Lloyds Metals and Energy Ltd

Brickwork Ratings upgrades the long-term rating for the Bank Loan Facilities of Rs. 100.00 Crs. of Lloyds Metals and Energy Limited

Particulars

Facilities**	Amount (Rs.Crs.)		Tenure	Rating#
	Previous	Present		Previous (19 Aug 2021)	Present
Fund Based	100.00	100.00	Long Term	BWR BBB/Stable Upgraded	BWR BBB + /Stable Upgrade
Grand Total	100.00	100.00	(Rupees One Hundred Crores 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

The rating revision reflects the improvement in the operating efficiency following the commencement of the mining & extraction activity in October 2021 at the Surajgarh Iron ore mines, allotted on lease to Lloyds Metals & Energy Limited (LMEL or “the company”) till the year 2057. The company’s operating profile is supported by benefits from the improvement in the capacity utilization levels as well as a partially integrated nature of operations supported by captive iron ore mines, captive power generation, and sponge iron manufacturing capacity which in turn lead to an efficient cost structure. The captive sourcing of the iron ore ensures continuous availability resulting in improved capacity utilization levels and a reduction in the cost of iron ore procurement by nearly 50 percent leading to significant improvement in the profitability of the company. Also, the surplus iron ore produced over the requirement is available for sale and hence contributes to the revenue of the company. The steel industry also witnessed a sharp rebound in the second half of FY2021 which supported the overall performance of the company. 

The company is also setting up a mineral based Steel plant at Konsari, Gadchiroli district for manufacturing sponge iron with a capacity of 75000 metric tonnes per annum (MTPA) at the initial stage, and subsequently capacity to manufacture other value-added products will be set up. The forward integration being undertaken by the company is expected to further enhance its business risk profile. The rating revision also considers the significant infusion in the capital of the company during the current year leading to a significant reduction in overall debt and interest outgo for the company. The capital infusion will also support the ongoing & future capital expenditure plan of the company.  

The rating continues to draw comfort from the established market presence of the Company supported by the extensive experience of the promoters in the iron & steel industry. The rating also derives comfort from the partially integrated nature of operations wherein the Company is engaged in manufacturing sponge iron and also has a 30MW captive power generation capacity. Further, the rating also derives comfort from the unsecured loans provided by the promoters as and when needed along with infusion in the capital.  

However, the rating is constrained by the susceptibility of the operations & profitability to the volatility in the sponge iron & iron ore prices along with cyclicality in the steel industry. The rating is also constrained by the presence of the highly competitive and fragmented sponge iron manufacturing industry.  

Outlook: Stable

BWR believes that LMEL’s business risk profile will be healthy considering the favorable demand outlook for the steel industry and the company's captive iron ore sourcing arrangement. The business risk profile is also supported by the company’s established market presence, experienced promoters along with long-standing relationships with the customers. The “Stable” outlook indicates a low likelihood of rating change over the medium term.

 

KEY RATING DRIVERS

Credit Strengths:

• Significant improvement in operating performance of the company during FY2022 :

  The company reported operating income from Rs. 253.41crores in FY2021 to Rs. 697.50 crores in FY2022; thereby reporting growth of around 1.75 times. The revenue growth during FY2022 is supported by the improvement capacity utilization levels, the average realization of sponge iron, and also the sale of iron ore which was nil in the previous year. The company also reported healthy net cash accruals of Rs.105.78 crores for FY2022 as against Rs. 13.95 crores in FY2021. The operating profit margin of the company improved from 4.29 percent in FY2021 to 20.86 percent in FY2022 supported by an improvement in average sales realization and a significant reduction in the cost of production during FY2022 over FY2021. Further, the company has reported Rs. 842.68 crores of operating income and an operating profit margin of 31.08 percent for Q1FY2023.  

  BWR believes that the demand outlook and sponge iron prices are likely to remain favorable in the current fiscal, which will support the company’s revenue and profitability growth in FY2023.  

   

• Established presence in the market supported by the extensive experience of promoters :

  The Company has an established presence in the steel industry with an operational track record of more than four decades. LMEL mainly caters to steel producers located in Maharashtra. Apart from sponge iron, the company also sells the excess power generated from waste heat gases produced in sponge kilns to power trading companies. 

  The Company also benefits from the extensive experience of its promoter i.e. Mr. Babulal Agarwal who possesses more than five decades of experience in the steel and mining business, supported by a team of well qualified and experienced professionals as the second line of management. 

   

• Strategic location of the plant near the raw material source :

  The Company benefits from the strategic location of its sponge iron manufacturing plant in the Chandrapur district of Maharashtra. The company enjoys proximity to the source of raw material (iron ore) which is procured from its captive mines located in the Gadchiroli district of Maharashtra. LMEL has been allotted a mining lease at Surajgarh Iron Ore Mine (Wooria Hills) over an area of 348.09 Ha situated at village Surajgarh in the Gadchiroli district, Maharashtra for a period of 50 years starting from 2007 with environmental clearance for production of 3 million MTPA at present and total reserves estimated at 73.60 million tonnes. Thriveni Earthmovers Private Limited (TEMPL) has infused funds as equity in the company and is now the Joint Promoter in the company by holding an equal number of shares as that of the existing promoters. TEMPL is the largest mining operator in the country and also handles the entire mining operations of LMEL. The company has already commenced mining & extraction operations in October 2021. The procurement of iron ore directly from its own mines has ensured continuous availability of iron ore leading to improvement in capacity utilization levels along with a reduction in the cost of raw materials by around 50 percent. Also, the iron ore requirement for the company presently is around 500000 MTPA hence any surplus iron ore production will be available for sale to third parties. The company has also received approval to sell iron ore across India and exports. The company also benefits from the captive power plant with a 30 MW capacity which runs on the waste heat gases produced in the sponge kiln and the coal required for the power plant is procured from the nearby coalfields.

   

• Healthy Financial risk profile :

  The company has reported a healthy financial risk profile marked by a healthy tangible net worth of Rs. 481.58 crores as on 31st March 2022 as against Rs. 182.11 crores in the previous supported by significant capital infusion to the tune of Rs. 200.00 crores from co-promoter of the company i.e. TEMPL and retained earnings. The capital structure is comfortable with gearing of 0.16 times as on 31st March 2022 and total debt to OPBDIT of 0.53 times for FY2022. The company has also reported significant improvement in debt coverage indicators with the ISCR ratio at 8.03 times and the DSCR ratio at 1.92 times for FY2022. Going forward, the company is expected to maintain its healthy financial risk profile on the back of expected improvement in cash accruals and a reduction in the external borrowings of company. 

   

Credit Risks:

• Susceptibility of the profitability to volatility in raw material and finished product prices along with the cyclicality in the steel industry :

  The raw materials are the main cost drivers for LMEL and raw material consumption constituted around 95 percent of the total cost of goods sold for FY2022. The main raw materials of the company i.e. iron ore and/or pellets and non-coking coal are procured locally. However, the prices of these raw materials are volatile in nature and therefore the profitability of the company is susceptible to fluctuation in raw material prices and finished goods. Nonetheless, the company’s dependence on the market for iron ore has decreased drastically with the company's captive sourcing arrangements and hence the profitability is protected to that extent.

  The performance of the sponge iron industry is directly dependent on the performance of the nation’s steel sector. The steel industry is cyclical in nature and strongly related to the economic cycles with its key end-user industries i.e. construction, infrastructure, automobiles, and capital goods are hugely dependent on the state of the economy. Hence, the slowdown in demand for any of these sectors directly impacts the demand for steel products. Further, any subsequent waves of the COVID-19 pandemic can severely impact the demand in major steel-consuming sectors and thereby resulted in lower steel production. 

   

• Exposure to project implementation risk :

  The company has planned expansion into value-added products i.e. billets, thermo-mechanically treated (TMT) steel bars, wire rods as well as a power plant with a total CAPEX of Rs. 1200.00 crores. The construction period is around 8 years and the same is spread over three phases. Phase I includes the construction of additional capacity for sponge iron unit by 75000 MTPA along with a 4MW captive power plan with a total project outlay of Rs. 130.00 crores which will be funded entirely through internal accruals & promoters funds. 

  The construction for Phase I has commenced and the commercial operation of the sponge iron unit with 75000 MTPA capacity is expected to  commence from the first quarter of FY2023. The demand risk is expected to be low considering the cost advantage of the company over non-integrated players in the market due to captive iron ore as well as healthy market conditions. Nevertheless, as the project is large relative to the present size of the company and of long tenure, the company remains exposed to project implementation risk.

   

• Presence in the highly competitive and fragmented sponge iron manufacturing industry :

  With the presence of around 400 sponge iron units in the country, the Indian sponge iron industry is highly fragmented. The top 20 producers contribute about 60~65 percent of the total production whereas the rest contribute 35~40 percent of the production. Hence, the pricing flexibility of the Company is restricted due to this intense competition. 

   

ANALYTICAL APPROACH - Standalone

For arriving at its ratings, BWR has principally relied upon the standalone audited financials up to FY22, publicly available information, and clarification/information provided by the Company. 

 

 

RATING SENSITIVITIES

Going forward, BWR will monitor the following key rating sensitivity factors for any rating change. 

Positive:

The rating can be upgraded if the company reports:

• Significant and sustainable improvement in the operating income and profitability resulting in substantial improvement in the financial risk profile and debt coverage indicators of the company. 
• Efficient working capital management leads to improvement in liquidity profile. 

Negative:

The rating can be downgraded if the company reports:

• Significant decline in operating income and profitability leading to deterioration in debt coverage indicators 
• A stretch in the working capital cycle leads to deterioration in the liquidity profile of the company.
• Majorly debt-funded capacity expenditure plan resulting in high leveraged capital structure.

LIQUIDITY INDICATORS - Strong

The company has reported a significant increase in net cash accruals from Rs.13.95 crore in FY 2021 to Rs. 105.78 crore in FY 2022. The current ratio comfortably stood at 2.61 times as on 31st March 2022. Further, the company’s average working capital limit utilization stood at around 8.40 percent for the period from August 2021 to August 2022. 

The unencumbered cash and cash equivalents stood at Rs. 21.87 crores as on 31st March 2022. Further, the repayment of around Rs. 42.28 crores is estimated during the period from FY2023 to FY2025 and the same is expected to be met through internal accruals and infusion in the share capital by promoters. Also, the company had raised around Rs. 202.00 crores through the issue of new shares and application money for convertible warrants during FY 2022. Going forward, the company is to expected infuse promoters' funds in order to meet additional working capital requirements and any capital expenditures. 

 

 

ABOUT THE ENTITY

Lloyds Metals and Energy Limited [Erstwhile Lloyds Metals & Engineer Limited] was initially incorporated as a private limited company under the name “Nagarjuna Metals and Engineer Private Limited” in the year 1977. Subsequently, in 1986 the constitution of the entity was converted into a public limited company and listed on the Bombay Stock Exchange in February 1987 however the name was changed to Lloyds Metals & Engineer Limited in January 1990 and to the latest name in April 2011. The Company is promoted by Mr. B. L. Agarwal & family along with TEMPL members holding around 74.63 percent; public shareholding stood at 25.09 percent and the non-promoter & Non-public group is 0.28 percent as on 31st March 2022. The day-to-day operations of the Company are handled by Mr. Babulal Agarwal who possesses more than five decades of experience in the iron & steel industry. 

The company is engaged in the manufacturing of sponge iron and its by-products along generation/distribution of power. The by-products of the sponge iron include Char, Fly Ash, ESP Dust, Bed Material, and Iron Ore Fines. The company’s sponge iron plant is located in the Chandrapur district of Maharashtra with an installed capacity of 300000 MTPA and also the captive power plant with a 30 MW capacity which runs on the waste heat gasses produced in the sponge kiln. The Company possesses certifications including ISO - 9001, 14001, OHSAS 18001 ISO 9001:2008. Sponge iron is an intermediate product; a source of metallics for secondary steel making through Electric Arc Furnace (EAF) or Induction Furnace (IF)  route. The sale of sponge iron contributed around 64 percent, iron ore contributed around 29 percent whereas power contributed around 7 percent to the total revenue for FY 2022. The main raw material required by the company is iron ore and non-coking coal. The iron ore is sourced from the iron ore mine located in Surjagarh village, Gadchiroli district Maharashtra which it has leased for a period of 50 years starting from 2007; the mining extraction activity commenced in October 2021. It also procures iron ore from other suppliers located in Raipur and Odisha. The company procures coal from Western Coalfields Limited under long-term linkages.

The company has only one associate under the name Thriveni Lloyds Mining Private Limited (TLMPL) effective from 28th May 2020 and has a 40 percent holding in it as on 31st March 2022. 

KEY FINANCIAL INDICATORS (Standalone)

Key Parameters	Units	FY 21-22 (Audited)	FY 20-21 (Audited)
Operating Revenue	Rs.Crs.	697.50	253.41
EBITDA	Rs.Crs.	145.63	10.87
PAT	Rs.Crs.	97.30	0.13
Tangible Net Worth	Rs.Crs.	481.58	182.11
Total Debt/TNW	Times	0.16	0.85
Current Ratio	Times	2.61	1.63

KEY FINANCIAL INDICATORS (Consolidated)

Key Parameters	Units	FY 21-22 (Audited)	FY 20-21 (Audited)
Operating Revenue	Rs.Crs.	697.50	253.41
EBITDA	Rs.Crs.	145.63	10.87
PAT	Rs.Crs.	97.30	0.13
Tangible Net Worth	Rs.Crs.	481.65	182.11
Total Debt/TNW	Times	0.16	0.96
Current Ratio	Times	2.61	1.63

KEY COVENANTS OF THE FACILITY RATED

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

NON-COOPERATION WITH PREVIOUS CREDIT RATING AGENCY

Not Applicable

ANY OTHER INFORMATION

None

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

Facilities	Current Rating (2022)			2021		2020		2019
Type	Tenure	Amount (Rs.Crs.)	Rating	Date	Rating	Date	Rating	Date	Rating
Fund Based	LT	100.00	BWR BBB+/Stable (Upgrade)	19Aug2021	BWR BBBStable (Upgraded)	26May2020	BWR BBB-Stable (Reaffirmed)	30Jan2019	BWR BBB-Stable (Assigned)
Non Fund Based	ST	0.00	NA	19Aug2021	BWR A3 (Withdrawn)	26May2020	BWR A3 (Reaffirmed)	30Jan2019	BWR A3 (Assigned)
Grand Total		100.00	(Rupees One Hundred Crores 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

• Approach to Financial Ratios
• General Criteria
• Manufacturing Companies

Analytical Contacts
Shashikala Umanath Hegde Senior Ratings Analyst Board : +91 22 2831 1426, +91 22 2831 1439 shashikala.h@brickworkratings.com	Vidya Shankar Principal Director - Ratings Board : +91 80 4040 9940 vidyashankar@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	Aditya Birla Finance Limited	Term Loan - Out-standing	19.20	_	19.20
2	Citizen Credit Co-operative Bank	Cash Credit - Sanctioned	10.00	_	10.00
3	Citizen Credit Co-operative Bank	Term Loan - Out-standing	17.12	_	17.12
4	Kotak Mahindra Bank	Term Loan - Out-standing	_	_	0.00
5	Others	Cash Credit - Proposed	24.88	_	24.88
6	TATA Capital Financial Services Limited	Term Loan - Out-standing	28.80	_	28.80
Total			100.00	0.00	100.00
TOTAL (Rupees One Hundred Crores Only)