Agarwal Foundries

Brickwork Ratings reaffirms the ratings for the Bank Loan Facilities of Rs. 17.80 Crs. of Agarwal Foundries

Particulars

Facilities**	Amount (Rs.Crs.)		Tenure	Rating#
	Previous	Present		Previous (11 Aug 2020)	Present
Fund Based	15.00	17.80	Long Term	BWR BBB/Stable Reaffirmation	BWR BBB /Stable Reaffirmation
	(0.00)	(12.00)	Short Term		BWR A3 + Reaffirmation
Non Fund Based	4.00	0.00	Short Term	BWR A3+ Reaffirmation	_
	(0.00)	(4.00)
Grand Total	19.00	17.80	(Rupees Seventeen Crores and Eighty lakhs Only)

#Please refer to BWR website www.brickworkratings.com for definition of the ratings
**Details of Bank Loan facilities,consolidation or instruments are provided in Annexure
Note: WCDL and Letter of Credit are the sub-limits of Cash Credit.

RATING ACTION / OUTLOOK

The rating reaffirmation continues to reflect industry experience of the proprietor, established operational track record, long standing relationships with customers and suppliers, overall group synergies derived from the operations of the proprietorship concern being aligned to and integrated with the flagship company i.e., MS Agarwal Foundries Private Limited of Hyderabad based MS group and the average financial risk profile. However, the rating remains constrained by increase in investment in group companies, thin profitability margins, susceptibility of profitability to volatility in raw material prices, modest scale of operations, stiff competition from both organized and unorganized players in a fragmented industry, inherent risks associated with the cyclical iron & steel industry and working capital intensive nature of operations.

Brickwork Ratings (BWR) notes that the concern has not availed any relief under Covid-19 related RBI Moratorium Package during March - August 2020. BWR also notes that the concern has not opted for one time restructuring (OTR) of any loan under RBI Resolution Framework for Covid-19 related Stress.

The ‘Stable’ outlook indicates a low likelihood of rating change over the medium term. BWR expects that Agarwal Foundries’ business risk profile will be maintained over the medium term. The outlook may be revised to ‘Positive’ if the proprietorship concern records significantly better-than-expected revenue and profitability, increased scale of operations and improved working capital management, resulting in better debt coverage metrics and liquidity profile. The outlook may be revised to ‘Negative’ if the proprietorship concern reports significantly lower than expected performance, resulting in lower than estimated coverage indicators and a weaker liquidity position. Further, any major debt-funded expenditure resulting in deterioration in capital structure and debt coverage indicators and/or a sharp reversal in industry operating conditions may exert a downward pressure on the rating.

KEY RATING DRIVERS

Credit Strengths:

• Experienced management and established track record :

  The proprietor has over three decades of experience in the Iron & Steel industry which has helped in establishing strong relationships with its suppliers and customers. The concern has an operational track record of nearly 3 decades.

• Group support and integrated operations :

  Agarwal Foundries is part of the Hyderabad based MS Agarwal Group (group). The group forayed into the steel industry through Agarwal Foundries, incorporated in 1991, engaged in the manufacturing of ingots and billets. The group as a whole is an integrated steel unit operating across the value chain – i.e. from manufacturing of Sponge Iron to Billets, Ingots, TMT bars and steel structures. MS Agarwal Foundries Private Limited [BWR BBB+/Stable/ A2+] is the flagship company of the group. Another group company , Maruti Ispat & Energy Private Limited [BWR BBB+/ Stable/A2] is engaged in manufacturing of Sponge Iron. The group entities are managed by common promoters and there are strong managerial and operational synergies

• Average financial risk profile :

  Agarwal Foundries' total operating income (TOI) continued to remain flat at Rs. 115.28 Crs. in FY20 when compared to FY19 (Rs. 116.27 Crs.) and FY18 (Rs. 106.23 Crs.). EBITDA and PAT were at Rs. 2.91 Crs. and Rs. 0.96 Cr., respectively, in FY20. Decline in total debt level to Rs. 12.43 Crs. and increase in Proprietor's Capital to Rs. 21.28 Crs. as  on 31Mar2020 led to improved gearing of 0.58 time as on 31Mar2020. Debt coverage metrics given by ISCR and DSCR were at 2.64 times and 2.81 times as on 31Mar2020. Current ratio remained stable and adequate at 1.44 times as on 31Mar2020. On a provisional basis, the concern reported TOI, EBITDA and PAT of Rs. 122.57 Crs., Rs. 4 Crs. and Rs. 0.91 Cr respectively and TOI of ~Rs.100 crs in 6MFY22.

Credit Risks:

• Susceptibility to cyclicality and fluctuation in raw material prices :

  The profitability is vulnerable to fluctuations in the prices of raw materials which constitute ~70% - 75% of the operating expenses. Further the performance of the concern is linked to the steel industry, with cyclical changes in demand and price volatility. As the demand for steel is closely linked to economic activity, the domestic steel industry is susceptible to the cyclicity in the industry. The concern’s operations are vulnerable to any demand slowdown in the end user industry - real estate / infrastructure etc., thereby impacting the capacity utilisations and margins.

• Thin profitability margins :

  Profitability margins continued to be thin over the last three fiscals due to the intensely competitive and fragmented nature of industry and commodity nature of the product being offered. Operating profit margin is around 2% - 3% and net profit margin less than 1%. Any further deterioration of profitability margins would be a key rating monitorable.

• Intense competition in the fragmented industry and limitations due to constitution :

  The Iron & Steel industry is characterised by intense competition across the value chain due to low product differentiation and consequent intense competition from unorganised as well as organised players leading to pricing pressures. These in turn affect the profitability margins of the proprietorship concern. The entity's constitution as a proprietorship concern limits the managerial resources at disposal for decision making. It also inhibits the financial and operational flexibility compared to those available to its group companies incorporated as private limited companies.

• Impact of Covid-19 pandemic :

  The concern was able to keep its operations largely unaffected from the first wave of the Covid-19 pandemic in FY21 by better inventory management. However, there was decline in capacity utilization due to subdued demand from end user sectors like infrastructure and construction. There was no impact of the second wave of the pandemic in FY22 as the government exempted manufacturing industries from the Covid-19 induced lockdown. However, the demand for the concern's products remain vulnerable to any third wave of the pandemic with high intensity and prolonged duration impacting the business activities of the end user industries.

ANALYTICAL APPROACH - Standalone

As it is a proprietorship concern, standalone approach has been adopted and BWR has applied its rating methodology as detailed in the Rating Criteria links given below. However, BWR has taken note of the overall group support to the concern and the common promoters and strong managerial and operational synergies among Agarwal Foundries, MS Agarwal Foundries Private Limited and Maruti Ispat & Energy Private Limited for arriving at the rating decision.

RATING SENSITIVITIES

The ability of the proprietorship concern to increase its scale of operations, improve its profitability margins, strengthen its credit risk profile and manage its working capital efficiently would remain the key rating sensitivities.

Upward: 

• Sustained improvement in scale of operations and profitability

Downward:

• Deterioration in key credit metrics on account of weaker than expected business performance
• Specific credit metrics that could lead to a downgrade of the concern's rating include (1) decline in operating margin below 2% and net margin below 0.5%, (2) total debt/proprietor’s capital exceeding 1.50 times and weakening in debt coverage metrics with DSCR and ISCR declining below 1.5 times
• Any disruption caused by Covid-19 pandemic resulting in substantial deterioration in financial risk profile

LIQUIDITY INDICATORS - Adequate

The entity's liquidity position is adequate based on adequate EBITDA and net cash accruals to cover the debt service obligations, modest cash conversion cycle and moderate current ratio. EBITDA and net cash accruals covered the interest & finance charges in FY21. The entity has no term loans except a vehicle loan and a GECL WCTL sanctioned in September 2020. Cash & cash equivalents were low at Rs. 0.06 Cr. as on 31Mar2021. Average working capital limit utilization in past six months was ~100%. Cash conversion cycle improved considerably to 37 days as on 31Mar2021 (Prov.).

ABOUT THE ENTITY

Agarwal Foundries is a proprietorship concern of Mr. Pramod Kumar Agarwal incorporated in 1991 at Secunderabad, Telangana. It is engaged in manufacturing of MS Billets at its manufacturing unit at Petbasheerabad, Quthbullapur mandal, Ranga Reddy district, Telangana and has an installed capacity of 50500 TPA.

Agarwal Foundries is part of Hyderabad based MS Group. Other operational entities of the group are MS Agarwal Foundries Private Limited [BWR BBB+/Stable/ A2+], Maruti Ispat & Energy Private Limited [BWR BBB+/ Stable/A2] and Sitaram Spinners Private Limited [ BWR BBB/Stable/A3+].

KEY FINANCIAL INDICATORS (Standalone)

Key Parameters	Units	FY 19-20 (Audited)	FY 18-19 (Audited)
Operating Revenue	Rs.Crs.	115.28	116.27
EBITDA	Rs.Crs.	2.91	2.99
PAT	Rs.Crs.	0.96	0.93
Tangible Net Worth	Rs.Crs.	21.28	20.68
Total Debt/Tangible Net Worth	Times	0.58	0.68
Current Ratio	Times	1.37	1.43

KEY COVENANTS OF THE FACILITY RATED

The terms of sanction include standard covenants normally stipulated for such facilities.

STATUS OF NON-COOPERATION WITH PREVIOUS CRA

Not applicable

ANY OTHER INFORMATION

Not applicable

RATING HISTORY FOR THE PREVIOUS THREE YEARS (including withdrawal and suspended)

Facilities	Current Rating (2021)			2020		2019		2018
Type	Tenure	Amount (Rs.Crs.)	Rating	Date	Rating	Date	Rating	Date	Rating
Fund Based	LT	17.80	BWR BBB/Stable (Reaffirmation)	11Aug2020	BWR BBBStable (Reaffirmation)	20Sep2019	BWR BBBStable (Reaffirmation)	30May2018	BWR BBBStable (Reaffirmation)
FB SubLimit	ST	(12.00)	BWR A3+ (Reaffirmation)	NA	NA	NA	NA	NA	NA
Non Fund Based	ST	NA	NA	11Aug2020	BWR A3+ (Reaffirmation)	20Sep2019	BWR A3+ (Reaffirmation)	30May2018	BWR A3+ (Reaffirmation)
NFB SubLimit	ST	(4.00)	BWR A3+ (Reaffirmation)	NA	NA	NA	NA	NA	NA
Grand Total		17.80	(Rupees Seventeen Crores and Eighty lakhs Only)

COMPLEXITY LEVELS OF THE INSTRUMENTS - Simple

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.

Hyperlink/Reference to applicable Criteria

• General Criteria
• Approach to Financial Ratios
• Manufacturing Companies
• Short Term Debt

Analytical Contacts
Swarn Saurabh Senior Rating Analyst swarn.s@brickworkratings.com	Saakshi Kanwar Senior Manager Ratings saakshi.k@brickworkratings.com
1-860-425-2742 | media@brickworkratings.com

SL.No.	Name of the Bank/Lender	Type Of Facilities	Long Term(Rs.Crs.)	Short Term(Rs.Crs.)	Total(Rs.Crs.)
1	Indian Overseas Bank	Cash Credit - Sanctioned	15.00	_	15.00
	Sub-Limit (Letter of Credit) - Sanctioned		(4.00)
	Sub-Limit (WCDL) - Sanctioned		(12.00)
2	Indian Overseas Bank	Letter of Credit - Sanctioned	_	_	0.00
3	Indian Overseas Bank	GECL - Sanctioned	2.80	_	2.80
Total			17.80	0.00	17.80
TOTAL (Rupees Seventeen Crores and Eighty lakhs Only)