CRISIL has downgraded its ratings on Balbir Metals & Power Pvt Ltd (BMPPL, part of the Balbir group) to 'CRISIL BB+/Stable/CRISIL A4+' from 'CRISIL BBB-/Stable/CRISIL A3'.
 
The downgrade reflects the decline in Balbir group's profitability following slowdown in demand from the construction and engineering sectors, and CRISIL's expectation that the group's growth and profitability are expected to remain under pressure in the near-term. While the group has been able to maintain growth in 2012-13 (refers to financial year, April 1-March 31) and 2013-14, the intensity of competition and exposure to foreign exchange (forex) fluctuations is expected to lead to operating margin declining to less than 3 per cent in 2013-14.
 
The group is in the process of commissioning a new plant in Gujarat. The debt related to the capital expenditure (capex) is expected to be taken in Q4 2013-14, leading to higher gearing. CRISIL expects that the group's debt protection metrics particularly will weaken considerably in 2013-14, given the decline in margin and increase in debt. While financial risk profile is expected to improve after the plant becomes operational, traction on the plant and its off take are likely to be realized only by the second half of 2014-15; and the recovery is likely to be gradual.
 
The ratings continue to factor in the Balbir group's moderate net worth level, which drives the group's financial flexibility; and the group's promoters' extensive experience in the steel industry. These rating strengths are partially offset by the Balbir group's geographic concentration and susceptibility to intense competition and demand variations in its key customer segments.
 
For arriving at its ratings, CRISIL has combined the business and financial risk profiles of BMPPL, Balbir Rolling Mills Ltd (BRML), and Balbir Profiles Pvt Ltd (BPPL), collectively referred to as the Balbir group. This is because the three entities are managed by the same promoters, are in the same line of business, have operational linkages, and have fungible cash flows.

CRISIL believes that Balbir Group will continue to maintain its established market position over the medium term. The outlook may be revised to 'Positive' if the group improves its profitability and scale of operations substantially, while enhancing its financial risk profile. Conversely, the outlook may be revised to 'Negative' if the revenues or operating margin decline sharply, weakens its financial risk profile and liquidity.

Incorporated in 1997, BRML manufactures thermo-mechanically treated (TMT) bars, angles, channels, and beams, which are used in the construction, telecom, power, and engineering industries. The company commenced operations by manufacturing structures in 2001 and diversified into manufacturing TMT bars in 2004. Acquired in 2007, BMPPL manufactures ingots and structures. Started in 2000, BPPL manufactures ingots.
 
The promoter, Dr. Prabhat Bhushan, and his son, Mr. Vikas Bhushan, are actively involved in the group's operations. The promoters also have several other group companies, which manufacture long steel products, windmills, and lease properties.
 
BMPPL reported a profit after tax (PAT) of Rs.0.2 million on net sales of Rs.1.2 billion for 2012-13, as against a PAT of Rs.1.0 million on net sales of Rs.1.2 billion for 2011-12.