Detailed Rationale

CRISIL Ratings has revised the outlook on long term bank facilities of Bajaj Steel Industries Limited (BSI) to ‘Positive’ from ‘Stable’ while reaffirming the rating at ‘CRISIL A-’. The rating on short term bank facilities is reaffirmed at ‘CRISIL A2+’. 

 

The revision in outlook reflects expectations that credit risk profile may improve over the medium term backed by healthy execution of high-margin export orders.

 

Performance for fiscal 2021 was substantially better than previous year due to increase in the export sales. Revenue has increased by 23% in fiscal 2021 while operating profit before depreciation, interest and taxes (OPBDIT) margin has improved to 18.9% in fiscal 2021 from 10.8% a year ago. The performance has also sustained in first half of fiscal 2022 with revenue increasing by 21% in 6-month period ended September 2021 against the corresponding period last year and OPBDIT margins improving to 14.9% against 12.6% against the corresponding period last year.   

 

BSI keeps on bidding for new orders and has also expanded its geographic reach to more than 30 countries, which is expected to sustain performance. Substantial portion of the current order books consists of new customers. BSI is further increasing the revenue mix from PEB segments in addition to exports to diversify growth.

 

Consequent to strong operational performance, the capital structure and debt protection metrics have improved and are likely to sustain at a healthy level over the medium term.

 

The ratings also factor in an established market position, improved geographical diversity, the extensive experience of the promoters in the cotton ginning machinery business, and strong financial risk profile. These strengths are partially offset by susceptibility to economic downturns and to volatility in cotton demand-supply and prices, and moderate working capital requirement.

Analytical Approach

For arriving at the ratings, CRISIL has fully consolidated the business and financial risk profiles of BSI and its wholly owned subsidiaries-Bajaj Coneagle LLC, USA, and Bajaj Steel Industries (U) Ltd, Uganda-because of strong financial and operational linkages.

 

Unsecured loans (outstanding at Rs 37.21 crore as on Aug 31, 2021) extended by the promoters and related parties have been treated as debt.  That’s because these loans bear interest, which is being paid.

 

Please refer Annexure - List of entities consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

• Established market position and extensive experience of the promoters

The company has been manufacturing cotton ginning machinery since 1961, and in 2008 was awarded the ‘Largest and Modern Cotton Ginning & Pressing Machinery Manufacturer in India’ by the Ministry of Textiles, Government of India. BSI is one of the very few integrated ginning machinery manufacturers in India and has more than 60% market share in the country. It is also the only company in the world that manufactures cotton ginning machinery based on all the four technologies available in the industry. Besides a strong domestic presence, the company also exports to several countries in the Indian subcontinent, the US, Southeast Asia, Africa, Australia and Europe and has been able to secure several new international clients.

 

Furthermore, benefits from the extensive experience of the promoters (members of the Bajaj family), who have been in the cotton business for around 60 years, continue. The current promoters, led by Mr Rohit Bajaj (managing director), are actively involved in operations and extend timely, need-based financial support.

 

• Improving geographical diversification, providing stability to profitability

Over the past few years, the company has been increasing its international footprint due to high competition from the unorganised sector in the domestic market and to safeguard itself from the cyclicality of domestic cotton production. The high proportion of fixed operating costs had resulted in a significant dip in the operating margin during a slowdown in the domestic market. In fiscal 2017, the margin dropped to 1.4% as revenue was adversely impacted by demonetisation. However, with increased geographical diversification, the company has been able to improve the scale despite a slowdown in domestic cotton production. Revenue grew by a CAGR of 27.6% between fiscals 2018 to fiscal 2021, backed by strong contribution from export orders. Exports, which accounted for only about 14% of sales in fiscal 2016, accounted for 53% in fiscal 2021, indicating the ability to successfully cater to international markets. The operating margin improved to 18.9% in fiscal 2021 from 1.4% in fiscal 2017 and may sustain at over 10% in the medium term. Furthermore, the order book is well diversified across multiple clients, thereby reducing counterparty risk.

 

• Strong financial risk profile

Outstanding debt was low at about Rs 62 crore as on Sep 30, 2021, of which about Rs 37 crore comprised unsecured loans from the promoters and related parties. The networth grew to over Rs 171 crore as on March 31, 2021, from Rs 56 crore as on March 31, 2017, supported by steady improvement in cash accrual since fiscal 2018. Consequently, the total outside liabilities to tangible networth ratio and gearing were healthy at 1.13 times and 0.3 time, respectively, as on March 30, 2021. The interest coverage ratio is expected to remain healthy at above 5 times over the medium term.

 

Weaknesses:

• Susceptibility to economic downturns and to volatility in cotton demand-supply and prices

Demand for the company’s products comes from new ginning capacities being set up, and replacement demand from current ones, and is linked to cotton production levels. Domestic production of cotton has been volatile in the past as it is linked to monsoons and is also impacted by various other factors such as pest infestations and farmers switching to more profitable crops. Though the company has been diversifying into different regions across the world to mitigate these risks, growth in business will continue to be constrained by the volatility in global cotton production. The US is a key export market and production there has been impacted in the recent past due to storms. Additionally, economic growth and policy changes may impact capital expenditure plans of customers, as seen during demonetisation and reduced subsidies or minimum support prices from the government authorities in the past. The impact of these factors is reflected in the weak performance in fiscals 2016 and 2017. However, the company’s susceptibility to a slowdown in any specific geography has reduced significantly in the past 2-3 years.

 

• Moderate working capital requirement

The company operates mainly in two divisions: steel and related products (largely manufacture of ginning machinery) and masterbatches. It enjoys favourable payment terms in the steel division, where it receives a significant amount of advance payment before dispatch. Receivables are hence largely related to the masterbatches division, where there have been some delays in payment from dealers. Gross current assets stood at 164 days as on March 31, 2021, which has improved from over 200 days as on March 31, 2018, largely due to lower revenue from the masterbatches segment, where revenue has reduced from 28% of total revenue in fiscal 2018 to 12% in fiscal 2021. The receivables cycle is expected to improve, as the proportion of revenue from the steel division should grow while that from the masterbatches segment is expected to reduce. However, the impact of higher execution of export orders on the working capital cycle will remain a key monitorable.

Liquidity: Strong

Liquidity is supported by healthy cash accrual, moderate unutilised bank lines, and cash and cash equivalents. Expected cash accrual are in moderate range, against negligible debt payments over medium term. Average utilisation of the fund-based bank limit was moderate at 25% during the 6 months through Aug 2021.  Also, the unencumbered cash and bank balance was Rs 74 crore as on August-2021.

Outlook: Positive

CRISIL believes credit profile of BSI may improve over the medium term due its established position in the cotton ginning machine manufacturing business backed by a strong financial risk profile.

Rating Sensitivity factors

Upward factors

• Sustained revenue growth while operating margin of more than over 10% are maintained
• Continued growth in revenue from exports
• Sustenance of the financial risk profile and working capital cycle

 

Downward factors

• Sustained decline in the operating margin to below 8%
• Sustained fall in revenue from exports
• A significant increase in the working capital cycle or higher-than-expected debt

About the Company

BSI, incorporated in 1961, manufactures Cotton Processing Machineries, equipment and its spare parts, Pre-engineered Buildings, Electrical panels, Fire-fighting equipment, and plastic masterbatches. The company is one of the few players with operations across the entire ginning process value chain. It has a registered office and four manufacturing units in Nagpur, Maharashtra. The steel and plastic divisions contributed around 86% and 14%, respectively, to revenue in fiscal 2020.

 

In 2012, BSI set up Bajaj Coneagle LLC as its wholly owned subsidiary in US. The company owns another wholly owned subsidiary in Uganda, namely Bajaj Steel Industries (U) Ltd, both the subsidiaries are in the business of selling and marketing of products of holding company as well as other product and services.

Key Financial Indicators

Consolidated financials as on / for the period ended March 31		2021	2020
Revenue	Rs crore	516	419
PAT	Rs crore	66	24
PAT margin	%	12.7%	5.6%
Adjusted debt/adjusted networth	Times	0.30	0.68
Interest coverage	Times	11.50	5.36

 

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue Size (Rs Cr)	Complexity levels	Rating outstanding with Outlook
NA	Bank Guarantee@	NA	NA	NA	40	NA	CRISIL A2+
NA	Cash Credit^	NA	NA	NA	30	NA	CRISIL A-/Positive
NA	Cash Credit!	NA	NA	NA	15	NA	CRISIL A-/Positive
NA	Proposed Bank Guarantee	NA	NA	NA	10	NA	CRISIL A-/Positive
NA	Proposed Overdraft Facility	NA	NA	NA	8	NA	CRISIL A-/Positive
NA	Loan Equivalent Risk Limits	NA	NA	NA	3	NA	CRISIL A2+
NA	Foreign Bill Discounting	NA	NA	NA	10	NA	CRISIL A2+

@ Includes sublimit of Foreign and Inland letter of Credit of Rs. 30 Cr. 

^ Includes Sublimit of Pre-shipment Finance and Post –shipment Finance of Rs. 30 Cr. each, sublimit of Foreign Currency & Indian Rupee – WCDL   of Rs. 15 Cr., SBLC sublimit of Rs. 15 Cr., sublimit of Post Shipment and Post acceptance finance of Rs. 10 Cr. each.   

! Includes sub limits of letter of credit of Rs 4 crore, bank guarantee limit of Rs. 0.5 crore and LER limit of Rs 2 crore

Annexure – List of entities consolidated

Names of Entities Consolidated	Extent of Consolidation	Rationale for Consolidation
Bajaj Coneagle LLC, USA	Full	Strong operational and financial linkages with BSI
Bajaj Steel Industries (U) Ltd., Uganda	Full	Strong operational and financial linkages with BSI