A.R. Steels

Brickwork Ratings assigns the ratings for the Bank Loan Facilities of Rs.30.00 Crs. of A.R. Steels

Particulars

Facility**	Amount (Rs.Crs)	Tenure	Rating*
Fund Based
Cash Credit - Sanctioned Channel Finance Facility - Sanctioned Cash Credit - Proposed	17.00 03.00 05.00	Long Term	BWR BB - (Stable)
Sub Total	25.00
Non-Fund Based
Letter of Credit - Sanctioned Sub-Limit (Bank Guarantee) - Sanctioned	05.00 (03.00)	Short Term	BWR A4
Sub Total	05.00
Grand Total	30.00	(Rupees Thirty Crores Only)

*Please refer to BWR website www.brickworkratings.com for definition of the ratings
**Details of Bank facilities are provided in Annexure-I RATING ACTION / OUTLOOK : Stable

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 DRIVERS

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.

ANALYTICAL APPROACH AND APPLICABLE RATING CRITERIA

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 POSITION

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. 

PROFILE

A 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

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

KEY COVENANTS OF THE INSTRUMENT/FACILITY RATED

None

RATING HISTORY (INCLUDING WITHDRAWAL AND SUSPENSION)

S.No	Current Rating (2020)				Rating History
	Facilities	Tenure	Amount (Rs.Crs)	Rating	2019	2018	2017
Fund Based
1	Cash Credit - Sanctioned Channel Finance Facility - Sanctioned Cash Credit - Proposed	Long Term	17.00 03.00 05.00	BWR BB- (Stable)	NA	NA	NA
Non-Fund Based
2	Letter of Credit - Sanctioned Sub-Limit (Bank Guarantee) - Sanctioned	Short Term	05.00 03.00	BWR A4	NA	NA	NA
Total			30.00	(Rupees Thirty Crores Only)

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.

For More Information Contact:

Analytical Contacts	Investor Contacts
Rajaram Gouda Ratings Analyst B : +91 80 4040 9940 Ext : 344 rajaram.g@brickworkratings.com	Liena Thakur Assistant Vice President - Corporate Communications M : +91 84339 94686 liena.t@brickworkratings.com
K Nagaraj Associate Director - Ratings B : +91 80 4040 9940 nagaraj.ks@brickworkratings.com
1-860-425-2742

SL.No.	Type Of Facilities	Long Term(Rs.Crs.)	Short Term(Rs.Crs.)	Total(Rs.Crs.)
1	Letter of Credit - Sanctioned	_	5.00	5.00
Sub-Limit (Bank Guarantee) - Sanctioned		(3.00)
2	Cash Credit - Sanctioned	17.00	_	17.00
3	Channel Finance Facility - Sanctioned	3.00	_	3.00
4	Cash Credit - Proposed	5.00	_	5.00
Total				30.00
TOTAL (Rupees Thirty Crores Only)