Rating Rationale
November 23, 2022 | Mumbai
Vardhman Special Steels Limited
Ratings Reaffirmed
 
Rating Action
Total Bank Loan Facilities RatedRs.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 facilities and commercial paper of Vardhman Special Steels Limited (VSSL).

 

The ratings continue to reflect VSSL’s established market position and customer base, healthy financial risk profile, and continued support from the Vardhman group. These strengths are partially offset by susceptibility to fluctuations in raw material prices and exposure to cyclicality in demand in the automotive industry.

 

The ratings reflect improvement in standalone credit profile supported by sustained improved operating performance of VSSL in fiscal 2023 with performance expected to improve in fiscal 2024 also, driven by the recovery in demand from the automobile industry healthy offtake from its customers and expected traction in exports. Hence, sales volume of the company is likely to increase by ~15% year-on-year in fiscal 2023 and revenue is likely to grow by ~15% in 2023.

 

Delay in pass through, volatility in cost of raw materials has resulted in moderation in operating margin in first half of fiscal by 570 bps to 9%, however operating margin is expected to remain at 10-11% range in fiscal 2023 and 2024 supported by healthy capacity utilization and operational efficiency. Realizations however were higher due to changes in raw material procurement strategy and benefits accruing from the technical know-how of Aichi Steel Corporation, Japan (ASC, a Toyota group associate). The higher margin is in line with expectation of EBITDA per tonne to likely sustain Rs 7,000-10,000 per tonne over the medium term.

 

Financial risk profile is marked with improving debt protection metrics. The interest coverage ratio is expected to improve to about 13-15 times over the medium term13.3 times in fiscal 2024 compared to 11.45 times in fiscal 2022 due to no additional expected debt and higher operating profit. Gearing is expected to reduce to 0.18 times in fiscal 2024 compared to 0.29 at the end of fiscal 2022 with no additional debt expected over the medium. The liquidity remains comfortable with Rs 216 crore in utilized bank lines as of July 2022.

 

The company is also expanding capacity to 2.5 lakh MT by fiscal 2025 from 2 lakh MT, which will be funded through equity infusion and internal accrual. Increased capacity coupled with higher operating margin of ~10% will improve net cash accrual to Rs 120-140 crore over the medium term and will be sufficient to cover annual debt obligations of Rs 25-35 crore. The equity infusion of Rs 50 crore  in fiscal 2020 have been utilized for funding the capex under this collaboration.

 

The ratings of VSSL continue to reflect the parentage of the Vardhman group, whose flagship company, Vardhman Textiles Ltd (VTXL; rated 'CRISIL AA+/Stable/CRISIL A1+') is the largest shareholder in VSSL. The ratings also factor in established market position coupled with considerable backward integration as well as healthy financial risk profile. These rating strengths are partially offset by susceptibility to cyclicality in end-user industries.

Analytical Approach

CRISIL Ratings has applied its parent notch-up framework to factor in the parentage of Vardhman Group (whose flagship company, VTXL is the largest shareholder in the VSSL) with 60.81% shareholding in VSSL.

Key Rating Drivers & Detailed Description

Strengths

  • Established market position: Market position is supported by a strong customer base, including automotive original equipment manufacturers and other established players in the engineering segment. Contribution from the top 5 clients remain at about 30%. Presence across segments is diversified, with 70-75% of the contribution coming from passenger vehicles and two-wheelers. In-house manufacturing of billets, along with ability to pass on price increases to clients resulted in moderate operating efficiency. The management focus on the steel business, high capacity utilisation (around 95%) and considerable backward integration (around 90%) should drive growth in operating income and improve business risk profile over the medium term.

 

  • Healthy financial risk profile: The interest coverage ratio is expected to improve to about 13-15 times over the medium term compared to 11.45 times in fiscal 2022. Gearing is expected to reduce to 0.18 times in fiscal 2024 compared to 0.29 at the end of fiscal 2022 with no additional debt expected over the medium. Despite increase in capex plans from Rs 250 crore to Rs 300 crore, gearing is expected to remain healthy as it is to be funded through equity infusion and internal accruals with the long term debt levels expected to reduce from Rs.110 crore in fiscal 2022 to Rs. 50- Rs 55 crore in fiscal 2024, in line with the company’s goal to become debt free by fiscal 2025-2026 with current plans. ST Debt is expected to sustain at same levels with average BLU of ~40% over the medium term.

 

  • Strong support from parent: Prior to its demerger from VTXL, VSSL was its steel division. Operations continue to be 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 flagship company, its promoters, and other promoter-holding/investment companies and 11.41 % owned by Aichi Steel Corporation (ASC); while the rest is owned by the public. VSSL continues to benefit due to strong parentage, such as using the Vardhman group logo, and common banking and treasury operations with VTXL. Any major change in the shareholding will be a key rating sensitivity factor.

 

Weakness:

  • Susceptibility to cyclicality in end-user industries: The company is a small player in the alloy steel industry, with only 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.

Liquidity: Strong

VSSL has adequate liquidity driven by expected cash accruals of Rs 120-140 crore per annum over medium term. The company has a working capital limits of Rs 300 crore with average BLU of 36% for 6 months ended October 2022. Further, VSSL also maintains Rs 17-20 crore in the form cash and equivalents. Capex plans of Rs 300 crore are to be funded through equity infusion and internal accruals. As indicated by management, the Company has no plans of availing any new LT debt over the medium term.

Outlook: Stable

CRISIL Ratings believes the operating performance will recover in line with the recovery in end user industry, while support from Vardhman group should continue. The tie-up with ASC is also expected to support business and financial risk profile.

Rating Sensitivity factors

Upward factors:

  • Substantial increase scale of operations and sustained RoCE of over 20% leading to higher strategic importance to group and improved market position of the company
  • Improvement in credit profile of VTXL by one notch

 

Downward factors:

  • Operating margin remaining below 7-8% on consistent basis or fall in market position due to higher competition from competitors
  • Weakening of the 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 1972 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 lakh tpa of steel billets and also 2 lakh tpa of steel rolled products. Manufacturing unit is equipped with a 30-tonne ultra-high-power electric arc furnace with an electro-magnetic stirrer, a vacuum degassing system and a bloom caster.

 

For the six months ended 30th September 2022, VSSL posted revenue of Rs 912 crore and operating profit of Rs 82 crore as against Rs 666 crore and Rs 98 crore respectively for similar period in corresponding year.

Key Financial Indicators

Particulars

Unit

2022

2021

Revenue

Rs crore

1390

937

Profit After Tax (PAT)

Rs crore

110

44

PAT Margin

%

7.2

4.7

Adjusted debt/adjusted networth

Times

0.29

0.41

Interest coverage ratio

Times

11.45

6.14

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.crisil.com/complexity-levels. Users may also call the Customer Service Helpdesk with queries on specific instruments.

Annexure - Details of Instrument(s)

ISIN

Name of

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
Annexure - Rating History for last 3 Years
  Current 2022 (History) 2021  2020  2019  Start of 2019
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund Based Facilities LT 396.52 CRISIL AA/Stable   -- 13-12-21 CRISIL AA/Stable 21-05-20 CRISIL AA/Negative 10-12-19 CRISIL AA/Negative CRISIL AA/Stable
      --   -- 08-09-21 CRISIL AA/Stable   --   -- CRISIL AA/Stable
      --   -- 22-01-21 CRISIL AA/Stable   --   -- --
Non-Fund Based Facilities ST 150.0 CRISIL A1+   -- 13-12-21 CRISIL A1+ 21-05-20 CRISIL A1+ 10-12-19 CRISIL A1+ CRISIL A1+
      --   -- 08-09-21 CRISIL A1+   --   -- --
      --   -- 22-01-21 CRISIL A1+   --   -- --
Commercial Paper ST 150.0 CRISIL A1+   -- 13-12-21 CRISIL A1+ 21-05-20 CRISIL A1+ 10-12-19 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
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

This Annexure has been updated on 23-Nov-2022 in line with the lender-wise facility details as on 05-Aug-2021 received from the rated entity.

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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