| Vardhman Special Steels Limited | ||||||
| Rating outlook revised to 'Negative'; ratings reaffirmed | ||||||
| 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 revised its rating outlook on the long-term bank facilities of Vardhman Special Steels Limited (VSSL) to 'Negative' from 'Stable' while reaffirming the rating at 'CRISIL AA'; the short-term rating has been reaffirmed at 'CRISIL A1+'. |
| Analytical Approach |
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CRISIL has applied its parent notch-up framework to factor in the extent of support from Vardhman Group (whose flagship company, VTXL is the largest shareholder in the VSSL) as the company will enjoy strong support from the group owing to its 59% shareholding in VSSL. |
| Key Rating Drivers & Detailed Description |
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Strengths: * Strong support from Vardhman Group VSSL, prior to its demerger from VTXL (flagship company of Vardhman Group), was the steel division of the latter. Operations continue to be largely controlled by the management of group even after the demerger. That's because of 58.97% of the equity shares are owned by group including VTXL, its promoters, and other promoter-holding/investment companies. Post the acquisition, ASC also holds 11.46% in the company. VSSL receives support from the group, uses the Vardhman group logo, and has common banking and treasury operations with VTXL. Any major change in the shareholding will be key rating sensitivity factor. * Moderate business risk profile Market position is supported by a strong customer base, including automotive original equipment manufacturers and other established players in the engineering segment. In-house manufacturing of ingots and billets, along with ability to pass on price increases, resulted in moderate operating efficiency. The management's focus on the steel business, high capacity utilisation, and considerable backward integration (around 90%) should drive improvement in the business risk profile over the medium term. Weaknesses: * Susceptibility to cyclicality in end-user industries The company is a small player in the alloy steel industry, with only about 3% of the total capacity in India. Its products are used in the automotive, tractor, bearings, engineering, and allied industries; it is dependent on companies in the automotive sector for over 80% of revenue. This dependence subjects the company to risks related to cyclicality in the automotive segment as witnessed during the recent years of economic slowdown. Further, vulnerability to fluctuations in input prices persists. * Average financial risk profile The interest coverage ratio is expected at 1.5-1.7 times in fiscal 2019 (3.1 time in 2019). The gearing while remains high, is expected to improve to 0.7 times as on March 31, 2020 as against 0.9 times as on March 31, 2019. Improvement in gearing is on account of equity infusion of Rs 50 crore by ASC in fiscal 2020. The operating margin gradually improved over the years to 6.1% in fiscal 2019 from 2.4% in fiscal 2015 due to improving process efficiencies and increasing capacity utilizations, however has remained lower 4% in first half of fiscal 2020 owing to lower capacity utilisation. As there are no major capex plans over medium term at present, the debt levels are expected to remain stable. |
| Liquidity Strong |
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VSSL's liquidity position is moderate; it had unutilised bank lines of Rs.50 crore at September 30, 2019 (bank limit utilisation has fluctuated between 75%-95% during January-September 2019) and is expected to generate cash accruals of ~Rs.25 crore in fiscal 2020, which should suffice to meet its term debt obligation of Rs. 12 crore for 2020. Accruals are expected to increase in fiscal 2021, which should enable the company service its debt obligations of Rs 19 crore in 2021. Presently the company has no major capex plan and focus is on increasing existing capacity utilization. Any major capex in future will be jointly done with ASC. |
| Outlook: Negative |
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CRISIL 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 |
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Upward factors: * Substantial improvement in business performance, resulting in cash accruals increasing beyond Rs.50-60 crore * Steady improvement in credit metrics, especially interest coverage above 3 times Downward factors: * Operating margin remaining below 5% on consistent basis affecting cash generation * Increase in gearing beyond 1-1.2 times and interest cover remaining below 2 times on sustained basis, due to continuing weak performance, higher capex or elongation of working capital cycle * Reduction in support from group, or downward rating action on, VTXL. |
| About the Company |
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The Vardhman group ventured into the steel business in 1972 by setting up Oswal Steels to manufacture special and alloy steels, with initial capacity of 0.5 lakh tpa. In 1986, the firm acquired a plant in Ludhiana, Punjab, and its capacity was increased 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 2.00 lakh TPA of steel billets and 2.0 lakh tpa of steel rolled products. Its 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. |
| Key Financial Indicators | ||||||||||||||||||||||||
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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. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments. |
| 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 | ||||||||||||||||||||||||||||||||||||||||||||||||
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