Rating Rationale
November 16, 2023 | Mumbai
Vardhman Special Steels Limited
Ratings reaffirmed at 'CRISIL AA/Stable/CRISIL A1+'; Rated amount enhanced for Bank Debt
 
Rating Action
Total Bank Loan Facilities RatedRs.556.52 Crore (Enhanced from Rs.546.52 Crore)
Long Term RatingCRISIL AA/Stable (Reaffirmed)
Short Term RatingCRISIL A1+ (Reaffirmed)
 
Rs.150 Crore Commercial PaperCRISIL A1+ (Reaffirmed)
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 loan facilities and commercial paper of Vardhman Special Steels Limited (VSSL).

 

The ratings reflect VSSL’s established market position, reputable customer base, technical assistance received from Aichi Steel Corporation, Japan (ASC, a Toyota group associate) as well as healthy financial risk profile. The ratings continue to reflect the strong parentage of Vardhman Textiles Ltd (VTXL) and other entities of the Vardhman group. VTXL (rated 'CRISIL AA+/Stable/CRISIL A1+') is the largest shareholder in VSSL.

 

The business profile expected to remain healthy with EBITDA per tonne expected to remain in the range of Rs. 7000-10000 per tonne in the medium term. While first half of the fiscal saw some moderation in EBITDA margins, slight recovery is expected in the second half of the fiscal with expected price renegotiation with major customers.

 

The financial risk profile is expected to remain healthy, despite large capex planned in the medium term, with gearing to remain below 0.25 times and comfortable credit metrics with interest coverage ratio of 11.0-12.5 times, debt to Ebitda of 0.7-0.85 times and TOL/TNW ratio of less than 1 time over the medium term, driven by healthy accruals, moderate repayments on term debt and modest utilisation of working capital debt. The planned capex is expected to be funded primarily through internal accruals with some term debt.

 

These strengths are partially offset by susceptibility to cyclicality in end-user industries and vulnerability of margins to risks relating to input cost and realisations.

Analytical Approach

For arriving at the ratings, CRISIL Ratings has applied its parent notch-up framework to factor in the parentage of Vardhman Textiles Ltd and other entities of Vardhman group, together holding 60.71% shareholding in VSSL.

Key Rating Drivers & Detailed Description

Strengths:

  • Established market position and reputed client profile: VSSL has an established market position with successful operational track record of over five decades and cumulative steelmaking capacity of around 2.40 lakh TPA. The company has a reputable client profile consisting of large automotive original equipment manufacturers (OEMs) and other established players in the engineering segment. It has a presence across automotive sector, with 70-75% of the revenue contribution coming from passenger vehicles and two-wheelers segments. In-house manufacturing of billets, along with ability to pass on price increases to clients results in better operating efficiency.

 

The ratings also take into consideration the healthy growth in operating income in fiscal 2023 over last year, chiefly attributed to strong uptick in sales volume (supported by strong demand primarily from the passenger vehicle segment) and better realisations during the year.  Volumes sold was 2,00,095 tonnes in fiscal 2023 against 1,73,308 tonnes last year, reflecting growth of ~15%. Further, operating income in fiscal 2024 is likely to be similar to last year.

 

The company’s established market position, successful operational track record, strong relationships with customers and suppliers, high capacity utilisation and considerable backward integration (around 90%) should drive growth in operating income and improve business risk profile over the medium term.

 

  • Strong support from parent: Prior to demerger, VSSL was a steel-making division of its parent (VTXL). The company’s operations have been largely controlled by the management of VTXL even after the demerger. This is because around 61% of VSSL’s equity shares are owned by the Vardhman group’s flagship company (VTXL), its promoters, and other promoter-holding/investment companies, and 11.40% stake is owned by Aichi Steel Corporation (ASC); while the rest is owned by the public. VSSL benefits from its parent’s strong brand name, as it uses the Vardhman group logo, and common banking and treasury operations with VTXL. Nonetheless, any major change in the shareholding will be a key rating sensitivity factor.

 

  • Healthy financial risk profile: The financial risk profile is expected to remain healthy, despite large capex plan, with gearing to remain below 0.25 times and comfortable credit metrics with interest coverage ratio of 11.0-12.5 times, debt to Ebitda of 0.7-0.85 times and TOL/TNW ratio of less than 1 time over the medium term, driven by healthy accruals, moderate repayments on term debt and modest utilisation of working capital debt. The planned capex is expected to be funded primarily through internal accruals with some term debt.

 

Weaknesses:

  • Susceptibility to cyclicality in end-user industries: The company is a small player in the alloy steel industry, with about 4% of the total capacity in India. Products are used in the automotive, tractor, bearings, engineering and allied industries, with higher dependence on the automotive sector (accounts for over 85% of the company’s total revenue). This exposes VSSL to cyclicality in the automotive industry, as witnessed during the recent economic slowdown. Vulnerability to fluctuations in input prices also persists

 

  • Vulnerability of margins to risks relating to input cost and realisations: The margins remained susceptible to volatility in key raw material (steel scrap and iron sponge) and sales realisations as it always maintains inventory for material and finished products for about two months. Significant price fluctuations leads to inventory gains or losses as witnessed in the past and thus, remain a key monitorable. Although the presence of pass-through clauses in contracts and volume-based tie-ups with periodic price settlements mitigate the inventory price risk to a certain extent, the ability to pass on the full impact of price hikes will depend on the underlying demand scenario.

 

Owing to volatile material prices during fiscal year 2023, the operating margin declined to 10.1% from 13.7%. The profitability was also impacted by higher prices of consumables and fuel (primarily in Q4 fiscal 2023, due to procurement of natural gas at higher prices at short notice led by delay in laying of natural gas supply pipeline from GAIL).

 

Delay in pass through, volatility in cost of raw materials has resulted in moderation in operating margin in first half of fiscal 2024, however EBITDA per tonne likely to sustain Rs 7,000-10,000 per tonne in the medium term. Operating performance will remain susceptible to volatility in raw material prices, and offtake by key user sectors.

Liquidity: Strong

Liquidity is strong, supported by cash & equivalents of around ~Rs. 30 crore and undrawn lines of ~Rs. 222 crore as on March 31, 2023. Average utilisation was 35% of total sanctioned fund based working capital bank limit of Rs. 300.0 crore in the past 12 months till July 2023. Further, net cash accrual is expected to be above Rs. 100 crore per annum which will support liquidity and satisfactorily meet debt obligations of Rs 35-50 crore over the medium term. Low gearing and healthy networth provide the financial cushion to any adverse conditions or downturns in the business. Liquidity is also supported by need-based support from Vardhman group.

Outlook: Stable

CRISIL Ratings believes that VSSL will continue to benefit from its established operational track record and long-standing relationships with its customers and suppliers. Also, the need-based support from Vardhman group should continue. Further, the tie-up with ASC is also expected to support business and financial risk profile.

Rating Sensitivity factors

Upward factors:

  • Substantial increase in scale of operations and sustained RoCE of over 20% leading to higher strategic importance to group and improved market position of the company.
  • Strengthening of the VTXL’s credit risk profile.

 

Downward factors:

  • Operating margin falling below 7-8% on consistent basis or fall in market position due to higher competition from competitors
  • Large debt funded capex weakening capital structure such as gearing increasing beyond 1 times
  • Reduction in support from, or downward rating action on, VTXL.

About the Company

The Vardhman group had set up Oswal Steels in 1973 to manufacture special and alloy steels with initial capacity of 0.5 lakh tonne per annum (TPA). In 1986, the firm acquired a plant in Ludhiana which increased capacity to 1 lakh TPA. Oswal Steels became a division of VTXL in 1992. VTXL demerged its steel division as VSSL effective January 1, 2011. VSSL has capacity to manufacture 2.40 lakh TPA of steel billets and also 2 lakh TPA of steel rolled products. Manufacturing unit is equipped with a 33-tonne ultra-high-power electric arc furnace with an electro-magnetic stirrer, a vacuum degassing system and a bloom caster.

Key Financial Indicators

As on/for the period ended March 31

 Unit

2023

2022

Operating income

Rs.Crore

1768

1390

Reported profit after tax (PAT)

Rs.Crore

100

101

PAT margin

%

5.7

7.2

Adjusted debt/adjusted networth

Times

0.22

0.29

Interest coverage

Times

10.20

11.45

*CRISIL Ratings adjusted numbers

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL Ratings` 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.

CRISIL Ratings will disclose complexity level for all securities - including those that are yet to be placed - based on available information. The complexity level for instruments may be updated, where required, in the rating rationale published subsequent to the issuance of the instrument when details on such features are available.

For more details on the CRISIL Ratings` complexity levels please visit www.crisilratings.com. Users may also call the Customer Service Helpdesk with queries on specific instruments.

Annexure - Details of Instrument(s)

ISIN Name of the
instrument		 Date of
Allotment		 Coupon
Rate (%)		 Maturity
Date		 Issue size
(Rs.Crore)		 Complexity
Level		 Rating assigned
with outlook
NA Commercial Paper NA NA 7-365 days 150 Simple CRISIL A1+
NA Cash Credit NA NA NA 300 NA CRISIL AA/Stable
NA Corporate Loan NA NA Sep-24 27 NA CRISIL AA/Stable
NA Corporate Loan NA NA Jun-25 20.64 NA CRISIL AA/Stable
NA Letter of credit & Bank Guarantee NA NA NA 150 NA CRISIL A1+
NA Term Loan NA NA Jul-26 26.4 NA CRISIL AA/Stable
NA Proposed Long Term Bank Loan Facility NA NA NA 22.48 NA CRISIL AA/Stable
NA Fund & Non Fund Based Limits NA NA NA 10 NA CRISIL A1+
Annexure - Rating History for last 3 Years
  Current 2023 (History) 2022  2021  2020  Start of 2020
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund Based Facilities LT 396.52 CRISIL AA/Stable   -- 23-11-22 CRISIL AA/Stable 13-12-21 CRISIL AA/Stable 21-05-20 CRISIL AA/Negative CRISIL AA/Negative
      --   --   -- 08-09-21 CRISIL AA/Stable   -- --
      --   --   -- 22-01-21 CRISIL AA/Stable   -- --
Non-Fund Based Facilities ST 160.0 CRISIL A1+   -- 23-11-22 CRISIL A1+ 13-12-21 CRISIL A1+ 21-05-20 CRISIL A1+ CRISIL A1+
      --   --   -- 08-09-21 CRISIL A1+   -- --
      --   --   -- 22-01-21 CRISIL A1+   -- --
Commercial Paper ST 150.0 CRISIL A1+   -- 23-11-22 CRISIL A1+ 13-12-21 CRISIL A1+ 21-05-20 CRISIL A1+ CRISIL A1+
      --   --   -- 08-09-21 CRISIL A1+   -- --
      --   --   -- 22-01-21 CRISIL A1+   -- --
All amounts are in Rs.Cr.
Annexure - Details of Bank Lenders & Facilities
Facility Amount (Rs.Crore) Name of Lender Rating
Cash Credit 75 ICICI Bank Limited CRISIL AA/Stable
Cash Credit 60 Axis Bank Limited CRISIL AA/Stable
Cash Credit 65 HDFC Bank Limited CRISIL AA/Stable
Cash Credit 45 YES Bank Limited CRISIL AA/Stable
Cash Credit 55 State Bank of India CRISIL AA/Stable
Corporate Loan 27 State Bank of India CRISIL AA/Stable
Corporate Loan 20.64 ICICI Bank Limited CRISIL AA/Stable
Fund & Non Fund Based Limits 10 Axis Bank Limited CRISIL A1+
Letter of credit & Bank Guarantee 50 ICICI Bank Limited CRISIL A1+
Letter of credit & Bank Guarantee 5 State Bank of India CRISIL A1+
Letter of credit & Bank Guarantee 50 HDFC Bank Limited CRISIL A1+
Letter of credit & Bank Guarantee 15 YES Bank Limited CRISIL A1+
Letter of credit & Bank Guarantee 30 Axis Bank Limited CRISIL A1+
Proposed Long Term Bank Loan Facility 22.48 Not Applicable CRISIL AA/Stable
Term Loan 26.4 HDFC Bank Limited CRISIL AA/Stable
Criteria Details
Links to related criteria
CRISILs Approach to Financial Ratios
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating criteria for manufaturing and service sector companies
Rating Criteria for Steel Industry
CRISILs Criteria for rating short term debt
Criteria for Notching up Stand Alone Ratings of Companies based on Parent Support

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