RATING RATIONALE
28Jul2020
A.R. Steels
Brickwork Ratings assigns the ratings for the Bank Loan Facilities of Rs.30.00 Crs. of A.R. Steels
Particulars| Facilities** | Amount (Rs.Crs.) | Tenure | Rating# | ||||
|---|---|---|---|---|---|---|---|
| Fund Based | |||||||
| Cash Credit Sanctioned | 17.00 | Long Term | BWR | ||||
| Channel Finance Facility Sanctioned | 03.00 | ||||||
| Cash Credit Proposed | 05.00 | ||||||
| Sub Total | 25.00 | ||||||
| Non-Fund Based | |||||||
| Letter of Credit Sanctioned | 05.00 | Short Term | BWR | ||||
| Sub-Limit (Bank Guarantee) Sanctioned | (03.00) | ||||||
| Sub Total | 5.00 | ||||||
| Grand Total | 30.00 | (Rupees Thirty Crores Only) | |||||
**Details of Bank Loan facilities,consolidation or instruments are provided in Annexure RATING ACTION / OUTLOOK
Note: The above mentioned bank facilities are proposed to a new bank in the form of cash credit of Rs. 30.00 Cr.
The rating draws strength from the business experience of the partner/s, long standing track record of operations of the firm, its moderate gearing, and established clientele and supply chain. The rating, however, is constrained by the thin profit margins of the firm due to trading nature of business, low cash accruals to total debt average, average interest coverage ratio, stressed working capital position and supplier concentration risk. The rating is also constrained by the constitution of the firm and fluctuation in prices of steel and its demand.
BWR believes that A.R. Steels business risk profile will be maintained over the medium term. The 'Stable' outlook indicates a low likelihood of rating change over the medium term. The rating outlook may be revised to 'Positive' in case the revenues and profit show sustained improvement. The rating outlook may be revised to 'Negative' if the revenues go down and profit margins show lower than expected figures.
KEY RATING DRIVERSBWR has essentially relied upon the audited financial statements of A.R. Steels of FY17, FY18, FY19, provisional financials of FY20 and projected financial statements of FY21, FY22, publicly available information and information / clarifications provided by the entity’s management.
Credit Strengths:
- Experienced partners and long standing presence of the firm :
The firm, established in 1991, has more than two decades of operational track record in the industry. Mr. A Ravi Kumar, the managing partner of the firm, has more than two decades of experience in the business of iron and steel trading. Long standing presence and experience of promoter has benefited the firm in establishing its relationship with customers, resulting in repeat orders.
- Established clientele :
The firm has established relationship of around two decades with its clientele which has resulted is stable flow of orders. The firm deals in a wide range of steel products and thereby customer can procure most of their requirements from a single source. It has long term relationship with suppliers and hence is able to ensure stable supply of finished products.
- Moderate gearing and no long term debt obligations :
The gearing of the firm stands improved from 1.81 times in FY19 to 1.41 times in FY20 due to improved net worth from Rs. 9.66 Cr in FY19 to Rs. 12.16 Cr in FY20. As there are no long term facilities except few vehicle loans, the firm has no significant long term debt obligations.
Credit Risks:
- Thin profit margins and low cash accruals :
Low profit margins in trading nature of business and intense competition in the steel trading industry has kept the profit margins of the firm at low level. The operating profit margin of the firm, though improved from 1.49% in FY19, stood at 3.18% in FY20. It achieved a net profit margin of 0.58% in FY20 as against 0.33% in FY19. With low profit margins, the total cash accruals to total debt stands low at 0.06 times in both FY19 and FY20, the firm has weak interest coverage of 1.33 times in FY19 and 1.02 times in FY20.
- Stressed working capital position :
The working capital requirement of the firm is stressed as it extends credit to its customers and makes advance payment to RINL (Rashtriya Ispat Nigam Limited), which accounts for more than 70% of its total purchase. Further, increased receivable position from ~11% in FY19 to ~19% in FY20 to total operating income along with inventory holding, has increased the working capital requirement of the firm and thereby, has adversely impacted the liquidity position of the firm as indicated by high utilization of working capital facilities.
- Supplier concentration risk, and fluctuation in steel prices and demand :
The firm is exposed to suppler concentration risk as it has signed MoU with RINL for procurement of 32000 MT of 'Rebars', accounting for more than 70% of its total purchase. The profit margins of the firm are susceptible to fluctuation in steel prices and as the firm is dealing with iron and steel products required for construction, any adverse trend in the construction industry would affect the top line of the firm.
- Partnership constitution of the firm :
Being a partnership firm, it is exposed to inherent risk of withdrawal of capital by the partner which may impact the overall capital structure and debt metrics of the firm.
For arriving at its ratings, BWR has applied its rating methodology as detailed in the Rating Criteria detailed below (hyperlinks provided at the end of this rationale).
RATING SENSITIVITIES
Going forward, the ability of the firm to retain its revenue scale while improving the profitability margins, maintain a favorable capital structure and manage the risk associated with volatility in iron and steel prices will remain the key rating sensitivities.
Positive: The rating could be positively revised if the firm's profit margins shows sustained improvement, thereby improving its interest coverage ratio.
Negative: The rating could be downgraded if the revenues and profit margins declines and also if there is any strain in receivables level affecting the liquidity position.
LIQUIDITY INDICATORS -
The firm has stressed liquidity position as reflected from its working capital utilization of around 100% in the last six months. Low profit margins resulting in low cash accruals and increased receivables level has further stressed the working capital requirement. It has cash and cash equivalents of Rs. 0.12 Cr as on 31 March 2020.
ABOUT THE ENTITYA R Steels ('ARS' or 'the firm'), established in 1991 by Late Kameswara Rao, is a partnership firm located at Vizianagaram, Andhra Pradesh. The present partners of the firm are Mr. Anumalisetty Ravi Kumar (son of Late Kameswara Rao), Mrs. Anumalisetty Jagan Mohini (wife of Late Kameswara Rao) and Mrs. Anumalisetty Lakshmi (wife of Mr. A Ravi Kumar). The firm, with its registered office in Vizianagaram (Andhra Pradesh), has its branch office in Visakhapatnam and Vijayawada, and has two stockyards located in Vizianagaram (6750 sq ft) and Visakhapatnam (51849 sq ft). It is engaged in wholesale trading of Iron and Steel products which includes TMT Rebars, Structural Steels, Plates, Wire, Rods etc. The firm has signed an MOU with Rashtriya Ispat Nigam Limited for procurement of 32000 MT of 'Rebars'.
KEY FINANCIAL INDICATORS (Standalone)| Key Parameters | Units |
FY 18-19 (Audited) |
FY 17-18 (Audited) |
|---|---|---|---|
| Operating Revenue | Rs.Crs. | 293.00 | 198.44 |
| EBITDA | Rs.Crs. | 4.38 | 0.39 |
| PAT | Rs.Crs. | 0.97 | 0.99 |
| Tangible Net Worth | Rs.Crs. | 9.66 | 9.42 |
| Total Debt/Tangible Net Worth | Times | 1.81 | 1.75 |
| Current Ratio | Times | 1.18 | 1.19 |
None
STATUS OF NON-COOPERATION WITH PREVIOUS CRA ANY OTHER INFORMATION RATING HISTORY FOR LAST THREE YEARS (including withdrawal and suspended) COMPLEXITY LEVELS OF THE INSTRUMENTS -
BWR complexity levels are meant for educating investors. The BWR complexity levels are available at www.brickworkratings.com / download / ComplexityLevels.pdf. Investors queries can be sent to info@brickworkratings.com.
| Analytical Contacts | |
|---|---|
|
Rajaram Gouda Ratings Analyst Board : +91 80 4040 9940 rajaram.g@brickworkratings.com |
K Nagaraj Associate Director - Ratings Board : +91 80 4040 9940 nagaraj.ks@brickworkratings.com |
| 1-860-425-2742 | media@brickworkratings.com | |
| SL.No. | Type Of Facilities | Long Term(Rs.Crs.) | Short Term(Rs.Crs.) | Total(Rs.Crs.) | ||
|---|---|---|---|---|---|---|
| 1 | Letter of CreditSanctioned | _ | 5.00 | 5.00 | ||
| Sub-Limit (Bank Guarantee) Sanctioned | (3.00) | |||||
| 2 | Cash CreditSanctioned | 17.00 | _ | 17.00 | ||
| 3 | Channel Finance FacilitySanctioned | 3.00 | _ | 3.00 | ||
| 4 | Cash CreditProposed | 5.00 | _ | 5.00 | ||
| Total | 30.00 | |||||
| TOTAL (Rupees Thirty Crores Only) | ||||||
| Instrument | Issue Date | Amount (Rs.Crs) | Coupon Rate | Maturity Date | ISIN Particulars |
|---|---|---|---|---|---|
| NA | NA | NA | NA | NA | NA |
| Name of Entity | % Ownership | Extent of consolidation | Rationale for consolidation |
|---|---|---|---|
| NA | NA | NA | NA |
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Brickwork Ratings (BWR) has assigned the rating based on the information obtained from the issuer and other reliable sources, which are deemed to be accurate. BWR has taken considerable steps to avoid any data distortion; however, it does not examine the precision or completeness of the information obtained. And hence, the information in this report is presented "as is" without any express or implied warranty of any kind. BWR does not make any representation in respect to the truth or accuracy of any such information. The rating assigned by BWR should be treated as an opinion rather than a recommendation to buy, sell or hold the rated instrument and BWR shall not be liable for any losses incurred by users from any use of this report or its contents. BWR has the right to change, suspend or withdraw the ratings at any time for any reasons.