slabs, ferro alloys, hot-rolled (HR) coils, electric resistance welding (ERW) pipes, thermo-mechanically treated (TMT) bars, angles, channels and allied products under the Super Shakti brand.

 

The company has capacity for manufacturing 1.2 million tonne per annum (TPA) of iron ore pellets with 1.8 million TPA grinding/beneficiation facility, 492,016 TPA of sponge iron, 442,080 TPA of billets/slabs, 28,500 TPA of ferro alloys and 312,000 TPA of rolled products. SSL also has captive power plants of 74 megawatt.

 

The other key group companies are Supershakti Metaliks Ltd, Sai Electrocasting Pvt Ltd, GMPL and Sai Sponge India (Pvt) Ltd. SSL is the flagship company of the group. Supershakti Metaliks Ltd and Sai Electrocasting Private Ltd were demerged from SSL in August 2016.

Any other information: Not applicable