Sree Rengaraj Ispat Industries (P) Ltd

Brickwork Ratings reaffirms the ratings for the Bank Loan Facilities of Rs.99.19 Crs. of Sree Rengaraj Ispat Industries (P) Ltd

Particulars

Facilities**	Amount (Rs.Crs.)		Tenure	Rating#
	Previous	Present		Previous (06 Aug 2020)	Present
Fund Based	39.00	35.19	Long Term	BWR BBB/Stable Reaffirmation	BWR BBB /Stable Reaffirmation
	0.30	0.00	Short Term	BWR A3 Reaffirmation	_
Non Fund Based	64.00	64.00	Short Term	BWR A3 Reaffirmation	BWR A3 Reaffirmation
Grand Total	103.30	99.19	(Rupees Ninety Nine Crores and Nineteen 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: The company was banking with South Indian Bank earlier. The facilities have been taken over by HDFC bank Ltd.

RATING ACTION / OUTLOOK

The reaffirmation of the bank loan rating of Sree Rengaraj Ispat Industries (P) Ltd ('SRIIPL' or the 'company') continues to factor the extensive experience of the promoter in steel industry, strong customer base, above-average financial risk profile and integrated nature of operations. BWR also notes the improved Year to date performance for 6M FY22 post the significantly impacted operations in FY20 and FY21. The ratings continue to remain constrained by susceptibility of profitability to fluctuations in raw material prices, and cyclical nature of the steel industry, intensely competitive industry,  geographical and customer concentration risks and working capital intensive nature of operations. The ratings also factor the continuing inherent susceptibility to cyclicality of end user industries.

BWR notes that the company had availed relief under the COVID-19 moratorium package during Mar'20 - Aug'20 involving deferment of interest and emergency credit lines. The company has been regular in debt obligation payments in the post-moratorium period, as confirmed by the lenders. BWR also notes the company has not availed for one-time restructuring (OTR) of loans under RBI Resolution Framework for Covid-19 related Stress.

The ‘Stable’ outlook indicates a low likelihood of rating change over the medium term. Brickwork Ratings believes that SRIIPL’s business and financial risk profile will be maintained over the medium term. The outlook may be revised to positive if the company reports better-than-estimated growth in its operations, profitability and liquidity position while maintaining its credit risk profile. The outlook may be revised to negative if there is lower than expected revenue or profitability and deterioration of gearing and debt coverage metrics, any adverse impact of COVID-19 on the business profile resulting in a weaker liquidity position of the company.

KEY RATING DRIVERS

Credit Strengths:

• Extensive experience of the management :

  The Company has an established track record 15 years. SRIIPL is primarily a family-owned company, promoted by Mr. P. Sampath Kumar. In line with the succession plan of the management, the next generation has been inducted into the business. The promoters' experience of nearly four decades continues to support the business. The family continues to hold the overall management control supported by a team of professional and technically qualified management personnel.

• Established market position and integrated operations :

  SRIIPL as a whole is a fully integrated steel unit operating across the value chain – i.e. from the manufacturing of Sponge Iron to Billets, Ingots, TMT bars and steel structures.  The company has installed capacity of 1,00,000 MT for sponge iron, 1,00,000 MT for MS billet and 25,000 MT for MS bars & TMT.  Apart from this the company has 8MW waste heat recovery system and 30 MW thermal power plant. On account of its long standing presence and integrated operations, the company benefits from established relationships with its customers and suppliers.  The Company has retained its top 5 clients for over 10 years, thereby getting repeat business from these clients on a sustained basis, which has facilitated growth in its scale of operations. The Company has established a strong business relationship with reputed players viz. Gasha Steels, Kairali Steels Pvt Ltd, Peekay Rollings etc for steel trade and also entered into a power-purchase agreement with Saint-Gobain India Pvt Ltd for surplus generated power.

• Above-average financial risk profile :

  The company’s risk profile is above-average as reflected by the modest scale of operations, adequate net worth, comfortable gearing and subdued debt coverage metrics. Operating income was at Rs. 307.38 Crs. in FY20 as against Rs.440.32 Crs. in FY19. The decline in scale of operations was attibuted to fall in steel prices, operational disruption due to a Boiler accident that took place in March 2020 coupled with Covid-19 impact. PAT was at Rs.2.94 Crs. in FY20 when compared to Rs.5.57 Crs. in FY19. The tangible net worth improved was Rs.79.93 Crs. as on 31Mar2020. Total Debt/Tangible net worth was at 0.63 times as on 31Mar2020 as against 0.86 times as on 31Mar2019. As for the debt coverage metrics, ISCR was moderate at 1.64 times and DSCR continues to be low at 0.96 times as on 31Mar2020.

  On a provisional basis in FY21, the company reported operating income, operating profit and net profit of Rs.257.19 Crs., Rs.27.53 Crs. and Rs.2.33 Crs., respectively. The company for H1FY22 reported a significantly higher turnover of ~Rs.202 Crs.

Credit Risks:

• Exposure to cyclicality inherent in the steel industry :

  As the demand for steel is closely linked to economic activity, the domestic steel industry is susceptible to the cyclicality in the industry. The company is exposed to fluctuations in the availability and prices of the raw materials. The company’s operations are vulnerable to any demand slowdown in the end user industry - real estate/infrastructure etc., thereby impacting the capacity utilizations and margins. However, established relationships with reputed customers helps SRIPL to maintain its competitive position.

• Intense competition in a fragmented industry :

  Highly fragmented nature of the industry with low entry barriers leads to intense competition and pricing pressures. However, with fully integrated operations right from the manufacture of sponge iron to Billets and TMT bars the company is able to manage competition through its superior product profile and competitive pricing.

• Geographical and customer concentration :

  The top 5 customers viz. PeeKay Rolling Mills Pvt Ltd, Prince TMT Steels Pvt Ltd, Kairali Steels Pvt Ltd, Theih Ingots Pvt Ltd & Gasha Steels Pvt Ltd contribute ~40-45% of the company’s revenue. Also, ~35% of the steel sales revenue is contributed by clients from Kerala. The company has been in the steel business for the last 40 years and has undergone various trade cycles. The associated risks are mitigated to a certain degree by the long-standing relationship with such customers.

• Impact of Covid-19 pandemic :

  The Covid-19 pandemic impacted the production and sales severely in H1FY21 due to country-wide lockdown and the subsequent muted demand conditions. The recovery started in Q2FY21. The operations normalized in H2FY21. The second wave of the pandemic did not impact the company business as it did during the first wave. As the government exempted manufacturing industries from the Covid-19 induced lockdown with certain conditions, the company’s manufacturing and sales operations are going smoothly. However, uncertainty regarding the onset of the subsequent waves of the pandemic in H2FY22 and possible government actions, if any to restrict its spread is likely to have bearing on the business environment of the company. 

• Working capital intensive operations :

  The company’s operations continue to remain working capital intensive owing to elongated receivables position historically around 2 months and almost full utilization of the working capital limits. The operating cycle increased from ~90 days as on 31 Mar 2019 to ~130 days as on 31 Mar 2020 and ~140 days as on 31 Mar 2021 (Prov). However, the elongated inventory and receivables holding period are partially offset by the longer payment terms the company enjoys with suppliers, due to the longstanding relationships. Hence, the conversion cycle is maintained at an adequate level.

ANALYTICAL APPROACH - Standalone

For arriving at its ratings, Brickwork Ratings 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). The company does not have any subsidiaries.

RATING SENSITIVITIES

The ability of the company to consistently improve revenue and profitability, manage the competitive landscape and its working capital efficiently and strengthen its overall credit profile would be the key rating sensitivities.

Positive:

• Significant improvement in scale of operations, profitability on a sustained basis.
• Prudent working capital management to improve liquidity profile and debt coverage metrics on a sustained basis

Negative:

• Deterioration in key credit metrics on account of weaker than expected business performance
• Specific credit metrics that could lead to a downgrade of SRIIPL rating include gearing above 2.00 times and ISCR and DSCR less than 1.00 times on a sustained basis
• Any further disruption caused by Covid-19 pandemic resulting in substantial deterioration in the financial risk profile

LIQUIDITY INDICATORS - Stretched

The company's liquidity is considered stretched considering the near-full utilisation of its working capital limits and availment of the corporate loan to support its working capital during the last six months. The current ratio continues to be below unity as on 31 Mar 2020. The cash and cash equivalent as on 31 Mar 2021 (Prov) were Rs.0.02 Crs. The operating cycle increased from ~90 days in FY19 to ~130 days in FY20. The EBITDA of Rs.25.18 Crs was sufficient to cover the interest and finance cost of Rs.15.34 crs in FY20. The net cash accruals for FY20 and FY21 was sufficient to cover the debt obligations and a similar trend is expected in FY22 and FY23. Operations are expected to remain working capital intensive and timely recovery of receivables and efficient utilization of working capital facilities will be a key rating monitorable.

ABOUT THE ENTITY

Sree Rengaraj Ispat Industries Private Limited was incorporated in 2004 by Mr. Pandurangan Sampathkumar, Mr. Pandurangan Sivakumar and Mr. Pandurangan Srinivasan. The company’s registered office is at Erode, Tamil Nadu. Presently Mr. Pandurangan Sampathkumar is the Managing Director. The promoters’ father Mr. P.V.Pandurangan established Sree Rengaraj Steels in 1973, taking up the operations of rolling mills, as a proprietorship firm. Later this got incorporated as Sree Rengaraj Steels Alloys Private Limited and operates in Salem as a sister concern of SRIIPL. Sree Rengaraj Ispat Industries Private Limited is engaged in the manufacturing of steel, MS Billets, TMT bars and power generation.

Mr. Pandurangan Sampathkumar is the Managing Director. 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.	307.38	440.32
EBITDA	Rs.Crs.	25.18	38.89
PAT	Rs.Crs.	2.94	5.57
Tangible Net Worth	Rs.Crs.	79.93	76.99
Total Debt/Tangible Net Worth	Times	0.63	0.86
Current Ratio	Times	0.85	0.82

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	35.19	BWR BBB/Stable (Reaffirmation)	06Aug2020	BWR BBBStable (Reaffirmation)	05Jul2019	BWR BBBStable (Assignment)	NA	NA
Fund Based	ST	NA	NA	06Aug2020	BWR A3 (Reaffirmation)	05Jul2019	BWR A3 (Assignment)	NA	NA
Non Fund Based	ST	64.00	BWR A3 (Reaffirmation)	06Aug2020	BWR A3 (Reaffirmation)	05Jul2019	BWR A3 (Assignment)	NA	NA
Grand Total		99.19	(Rupees Ninety Nine Crores and Nineteen lakhs Only)

Rating Advisory, as on 09Aug2021
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
• Short Term Debt

Analytical Contacts
Priyanka RS Rating Analyst Board : +91 044 24663326 priyanka.rs@brickworkratings.com	Saakshi Kanwar Senior Manager Ratings saakshi.k@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	HDFC Bank	Cash Credit - Sanctioned	12.00	_	12.00
2	HDFC Bank	Bank Guarantee - Sanctioned	_	2.00	2.00
3	HDFC Bank	Letter of Credit - Sanctioned	_	50.00	50.00
4	South Indian Bank	Bank Guarantee - Sanctioned	_	_	0.00
5	South Indian Bank	Cash Credit - Sanctioned	_	_	0.00
6	South Indian Bank	Bill Discounted (BD) - Sanctioned	_	_	0.00
7	South Indian Bank	Letter of Credit - Sanctioned	_	_	0.00
8	State Bank Of India (SBI)	Covid -19 Emergency Line Credit - Sanctioned	0.32	_	0.32
9	State Bank Of India (SBI)	Corporate Loan - Sanctioned	15.87	_	15.87
10	State Bank Of India (SBI)	Cash Credit - Sanctioned	7.00	_	7.00
11	State Bank Of India (SBI)	Letter of Credit - Sanctioned	_	12.00	12.00
Total			35.19	64.00	99.19
TOTAL (Rupees Ninety Nine Crores and Nineteen lakhs Only)