Sumangal Ispat Pvt Ltd

Brickwork Ratings reaffirms the ratings for the Bank Loan Facilities of Rs. 50.48 Crs. of Sumangal Ispat Pvt Ltd

Particulars

Facilities**	Amount (Rs.Crs.)		Tenure	Rating#
	Previous	Present		Previous (05 Aug 2020)	Present
Fund Based	43.55	44.20	Long Term	BWR BBB-/Stable, Removed from Issuer Not cooperating category Upgraded	BWR BBB - /Stable Reaffirmation
Non Fund Based	6.28	6.28	Short Term	BWR A3/Removed from Issuer Not cooperating category Upgraded	BWR A3 Reaffirmation
Grand Total	49.83	50.48	(Rupees Fifty Crores and Forty Eight 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 essentially relied on the audited financials of Sumangal Ispat Pvt. Ltd (SIPL or the company) for FY19 and FY20, provisional financials of FY21 and 1HFY22 as well as projections for FY22, FY23 and FY24, and other information as available in the public domain, as well as information/clarifications provided by the company and its bankers, to arrive at the present ratings.

BWR has reaffirmed both the long-term and short-term ratings of BWR BBB- (Stable)/A3 for the bank loan facilities aggregating Rs.50.48 Crs enhanced from Rs.49.83 Crs . The reaffirmation of the rating factors in, inter alia, improvement in SIPL's topline in FY21 driven by the shift to billet manufacturing in FY 20 which has better marketability, the ramp-up of installed production capacities and capacity utilisation in FY20 and FY21 as well as an increase in sales realisations leading to improved operating profitability resulting in improved ISCR and a moderate gearing despite the increase in total debt in FY21. The ratings also take cognisance of the long track record of operations of the company and its experienced promoters and locational advantage. 

The ratings are, however, constrained by the thin profitability as there is a lack of backward integration, the Company deals intermediary product of steel making which is exposed to steel price fluctuations, susceptibility of operating margins to volatility in the input costs, working capital intensive nature of operations, exposure to risks inherent in the steel industry, intense competition prevailing in the industry and the geographical concentration of its activities. The outlook has been retained as “Stable” since the business risk profile of the company is stable, and growth in business and profitability is expected to be maintained in the medium term.

KEY RATING DRIVERS

Credit Strengths:

• Improved Revenues and profitability in FY21 :

  SIPL outperformed sales and profitability projections for FY21 despite the pandemic conditions. On a year-over-year basis, total operating income grew 13% in FY 21 (Provisional)  to Rs.251.8Crs despite operations being impacted in the first two months of FY21 due to Covid induced lockdown. The Company benefitted from its shift to manufacturing and sales of Billets from ingots which has better marketability.  Billet sales volumes increased by 4% Y-o-Y while sales realisations were up 8.53% Y-o-Y in FY21. Total operating income grew 5.6% y-o-y in FY20 to Rs.223 Crs with a 11.26% Y-o-Y rise in billet sales volumes that mitigated a 5% decline in Billet prices during the year.  EBITDA  has improved to Rs.9Crs in FY21(Provisional) from Rs.7.43Crs in FY20. PAT improved from 1.77Crs in FY20 to Rs.2.83 Crs in FY21(Provisional). The Company expects the growth in sales in FY22 to be largely driven by higher volumes. It expects to increase capacity utilisations to near to full to meet its sales projections in FY22.

• Long track record of operations and experienced promoters :

  SIPL is a family-owned business with experienced directors on the board running the business. Their long-standing presence and established track record in the steel business have led to established relationships with the customers and suppliers.

• Locational Advantage :

  SIPL enjoys locational advantage, being in the heartland of steel manufacturing in Durgapur, both in terms of procurement of raw materials and marketing of its products.

• Acceptable coverage metrics :

  Improved EBIDTA led to an improved ISCR of 2.10x in FY21(Provisional) from 1.77x in FY20 and 1.63x in FY19. DSCR improved to1.67x  in FY21(provisional) from 1.39x in FY20 and 1.29x in FY19.  Total Gearing is acceptable at 1.46x in FY21(Provisional) although it increased marginally from 1.36x in FY20. 

Credit Risks:

• Geographical concentration :

  SIPL earns more than 90% of its revenues through sales in West Bengal. This exposes the company’s revenue and profitability to risks related to geographical concentration. However, the Company has planned to start exporting to countries including Nepal and Bangladesh in the near term which will diversify sales and reduce dependence on a single state. 

• The small scale of operations and thin profitability :

  SIPL's scale of operations is small viz-a viz it's near to two decades of operations in the Iron and Steel industry. The company manufactures Billets without any integration, which results in thin profitability as compared to other integrated players in the industry. However, the Company plans to start an integrated unit with the set up of a TMT bar manufacturing unit in the near term which is likely to increase its scale of operations and add to profitability. 

• Exposure to risks inherent in the steel industry :

  The Company is exposed to the volatility in demand and volatility in the prices of raw material as well as finished goods due to the inherently cyclical nature of the Iron and steel industry. The key raw materials i.e,  sponge iron prices have shown a volatile trend over the years and are determined by market forces. Although SIPL can pass on the increased cost to end-users, any adverse input cost will impact the profitability margin. Demand for the end products, such as TMT bars, is linked to the Capex programmes of end-users such as the real estate, civil construction, and engineering industries; which are cyclical. Any slowdown in Capex in these segments due to economic downturns and lower than the expected gradual recovery will constrain revenue. 

• Working Capital intensive nature of operations and Intense Competition :

  The company's operations are working capital intensive as is visible in the high utilisation of working capital limits. However, the Company has availed enhancement in working capital limits to meet its liquidity requirements  It operates in a highly fragmented industry that has a large number of players leading to intense competiton. 

ANALYTICAL APPROACH - Standalone

For arriving at its ratings, BWR has applied its rating methodology as detailed in the Rating Criteria given below (hyperlinks provided at the end of this rationale). BWR considered standalone financials of Sumangal Ispat Pvt Ltd. for arriving at the ratings.

RATING SENSITIVITIES

Positive: Increase in scale of operations, EBIDTA margins of over 6%, ISCR greater than 3.50x, and DSCR greater than 2.00x on a sustained basis while maintaining adequate liquidity shall lead to a postive rating action. 

Negative: Decline in sales vis-a-vis the projections by more than 10% Deterioration in the operating profit margins to below 3.5%, ISCR and DSCR of below 1.0x on a sustained basis shall trigger a negative rating action.

LIQUIDITY INDICATORS - Stretched

The liquidity position of the company is Stretched. The company's operations are working capital-intensive as is reflected in the near to full utilisation of the working capital limits. The company has enhanced its working capital limits to meet liquidity requirements. The ability of the company to manage its incremental working capital funding requirements is crucial for smooth operations. The operating cycle of 31 days in FY20 has increased to 44 days in FY21 and is likely to elongate further in FY22 with an expected increase in the scale of operations. However, the expected cash accruals of Rs.4.38 Crs in FY22 would be sufficient to meet the debt obligations of Rs.2.70 Crs falling due in the year.

ABOUT THE ENTITY

Incorporated in 2004, Sumangal Ispat Pvt. Ltd. (SIPL) started commercial operations of manufacturing Steel Ingots from the year 2009 with an installed capacity of 24,000 MTPA.  The Company increased its installed production capacities to 93500MT by FY21. SIPL converted its production line completely from Mild Steel Ingots to Mild Steel Billets in October 2019, the commercial production of which commenced in November 2019. The company is managed by Mr. Santosh Kumar and Mr. Alok Kumar, who are the Directors of the company.

KEY FINANCIAL INDICATORS (Standalone)

Key Parameters	Units	FY 19-20 (Audited)	FY 18-19 (Audited)
Operating Revenue	Rs.Crs.	223.08	211.29
EBITDA	Rs.Crs.	8.07	7.43
PAT	Rs.Crs.	1.77	1.51
Tangible Net Worth	Rs.Crs.	29.61	25.28
Total Debt/Tangible Net Worth	Times	1.36	1.57
Current Ratio	Times	1.37	1.37

KEY COVENANTS OF THE FACILITY RATED

Standard. 

STATUS OF NON-COOPERATION WITH PREVIOUS CRA

None. 

ANY OTHER INFORMATION

The Company has availed ratings of CARE BB+, Stable/CAREA4 as per the press release dated October 07, 2021.

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	44.20	BWR BBB-/Stable (Reaffirmation)	01Jul2020	BWR BBStable, Issuer Not Cooperating (Downgraded)	04Dec2019	BWR BBB-placed under credit watch with developing implications (Reaffirmed )	NA	NA
		NA	NA	05Aug2020	BWR BBB-Stable, Removed from Issuer Not cooperating category (Upgraded)	NA	NA	NA	NA
Non Fund Based	ST	6.28	BWR A3 (Reaffirmation)	01Jul2020	BWR A4+Issuer Not Cooperating (Downgraded)	04Dec2019	BWR A3 (Reaffirmed)	NA	NA
		NA	NA	05Aug2020	BWR A3Removed from Issuer Not cooperating category (Upgraded)	NA	NA	NA	NA
Grand Total		50.48	(Rupees Fifty Crores and Forty Eight lakhs Only)

Rating Advisory, as on 06Aug2021
Press Release, as on 06Aug2021
More than 12 months have elapsed since the last rating and BWR has not been possible to review the rating within the stipulated time, mainly due to non-receipt of essential information/documents required for review.

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
• Short Term Debt

Analytical Contacts
Madhu Sonthalia Senior Rating Analyst Board : +91 80 4040 9940 madhusonthalia@brickworkratings.com	Anuradha Gupta Director - Ratings anuradha.g@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	Punjab National Bank	Term Loan - Sanctioned	4.10	_	4.10
2	Punjab National Bank	Cash Credit - Sanctioned	35.00	_	35.00
3	Punjab National Bank	Cash Credit - Proposed	_	_	0.00
4	Punjab National Bank	Bank Guarantee - Sanctioned	_	6.28	6.28
5	Punjab National Bank	GECL - Sanctioned	5.10	_	5.10
Total			44.20	6.28	50.48
TOTAL (Rupees Fifty Crores and Forty Eight lakhs Only)