Signet Industries Ltd

Brickwork Ratings upgrades the ratings for the Bank Loan Facilities of Rs. 375.81 Crs. of Signet Industries Ltd

Particulars

Facilities**	Amount (Rs.Crs.)		Tenure	Rating#
	Previous	Present		Previous (06 Oct 2021)	Present
Fund Based	210.36	205.81	Long Term	BWR BBB Downgrade/ISSUER NOT COOPERATING*	BWR BBB + /Stable Upgrade
Non Fund Based	180.00	170.00	Short Term	BWR A3+ Downgrade/ISSUER NOT COOPERATING*	BWR A2 Upgrade
Grand Total	390.36	375.81	(Rupees Three Hundred Seventy Five Crores and Eighty One 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

RATING ACTION / OUTLOOK

BWR has upgraded the Long term and short term rating to BWR BBB+ (Stable) and BWR A2 respectively for the bank loan facilities of Signet Industries Limited (SIL or the company).The rating upgrade is underpinned by comfortable scale of operations and capital structure over the years. The rating continues to factor in the experienced management of company coupled with long track record,  diversified product portfolio ,comfortable  scale of operations, tangible net worth, healthy order book position and stable industry scenario with strong government support in the form of Government’s thrust on infrastructure development, expansion in the housing sector and increasing  demand for agricultural production. The ratings are, however, constrained due to thin profit margins, high interest & finance cost, major contribution of the trading segment to the overall sales which in itself is a thin margin business for the company and working capital intensive nature of operations.

 The rating outlook is Stable as the company has been able to sustain the revenues from business operations even during the first wave and second wave of Covid-19 pandemic. Also the future growth of India HDPE/PVC pipes and fittings market is expected to be led by rapidly increasing population leading to increased demand for agricultural production, expanding housing sector and significant role played by the government in the development of the irrigation infrastructure sector in the country. The Indian PVC pipes and fittings industry has grown significantly over the last few years due to the increase in the demand from the irrigation sector on account of the burgeoning population and uncertain weather conditions in the country ,government’s thrust on infrastructure development,  in the housing sector and burgeoning population leading to increased demand for agricultural production, will drive the market growth in the coming years.

KEY RATING DRIVERS

Credit Strengths:

• Experienced Management: coupled with a long track record of the company :

  SIL has an established track record in the plastic products business, including MIS and polymer trading,of over two decades. SIL is one of the leading organized players in the poly vinyl chloride (PVC) piping industry. Over the years, the company has built an extensive distribution network throughout the rural and semi-urban areas of India and has now more than 3,800 dealers spread across the country selling Signet’s products. The principal promoter, Mr. Mukesh Sangla, has over four decades of experience in the agro and polymers business. Furthermore, his son Mr. Saurabh Sangla, Director, is an Industrial Engineer and currently heads the technical and sales operations teams of SIL. The management is supported by professionals, agriculture scientists, engineers & technicians in managing various business segments. The company has a track record of almost four decades.

• Comfortable scale of operations over the years :

  Although operating income declined to Rs 827 crores in FY 21 compared to Rs 883 crores in FY 10 at a degrowth rate of 6.3 % due to decline in volumes by ~`6 % offset by improvement in prices by ~4 % due to Covid -19 pandemic, the scale of operations is comfortable over the years as product portfolio of company is well diversified into manufacturing and trading contributing 47 % and 53 % in overall operating income in FY 21 , thus providing cushion to any business shock /cyclicality over the years.

•  Comfortable capital structure  :

  Tangible net worth of the company is comfortable as it stood at Rs. 189 Crs as on 31st March 2021 as against Rs.176 Crs. as on 31st March 2020 . Although gearing has increased to 1.56 x in FY 21 as against 1.38 x in FY 20, the increase is due to the Emergency credit line guarantee scheme (ECLGS)/Covid- 19 loan availed by the company during FY 21, the repayment of which has started, and gearing is expected to reduce in next two fiscal years with no debt funded capital expenditure in pipeline.
   

• Healthy order book :

  The company has an order backlog of Rs. 477 cr as on September 30,2021 in its manufacturing segment and the same has to be completed within Dec 2021. The company is continuously getting orders from renowned clients like L&T for supply of HDPE pipes, TATA projects, Shapoorji Pallonji & Co. Pvt. Ltd., JMC Projects Ltd., NCC Ltd.,etc. The share of sales of manufactured goods has also increased in Total operating Income over the years. SIL's manufacturing income has reduced during FY21 as compared to FY20 mainly due to shut down of operation during H1FY21 due to nationwide lockdown led by Covid-19 pandemic. The proportion of revenue from the trading segment has increased from 36.20% in FY18 to 47.34% in FY21, whereas the proportion of revenue from trading business has reduced from 63.71% in FY18 to 52.57% in FY21.

• Stable industry outlook :

  Future growth of India HDPE/PVC pipes and fittings market is expected to be led by rapidly increasing population leading to increased demand for agricultural production, expanding housing sector and significant role played by the government in the development of the irrigation infrastructure sector in the country. The Indian PVC pipes and fittings industry has grown significantly over the last few years due to the increase in the demand from the irrigation sector on account of the burgeoning population and uncertain weather conditions in the country. Government’s thrust on infrastructure development, expansion in the housing sector and burgeoning population leading to increased demand for agricultural production, will drive the market growth in the coming year.

• Diversified customer base with presence in Manufacturing & Trading :

  The company implements government-backed drip irrigation and agricultural projects, where 50-70% of the project cost is received as subsidy from the government, depending on the state. Also, the company has a policy of operating in only those states which have a track record of payment within stipulated time and which have higher budgetary allocation, such as Gujarat, Andhra Pradesh, Karnataka and Tamil Nadu. During FY19 and FY20 the company has increased its penetration in Karnataka due to familiarity with the demographic set up of these states. The company has a diversified customer base in its trading business, with the top-10 debtors comprising only around 20-25% of its trading business debtors. The customer base in manufacturing business is also diversified with the top-10 debtors comprising around 58% of its manufacturing business debtors. Around 85% of the debtors of the manufacturing segment are for Micro irrigation segment/products.

Credit Risks:

• Thin profit margins :

  The profit margins of the company are thin due to a sizable share of trading in overall operating income over the years.  Company registered an Operating profit margin of  7.65 % in FY 21 as compared to 7.72 % in FY 20. Net Profit margin improved  to 1.69 % in FY 21 as compared to 1.34 % in FY 20  due to deferred tax assets /reversal of deferred tax liability.

• High Interest & Finance Cost due to high gearing and leveraged position. :

  The performance of the company is also constrained by high interest and finance cost which is 73 % of EBITDA. High interest and finance cost is due to interest paid on fund based limits, term loans, processing charges on non fund based limits  and company's gearing position and leverage position being high over the years as indicated by TOL/TNW of 2.86 x in FY 21 and Net Debt/EBITDA of 4.4 x in FY 21.

• Moderate Debt protection metrics :

  The company’s debt protection metrics are moderate as the company reported ISCR and DSCR of 1.35 x and 1.30 x in FY 21 against 1.53 x and 1.22x in FY 20 . Decline in ISCR and DSCR in FY 21 is due to reduction of EBITDA and increase in interest expenses due to increase in overall debt position in FY 21 .

• Working capital intensive nature of operations :

  The company’s operations are of working capital intensive nature as the average working capital utilization for the last  six months ending Sep 2021 was  at 94 % . Cash conversion cycle stood at 136 days in FY 21 as against  105 days in FY 20 . Reason for the deterioration in cash conversion cycle in FY 21 is due to an increase in operating cycle to 244 days in FY 21 as compared to 216 days in FY 20  due to the second  wave  of Covid-19 pandemic.

ANALYTICAL APPROACH - Standalone

BWR has applied the standalone approach . For detailed information view hyperlinks below .  

RATING SENSITIVITIES

Positive: BWR may revise the ratings upward if there is a sustained improvement in SIL’s  scale of operations ,credit profile, coupled with improvement in EBITDA margins on a sustained basis .

Negative: BWR may revise the ratings downwards if there is a sustained deterioration in the company’s EBITDA and debt protection metrics and/or stretch in its working capital/liquidity

LIQUIDITY INDICATORS - Adequate

Company registered cash accruals of Rs 31.88Crs in FY 21 against repayment of Rs  6.07Crs  . Cash and cash equivalents stood at ~ Rs 20 .66Crs in FY 21 as against Rs 18.96  Crs in FY 20. Working capital utilization for the last six months ending Sep 2021 stood at  94 % for Fund based, and 39 % for Non fund based (LC )Limits. Current ratio stood at 1.37 x in FY 21. Free cash flow which is estimated as per BWR estimates in FY 22  is around Rs 60 Crs against the repayment liability of Rs 23.3 Crs which is expected to keep liquidity in an adequate range.  Average Liquidity index/cover is expected to be around 1.7x  in FY 22-23.

ABOUT THE ENTITY

• Incorporated in 1985, Signet is engaged in manufacturing of plastic pipes and fittings for  Micro Irrigation System (MIS) and manufacture of moulded plastic goods for household use. Signet is also engaged in trading and distribution of polymers such as polypropylene (PP),  high density polyethylene (HDPE), and poly-vinyl chloride resin (PVC).  The MIS (drip & sprinkler) is the major contributor to total revenue, wherein SIL provides water solutions such as transporting water, creating irrigation systems and assisting with agronomy.  The manufacturing operations commenced in 2011 at its manufacturing facility at Pithampur, Madhya Pradesh, equipped with a capacity of 54,870 MTPA as on 31 March 2020 enhanced from 40,328 MT in FY 18 . The capacity was same at 54,870 MTPA as on 31 March 2021. In trading division, the company mainly deals in various types of polymers, which are partly imported and partly sourced from large players.  Besides, the company also has a wind power generation capacity of 1.4 (MW) in the states of  Maharashtra and Rajasthan. The company implements government-backed drip irrigation and agricultural projects,  where 50-70% of the project cost is received as subsidy from government, depending on the  state.

KEY FINANCIAL INDICATORS (Standalone)

Key Parameters	Units	FY 20-21 (Audited)	FY 19-20 (Audited)
Operating Revenue	Rs.Crs.	826.99	882.82
EBITDA	Rs.Crs.	62.53	68.13
PAT	Rs.Crs.	13.95	11.79
Tangible Net Worth	Rs.Crs.	188.59	176.36
Total Debt/Tangible Net Worth	Times	1.56	1.38
Current Ratio	Times	1.37	1.32

NON-COOPERATION WITH PREVIOUS CREDIT RATING AGENCY

CRISIL  has moved rating to B+/A4 on 31st May 2021 on account of continued non cooperation from company  over the years.

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

Facilities	Current Rating (2021)			2021 (History)		2020		2019		2018
Type	Tenure	Amount (Rs.Crs.)	Rating	Date	Rating	Date	Rating	Date	Rating	Date	Rating
Fund Based	LT	205.81	BWR BBB+/Stable (Upgrade)	06Oct2021	BWR BBB (Downgrade/ISSUER NOT COOPERATING*)	06Jul2020	BWR BBB+ (Reaffirmation)	30May2019	BWR BBB+Positive (Reaffirmation)	30Apr2018	BWR BBB+Stable (Reaffirmation)
Non Fund Based	ST	170.00	BWR A2 (Upgrade)	06Oct2021	BWR A3+ (Downgrade/ISSUER NOT COOPERATING*)	06Jul2020	BWR A2 (Reaffirmation)	30May2019	BWR A2 (Reaffirmation)	30Apr2018	BWR A2 (Reaffirmation)
Grand Total		375.81	(Rupees Three Hundred Seventy Five Crores and Eighty One 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
• Trading Entities
• Short Term Debt

Analytical Contacts
Karan Ahluwalia Senior Rating Analyst Board : +91 11 2341 2232 karan.a@brickworkratings.com	Tanu Sharma Director - Ratings tanusharma@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	Bank of Baroda	Cash Credit - Sanctioned	4.00	_	4.00
2	Bank of Baroda	Letter of Credit - Sanctioned	_	28.00	28.00
3	Punjab National Bank	Letter of Credit - Sanctioned	_	18.00	18.00
4	Punjab National Bank	Cash Credit - Sanctioned	28.00	_	28.00
5	ShamRao Vitthal Co-operative Bank	Term Loan - Sanctioned	10.81	_	10.81
6	UCO Bank	Cash Credit - Sanctioned	102.00	_	102.00
7	UCO Bank	Bank Guarantee - Sanctioned	_	20.00	20.00
8	UCO Bank	Letter of Credit - Sanctioned	_	72.00	72.00
9	Union Bank of India	Bank Guarantee - Sanctioned	_	10.00	10.00
10	Union Bank of India	Letter of Credit - Sanctioned	_	22.00	22.00
11	Union Bank of India	Cash Credit - Sanctioned	61.00	_	61.00
Total			205.81	170.00	375.81
TOTAL (Rupees Three Hundred Seventy Five Crores and Eighty One lakhs Only)