Sugna Metals Ltd.

Brickwork Ratings reaffirms the ratings for the Bank Loan Facilities of Rs. 96.87 Crs. of Sugna Metals Ltd.

Particulars

Facilities**	Amount (Rs.Crs.)		Tenure	Rating#
Facilities**	Previous	Present	Tenure	Previous (30 Oct 2020)	Present
Fund Based	61.50	86.87	Long Term	BWR BBB-/Stable Upgrade	BWR BBB - /Stable Reaffirmation
	(0.00)	(9.00)
	(0.00)	(20.00)
Non Fund Based	25.00	10.00	Short Term	BWR A3 Upgrade	BWR A3 Reaffirmation
Non Fund Based	(0.00)	(15.00)	Short Term	BWR A3 Upgrade	BWR A3 Reaffirmation
Grand Total	86.50	96.87	(Rupees Ninety Six Crores and Eighty Seven 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: Enhancement in the rated facilities is due to the following reasons: HDFC Bank: 1. Cash credit enhanced from Rs. 35.00 Cr to Rs. 40.00 Cr. 2. WCDL of Rs. 9.00 has been sanctioned as sublimit of cash credit. 3. A new term loan of Rs. 5.00 Cr was sanctioned in February 2021; ICICI Bank - 1. Cash Credit enhanced from Rs 5.00 Cr ot Rs. 20.00 Cr. 2. Letter of Credit of Rs. 15.00 Cr has been renewed as sublimit of cash credit 3. WCDL of Rs. 20.00 has been sanctioned as sublimit of cash credit; SIDBI: Two new term loans of Rs 1.18 Cr and Rs. 2.63 Cr was sanctioned in December 2020 and January 2021, respectively.

RATING ACTION / OUTLOOK

The ratings reaffirmation continue to factor the promoter's experience in the iron and steel industry, operational track record of the Company, enhanced manufacturing capacities and moderate financial risk profile as indicated by improving net worth, moderate gearing and adequate debt protection metrics. The ratings, however, are constrained by the declined revenue scale, moderate profitability margins and increase in debt levels. The ratings also factor the susceptibility of revenue and margins to fluctuations in raw material prices, demand-supply situation of the Company's finished products and competition from both organized and unorganized sectors apart from the irregularity in submission of monthly NDS by the company.

`The ‘Stable’ outlook indicates a low likelihood of rating change over the medium term. Brickwork Ratings believes that the Sugna Metals Limited’s (‘SML’ or ‘the Company’) business risk profile will be maintained over the medium term in view of its enhanced manufacturing capacity, supportive prices and stable demand for steel and iron. The outlook may be revised to Positive if there is sustained increase in revenue, better than estimated profitability and improved working capital management results in a better debt coverage metrics and liquidity profile. The outlook may be revised to negative in case of inability to increase sales and profitability on a sustained basis, any deterioration in the capital structure, higher utilization of external working capital funding and any stretch in cash conversion cycle, thus weakening the financial risk profile of the Company.

BWR has principally relied upon the standalone audited financials of SML up to FY20, provisional financials for FY21, projected financials for FY22 and FY23, and publicly available information and information/clarifications as provided by the Company's management.

KEY RATING DRIVERS

Credit Strengths:

Experienced management and operational track record of the Company :
The Company was established in the year 2006 and has more than a decade of operational track record in the industry. Mr. Bharat Kumar, Mrs. Saroj Sonthalia and Mr. Mudit Sonthalia are the promoters of the Company. Mr. Bharat Kumar has around four decades of experience and Mrs. Saroj Sonthalia has more than two decades of experience in the iron and steel industry. The experience of the promoters has helped the Company in maintaining long term relations with its key distributors in the market of Andhra Pradesh, Telangana, Karnataka and Tamil Nadu. Their experience has also helped the Company in establishing healthy relations with suppliers resulting in smooth procurement of required raw materials from the domestic market. The Company will continue to benefit from long experience of the management in establishing relations with its customers and suppliers.
Group support and integrated operations :
The company has a backward integration system in place with its group companies, viz Sugna Sponge & Power Private Limited and Shri Hari Ferro Alloys Private Limited. Sugna Sponge & Power Private Limited supplies sponge iron to the Company. Shri Hari Ferro Alloys Private Limited supplies all of the Company’s Silico Manganese requirements. The group entities are managed/operated by the same promoters having managerial and operational synergies.
Moderate financial risk profile :
The financial risk profile of the company is marked by satisfactory net worth, moderate gearing and adequate debt protection metrics. With accretion of profit, the net worth of the company stood satisfactory at Rs. 78.59 Cr in FY21(P). The net worth was Rs 70.43 Cr as of 31 March 2020. The gearing of the company has marginally improved from 2.09 times in FY20 and stood moderate at 1.98 times in FY21(P). This improvement in gearing is mainly on account of increase in net worth during the period. Interest coverage ratio stood at 2.34 times in FY21(P) as against 2.57 times in FY20. The debt service coverage ratio stood at 1.14 times in FY21(P) as compared to 1.31 times in FY20. The net cash accruals to total debt stood same at 0.08 times in FY21(P) and FY20.

[(P) - Provisional]
Enhanced manufacturing capacities :
The Company has increased its installed capacity from 130000 Metric Tons in FY20 to 146000 Metric Tons FY21 for both TMT Bars and M.S. Billets. Utilization of the capacity has reduced from ~86% in FY20 to ~80% in FY21. The declined utilization is due to covid 19 induced lockdown and restrictions, and subdued demand for steel during H1FY21. With enhanced manufacturing capacities and in view of stable demand for steel from construction and infrastructure industry, the Company projected to achieve a revenue of ~Rs. 730 Cr for FY22.

Credit Risks:

Declined revenue scale and moderate profitability margins :
The Company reported revenues of Rs. 615.28 Crs in FY19 and Rs. 453.41 Crs in FY20. The decline in revenues in FY20 is due to decline in steel prices and subdued demand for steel in key sectors like construction and infrastructure industry, leading to lower sales. With gradual improvement in the domestic market environment, the Company witnessed a surge in prices and demand for TMT bars from its end user industries. This helped the Company in achieving revenue of Rs. 509.78 Cr in FY21(P), though the business operations were impacted adversely in H1FY21 due to Covid 19 induced restrictions. Operating profit margin and net profit margin stood moderate at 4.47% and 1.29%, respectively in FY21(P).

[(P) - Provisional]
Exposure to fluctuation in raw material prices and economic growth :
The profitability of the Company is affected by the prices of its key raw materials, viz. sponge iron, manganese and billets, used in the manufacturing process. However, the company has a backward integration system in place with its group companies for supply of sponge iron and manganese which provides pricing advantage to an extent. Further, the Company has focused on backward integration of its manufacturing process by absorbing the 60-70% of billets manufactured by the Company for its finished products. The products manufactured by the Company are used in various sectors which are directly affected by the overall growth level of the economy. Any downturn in economic growth will negatively affect the demand conditions of the Company’s products.
Intense competition in the fragmented industry :
The Company works in a highly fragmented industry characterized by a large number of small and medium sized companies producing the substitute products at competitive margins and a few big players with strong brand equity and premium product segments. Given the size of the Company, it has to compete with both segments of competitors for market share and margins.

ANALYTICAL APPROACH - Standalone

BWR has adopted a standalone approach and applied its rating methodology as detailed in the Rating criteria below (hyperlinks provided at the end of this rationale).

RATING SENSITIVITIES

Going forward, the ability of the company to enhance its scale of operations, improve profitability, efficiently manage its working capital requirements and strengthen its overall credit profile would be the key rating sensitivities.

Positive:

1. Significant increase in revenue scale and improvement in profitability.

2. Improvement in cash accruals and liquidity.

Negative:

1. Volatility in steel prices and impact of adverse market conditions on revenues and cash flows leading to deterioration in financial risk profile.

2. Deterioration in capital structure

3. Stretch in working capital cycle

LIQUIDITY INDICATORS - Adequate

The Company has adequate liquidity marked by its net cash accruals of Rs. 13.32 Crs in FY21(P) as against the annual long term debt obligation of Rs. 9.27 Cr for FY22. EBITDA of Rs 22.81 Crs in FY21(P) was sufficient to cover the interest and finance charges of Rs 9.76 Crs for FY21(P). The current ratio of the company stood moderate at 1.44 times as on 31 March 2021(P). Average utilisation of working capital facilities over the last six months was ~95%. Cash and cash equivalents were modest at Rs 6.33 Cr as on 31 Mar 2021(P) as against Rs 5.91 Cr as on 31 Mar 2019. Cash conversion cycle remains at 75 days as on 31 March 2021(P). This is due to high inventory holding period because of higher stock held by the company on account of increased manufacturing capacities.

ABOUT THE ENTITY

Sugna Metals Limited (SML) was incorporated in October 2006 at Hyderabad, as a private limited company and converted into a public limited company in 2013. The company is engaged in the manufacturing of MS Billets and TMT Bars of various grades. The manufacturing unit is located in Narayanpur village, Pargi Mandal, Telangana and has an installed capacity of 1,46,000 MT for both MS Billets and TMT bars. The Group has an established marketing network for the sales and distribution of their products across Andhra Pradesh, Telangana, Karnataka and other states in India. The finished products are sold under the brand name ‘Sugna TMT’. Mr Bharat Kumar is the Managing Director of the Company, and Ms.Saroj Sonthalia and Mr. Mudit Sonthalia are the other directors. The company is a family owned business.

KEY FINANCIAL INDICATORS (Standalone)

Key Parameters	Units	FY 19-20 (Audited)	FY 18-19 (Audited)
Operating Revenue	Rs.Crs.	453.41	615.28
EBITDA	Rs.Crs.	16.95	17.25
PAT	Rs.Crs.	5.87	8.61
Tangible Net Worth	Rs.Crs.	70.43	64.57
Total Debt/Tangible Net Worth	Times	2.09	1.33
Current Ratio	Times	1.33	1.31

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	86.87	BWR BBB-/Stable (Reaffirmation)	30Oct2020	BWR BBB-Stable (Upgrade)	08Aug2019	BWR BBB-Stable (Assignment)	NA	NA
		NA	NA	10Aug2020	BWR BB+ Stable (Downgrade/ISSUER NOT COOPERATING*)	NA	NA	NA	NA
FB SubLimit	LT	(9.00)	BWR BBB-/Stable (Reaffirmation)	NA	NA	NA	NA	NA	NA
		(20.00)	BWR BBB-/Stable (Reaffirmation)	NA	NA	NA	NA	NA	NA
Non Fund Based	ST	10.00	BWR A3 (Reaffirmation)	30Oct2020	BWR A3 (Upgrade)	08Aug2019	BWR A3 (Assignment)	NA	NA
		NA	NA	10Aug2020	BWR A4+ (Downgrade/ISSUER NOT COOPERATING*)	NA	NA	NA	NA
NFB SubLimit	ST	(15.00)	BWR A3 (Reaffirmation)	NA	NA	NA	NA	NA	NA
Grand Total		96.87	(Rupees Ninety Six Crores and Eighty Seven 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
Rajaram Gouda Senior Rating Analyst Board : +91 80 4040 9940 rajaram.g@brickworkratings.com	Hemant Sagare Senior Manager - Ratings Board : +91 80 4040 9940 hemant.s@brickworkratings.com
1-860-425-2742 \| media@brickworkratings.com

Sugna Metals 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	HDFC Bank	Cash Credit - Sanctioned	40.00	_	40.00
2	HDFC Bank	Term Loan - Sanctioned	4.92	_	4.92
3	HDFC Bank	Term Loan - Sanctioned	3.94	_	3.94
4	HDFC Bank	Term Loan - Sanctioned	5.00	_	5.00
5	HDFC Bank	Letter of Credit - Sanctioned	_	10.00	10.00
	Sub-Limit (WCDL (Sub limit of Cash Credit)) - Sanctioned	(9.00)
6	ICICI Bank	Cash Credit - Sanctioned	20.00	_	20.00
	Sub-Limit (Letter of Credit (Sub limit of Cash Credit)) - Sanctioned		(15.00)
	Sub-Limit (WCDL (Sub limit of Cash Credit)) - Sanctioned	(20.00)
7	ICICI Bank	Letter of Credit - Sanctioned	_	_	0.00
8	SIDBI	Term Loan - Sanctioned	0.53	_	0.53
9	SIDBI	Term Loan - Sanctioned	4.19	_	4.19
10	SIDBI	Term Loan - Sanctioned	2.12	_	2.12
11	SIDBI	Term Loan - Sanctioned	0.11	_	0.11
12	SIDBI	Term Loan - Sanctioned	0.77	_	0.77
13	SIDBI	Term Loan - Sanctioned	_	_	0.00
14	SIDBI	Term Loan - Sanctioned	1.52	_	1.52
15	SIDBI	Term Loan - Sanctioned	1.14	_	1.14
16	SIDBI	Term Loan - Sanctioned	2.63	_	2.63
Total			86.87	10.00	96.87
TOTAL (Rupees Ninety Six Crores and Eighty Seven lakhs Only)

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