Rama Steel Tubes Ltd.

Brickwork Ratings Upgrades the ratings for the Bank Loan Facilities of Rs. 131.75 Crs. of Rama Steel Tubes Ltd.

Particulars

Facilities**	Amount (Rs.Crs.)		Tenure	Rating#
Facilities**	Previous	Present	Tenure	Previous (17 Nov 2020)	Present
Fund Based	70.00	81.75	Long Term	BWR BBB- /Stable Assignment	BWR BBB /Stable Upgrade
Non Fund Based	50.00	50.00	Short Term	BWR A3 Assignment	BWR A3 + Upgrade
Grand Total	120.00	131.75	(Rupees One Hundred Thirty One Crores and Seventy Five 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

Brickwork Ratings (BWR) has upgraded the long-term rating to BWR BBB with a Stable outlook and short-term rating to BWR A3+ for the bank loan facilities of Rama Steel Tubes Ltd (RSTL or the company).

The rating upgrade factors in significant improvement in the business and financial risk profile of RSTL in FY21 and H1FY22. Business profile has improved via an increase in overall capacity from 1,68,000 metric tonne per annum (MTPA) in FY20 to 2,28,000 MTPA in FY21 which has led to an increase in revenue and EBITDA. Financial risk profile has improved due to retention of profits and infusion of interest free unsecured loan by the promoters which has improved the capital structure and credit ratios (net debt to EBITDA in FY21 2.85x, FY20: 8.16x).

The rating continues to derive comfort from the company’s experienced promoters, established long track record of over four decades with a demonstrated execution capability, diversified product portfolio and geographical presence. However, these strengths are partially offset by the working capital intensive operations, susceptibility to cyclicality and fluctuation in raw material prices and intense competition in industry.

The Outlook is Stable on account of improvement in credit profile and improved demand outlook for various end-user sectors such as infrastructure, irrigation, telecom etc. RSTL has rolling orders from its customers through a distribution and dealership network, which provides revenue visibility in the medium term.

BWR has principally relied on the consolidated audited financial results of RSTL upto 31 March 2021, H1FY22 results and projected financials for FY22 and FY23, and publicly available information/ clarifications provided by the company’s management.

KEY RATING DRIVERS

Credit Strengths:

Substantial improvement in debt protection metrics and financial risk profile :
Debt coverage indicators, the interest service coverage ratio (ISCR) and debt service coverage ratio (DSCR), improved to 2.84x and 2.12x, respectively, in FY21 from 0.94x and 1.01x, respectively, in FY20. The analysed gearing improved to 0.79x in FY21 from 0.91x in FY20. TNW (Analysed) improved to Rs 103.66 crs in FY21 from Rs.89.99 crs in FY20 mainly due to retention of profits and infusion of interest free unsecured loan by the promoters of the company. The total operating income (TOI) improved by ~34.18% to Rs. 473.98 crs in FY21 from Rs. 353.23 crs in FY20. In H1FY22 the TOI stood at Rs. 331.29 Crs with a PAT of Rs. 17.49 crs (H1FY21 TOI-Rs. 177.35 crs and PAT Rs. 1.21 crs).
Established track record of operations and experienced management :
The company commenced its operations in 1974 and has a successful track record of more than four decades in the existing line of business. RSTL’s long track record and the extensive experience of promoters have helped establish relations with various stakeholders for its business. Furthermore, the promoters are assisted by a team of experienced professionals in managing the company’s daily business operations.
Diversified product portfolio and geographical presence :
The company manufactures and sells black pipes and tubes, galvanised pipes and tubes and poles. The products manufactured by the company find end use in real estate, defence, telecom, irrigation and infrastructure. The company has an established network of authorized dealers spread over North, South and West India. Also, the company is exporting its products to countries like Dubai, Ethiopia, Kenya, Ghana, Germany and the United Kingdom.
Moderate but improved profitability margins :
The operating profit margins (OPM) and net profit margins (NPM) improved to 4.61% and 2.61% respectively, in FY21 from 2.57% and 0.12%, respectively, in FY20. The profitability margins have improved due to increased TOI and better margins from steel pipes. The company expects to sustain these margins in coming years because their products find end use in sectors like infrastructure, real estate, telecom, irrigation etc which will grow in future.

Credit Risks:

Working capital intensive operations :
The operations of RSTL remained working capital intensive, supported largely by bank borrowings. The average utilisation of fund based and non fund based working capital limits of the company stood high around 67% and 79% respectively during the last 12 months ending 31st October 2021. The working capital cycle stood at 67 days in FY21 (FY20: 92 days).
Susceptibility to cyclicality and fluctuation in raw material prices :
The profitability is vulnerable to fluctuations in the prices of raw materials as the latter constitutes ~80% of the company’s operating expenses. Further the performance of the company is linked to the steel industry, with cyclical changes in demand and price volatility. The demand for steel products depends on the growth of primary end user segments such as infrastructure, irrigation and real estate. Any slowdown may in turn adversely affect the demand for steel products over the medium term.Low margins in this business does not allow the company to absorb any sudden shocks on the input or end product pricing.
Intense competition in the industry :
The steel industry is highly fragmented with the presence of both organized and unorganized players in the downstream segment providing similar products. Hence, the company faces competition from regional players leading to intense competition and pricing pressures, which in turn affect the profitability margins of the company. Nonetheless, RSTL has been able to mitigate this risk to an extent, benefitting from the established relationships with its customers and gradual adoption of latest technology.

ANALYTICAL APPROACH - Consolidated

For arriving at its ratings, BWR has applied its rating methodology as detailed in the rating criteria below (hyperlinks provided at the end of this rationale).BWR has analysed RSTL’s credit profile by considering consolidated financial statements of the company owing to financial and operational linkages between the parent and subsidiaries and common management. The entities considered in the consolidated financial statements are Lepakshi Tubes Private Limited and RST International Trading FZE. They are wholly owned subsidiaries of RSTL and are into a similar line of business.

RATING SENSITIVITIES

Upward: BWR may revise the ratings upward in the case of a sustained improvement in EBITDA alongwith sustenance of comfortable credit profile, and liquidity.

Downward: BWR may revise the rating downward in the case of a significant reduction in the scale of operations, operating margins, and/or deterioration in debt protection metrics.

LIQUIDITY INDICATORS - Adequate

The company has an adequate liquidity position. There are long-term secured borrowings from banks, amounting to Rs. 25.93 Crs, as on 31 March 2021. Against a current portion of long term debt (CPLTD) of Rs 3.42 Crs in FY21, the company had a cash accruals of Rs. 11.75 Crs in FY21. The company projected to generate cash accruals of Rs. 25.61 Crs in FY22 against a CPLTD of Rs. 3.59 Crs, thereby indicating an adequate liquidity position.

ABOUT THE ENTITY

Rama Steel Tubes Ltd (RSTL) was incorporated in 1974 by the late Shri. Harbans Lal Bansal and is currently managed by his son Mr. Naresh Kumar Bansal and grandson Mr. Richi Bansal. The company started its commercial operations in 1981 with an installed capacity of 10,000 metric tonnes per annum (MTPA) for the manufacturing of ERW steel tubes/ pipes in Sahibabad. It is engaged in manufacturing of Black Pipes and Tubes, Galvanised pipes and tubes and poles. It is also involved in trading of steel pipes through its subsidiary RST International Trading FZE. The company has a total production capacity of 2,28,000 MTPA as on September 30, 2021. It has three manufacturing facilities at Sahibabad, UP with installed capacity of 60,000 MTPA, Khopoli, Maharashtra with installed capacity of 1,32,000 MTPA and Anantapur, Andhra Pradesh with installed capacity of 36,000 MTPA. The company products find application in various industries such as real estate, defence, telecom, irrigation and infrastructure. It is listed on BSE and NSE. The promoter group holds 62.33% equity stake in the company and the remaining 37.67% is with the public, as on September 30, 2021.

KEY FINANCIAL INDICATORS (Standalone)

Key Parameters	Units	FY 20-21 (Audited)	FY 19-20 (Audited)
Operating Revenue	Rs.Crs.	325.78	292.14
EBITDA	Rs.Crs.	11.08	6.31
PAT	Rs.Crs.	5.38	1.37
Tangible Net Worth	Rs.Crs.	88.45	83.02
Total Debt/Tangible Net Worth	Times	0.86	0.83
Current Ratio	Times	1.49	1.31

NON-COOPERATION WITH PREVIOUS CREDIT RATING AGENCY

ANY OTHER INFORMATION

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	81.75	BWR BBB/Stable (Upgrade)	17Nov2020	BWR BBB- Stable (Assignment)	NA	NA	NA	NA
Non Fund Based	ST	50.00	BWR A3+ (Upgrade)	17Nov2020	BWR A3 (Assignment)	NA	NA	NA	NA
Grand Total		131.75	(Rupees One Hundred Thirty One Crores and Seventy Five 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

Analytical Contacts
Shivam Bhasin Senior Rating Analyst shivam.b@brickworkratings.com	Tanu Sharma Director - Ratings tanusharma@brickworkratings.com
1-860-425-2742 \| media@brickworkratings.com

Rama Steel Tubes Ltd.

ANNEXURE-I

Details of Bank Facilities rated by BWR

SL.No.	Name of the Bank/Lender	Type Of Facilities	Long Term(Rs.Crs.)	Short Term(Rs.Crs.)	Total(Rs.Crs.)
1	Axis Bank Ltd.	Cash Credit - Sanctioned	20.00	_	20.00
2	Axis Bank Ltd.	Bank Guarantee - Sanctioned	_	11.00	11.00
3	Axis Bank Ltd.	Emergency Credit Line Guarantee Scheme (ECLGS) - Sanctioned	3.60	_	3.60
4	Axis Bank Ltd.	ILC/FLC - Sanctioned	_	14.00	14.00
5	Canara Bank	ILC/FLC - Sanctioned	_	8.00	8.00
6	Canara Bank	Term Loan - Sanctioned	4.33	_	4.33
7	Canara Bank	GECL - Sanctioned	2.99	_	2.99
8	Canara Bank	GECL - Sanctioned	1.50	_	1.50
9	Canara Bank	Bank Guarantee - Sanctioned	_	7.00	7.00
10	Canara Bank	Cash Credit - Sanctioned	15.00	_	15.00
11	HDFC Bank	Cash Credit - Sanctioned	25.00	_	25.00
12	HDFC Bank	Bank Guarantee - Sanctioned	_	10.00	10.00
13	HDFC Bank	GECL - Sanctioned	4.65	_	4.65
14	Others	GECL - Proposed	4.68	_	4.68
Total			81.75	50.00	131.75
TOTAL (Rupees One Hundred Thirty One Crores and Seventy Five lakhs Only)

ANNEXURE-III

List of entities consolidated

Name of Entity	% Ownership	Extent of consolidation	Rationale for consolidation
Lepakshi Tubes Pvt Ltd	100	Full Consolidation	Due to financial and operational linkages between the parent and subsidiaries, common management and fungible cash flows.
RST International Trading FZE	100	Full Consolidation	Due to financial and operational linkages between the parent and subsidiaries, common management and fungible cash flows.

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