Rating Rationale
October 07, 2019 | Mumbai
Bhulani Steel
Rating Reaffirmed
 
Rating Action
Total Bank Loan Facilities Rated Rs.34 Crore
Long Term Rating CRISIL BB/Stable (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has reaffirmed its 'CRISIL BB/Stable' rating on the bank facilities of Bhulani Steel (BS part of the Bhulani group).

The ratings continue to reflect a moderate scale of operations with above-average operating efficiency, the extensive experience of the promoters in the stainless steel industry, their continued funding support, and a moderate capital structure. These strengths are partially offset by average debt protection metrics, and working capital-intensive operations, leading to a stretch in liquidity. Furthermore, the group is susceptible to volatility in raw material prices and to intense competition.

Analytical Approach

For arriving at the ratings, CRISIL has combined the business and financial risk profiles of BS and A B Rolling mills Private Limited (ABRM). That's because the two entities, together referred to as the Bhulani group, are under a common management and in the same business, and have operational and financial linkages.

Of the total unsecured loans of Rs 26.29 crore as on March 31, 2019, Rs 14 crore is treated as neither debt nor equity, because though these loans bear interest, they are subordinate to bank debt and are expected to remain in the business over the medium term.

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:
* Moderate scale of operations with above-average operating efficiency
Revenue was moderate at Rs 265 crore in fiscal 2019. Also, the operating profitability margin has been healthy at 12-15% historically, though there was a drop in fiscal 2019 to 9.6% from 12.4% in fiscal 2018 due to high volatility in steel prices. The margin is expected to be around 11% over the medium term.
 
* Moderate capital structure:
The networth was Rs 42 crore and the gearing 3.16 times as on March 31, 2019. The gearing is expected to remain at around 3 times over the medium term.
 
* Extensive industry experience of the promoters and their funding support
The promoters have been in the stainless steel sheet and utensils business for almost two decades. This has led to an established position in the industry. They have also been supporting the business through unsecured loans.

Weaknesses:
* Susceptibility to volatile stainless steel prices and intense competition:
The cost of stainless steel billets, a key input, formed over 70% of the manufacturing cost in fiscal 2019. As billets are procured from large suppliers such as Jindal Steel Ltd, the group has limited bargaining power. Furthermore, despite order-backed inventory of around 60 days, there is less scope to pass on any unfavourable fluctuation in raw material prices due to intense competition.
 
* Working capital-intensive operations
Gross current assets (GCAs) were high at 217 days as on March 31, 2019, driven by large receivables of 165 days, as intense competition necessitates large credit to customers. Against this, the group gets limited credit of around 30 days from authorised traders of large suppliers like Jindal Steel and around 70 days from other traders. The working capital-intensive nature of operations has led to full utilisation of the bank limit.
 
* Average debt protection metrics
The interest coverage and net cash accrual to total debt ratios were 1.4 times and 0.06 time, respectively, for fiscal 2019.

Liquidity: Stretched
The bank limit was fully utilised during the 12 months through August 2019. Expected net cash accrual of around Rs 7 crore will be sufficient to meet repayment obligation of around Rs 5.3 crore in fiscal 2020. Liquidity is supported by significant unsecured loans of around Rs 26.29 crore as on March 31, 2019, from the promoters, Rs 14 crore of which is expected to be retained in the business over the medium term.
Outlook: Stable

CRISIL believes the Bhulani group will continue to benefit from the extensive experience of its promoters and their funding support.

Rating sensitivity factors
Upward factor
* Sustained improvement in the working capital cycle with GCAs lower than 150 days, leading to better liquidity
* Increase in the scale of operations and operating margin, resulting in higher net cash accrual

Downward factor
* Decline in the operating margins to below 8%
* Unanticipated withdrawals by the promoters, significant debt-funded capital expenditure, or substitution of unsecured loans from the promoters with external debt, leading to deterioration in the financial risk profile

About the Group

Set up by the Gala, Gosar, and Gada families, the Bhulani group manufactures stainless steel strips and sheets (70% of revenue), and utensils (30%).

ABRM, incorporated in 2007, manufactures stainless steel strips and sheets used for making utensils. Its unit in Umargaon, Gujarat, has an installed capacity of 2,300 tonne per month (tpm) for strips and sheets, and 200 tpm for utensils.

BS, a partnership firm established in 2012, manufactures stainless steel utensils at its unit in Palghar, Maharashtra, which has capacity to manufacture 300 tpm. It procures raw material almost entirely from ABRM.

Key Financial Indicators
As on / for the period ended March 31  Units 2019 2018
Operating income Rs crore 265.8 241.5
Reported profit after tax (PAT) Rs crore 2.5 3.2
PAT margins % 0.93 1.31
Adjusted Debt/Adjusted Net worth Times 3.16 2.87
Interest coverage Times 1.4 1.7

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments.
Annexure - Details of Instrument(s)
ISIN Name of instrument Date of allotment Coupon
Rate (%) 		Maturity date Issue Size (Rs Cr) Rating assigned with outlook
NA Cash Credit NA NA NA 21.00 CRISIL BB/Stable
NA Loan Against Property NA NA NA 4.00 CRISIL BB/Stable
NA Rupee Term Loan NA NA Mar-2022 9.00 CRISIL BB/Stable

Annexure - List of entities consolidated
Fully Consolidated Entities
A B Rolling Mills Private Limited
Bhulani Steel
Annexure - Rating History for last 3 Years
  Current 2019 (History) 2018  2017  2016  Start of 2016
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund-based Bank Facilities  LT/ST  37.50  CRISIL BB/Stable      29-11-18  CRISIL BB/Stable  28-09-17  CRISIL BB/Stable  09-06-16  CRISIL BB/Stable  CRISIL BB/Stable 
All amounts are in Rs.Cr.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Cash Credit 21 CRISIL BB/Stable Cash Credit 6 CRISIL BB/Stable
Loan Against Property 4 CRISIL BB/Stable Long Term Loan 28 CRISIL BB/Stable
Rupee Term Loan 9 CRISIL BB/Stable -- 0 --
Total 34 -- Total 34 --
Links to related criteria
CRISILs Approach to Financial Ratios
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating criteria for manufaturing and service sector companies
Rating Criteria for Steel Industry
CRISILs Bank Loan Ratings
CRISILs Criteria for Consolidation

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