Rating Rationale
October 03, 2018 | Mumbai
Danieli India Limited
Rated amount enhanced
 
Rating Action
Total Bank Loan Facilities Rated Rs.1025 Crore (Enhanced from Rs.900 Crore)
Long Term Rating CRISIL BBB+/Positive (Reaffirmed)
Short Term Rating CRISIL A2 (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has reaffirmed its ratings on bank facilities of Danieli India Limited (DIL) at 'CRISIL BBB+/Positive/CRISIL A2'
 
CRISIL had on August 23rd 2018 revised its outlook on the long-term bank facilities of DIL to 'Positive' from 'Stable'; reaffirmed the 'CRISIL BBB+/CRISIL A2' rating on the company's bank facilities.

The rating continues to reflect expected improvement in business risk profile of the company aided by doubling of order book of company to ~Rs 2,100 as of August 2018 against ~Rs 860 crores as of 31st December 2016. Order book is expected to remain strong aided by revival of capex cycle in steel industry. The improvement in orderbook is also expected to lead to better profitability aided by better capacity utilisation of Sri City plant of the company and impact of operating leverage leading to better absorption of fixed cost. The order book also reflects healthy mix of large clients and better customer and geographic diversity. This is mainly because parent has allowed DIL to operate in markets of Middle East and Africa.
 
The ratings also reflects sustained support from parent in form of financial, technical, operational and marketing support benefitting company's business and financial risk profile. Parent has exhibited consistent track record of financial support (equity and debt) which has helped maintained gearing of below 1 times over past 3 fiscals. Financial support from its parent is reflected in total funds infusion of Rs.442 crore over last 5 fiscals ended fiscal 2018 and an low interest outstanding debt of Rs 128 crore as of fiscal 2018 which accounted for ~40% of company's  overall debt. Parent, Danieli & C Officine Meccaniche Spa (Danieli SpA) also provided company's bankers with letter of comfort and provides operation and technical support as and when needed. It also provides support for procuring orders and provides guarantees to customers for the same.   Parent's financial risk profile has also improved for 6 months ended December 2017 with an improvement in operating profitability and increase in order book.
 
These rating strengths are partially offset by weak operating performance as of fiscal 2018 leading to weak profitability, large working capital requirement and vulnerability to risks related to cyclical demand in the steel industry.

Analytical Approach

For arriving at the ratings, CRISIL has applied its parent notch-up framework to factor in the support available from the parent.

Key Rating Drivers & Detailed Description
Strengths
* Strong operational, technical and financial support from ultimate parent Danieli SpA
In the Steel plant making sector Danieli SpA is one of the top three manufacturers in the world with a turnover and order book of Euro 2.5 billion and Euro 2.7 Billion respectively as on June 30, 2017. Danieli provides operational, technical and financial support to DIL. DIL executes all its large projects in consortium with the parent and a few of its fellow subsidiaries wherein the parent acts as principal contractor and provides technology and critical equipment. The latest technology of the parent and its extensive experience in the metal industry have helped the consortium win large contracts in India in the past two years. Danieli has also provided DIL with financial support through equity and low cost debt infusions helping stabilise company operations. It has also provided letter of comfort to all bankers of DIL.

Over the past five fiscals, Danieli infused equity of Rs.442 crore and has an outstanding term loan of Rs.128 crore as of 31st March 2018 which accounts for 40% of company's overall debt. This has helped maintain DIL's gearing at less than 1 time as on March 31, 2018. Going forward, CRISIL expects infusions to continue which will aid company's financial risk profile

* Established market position
From being just a furnace supplier, DIL has emerged as a one-stop shop for turnkey engineering, procurement and construction (EPC) projects, with limited civil work, for the steel industry. DIL, has gradually changed its product profile from small furnaces (up to 30 tonnes) to large electric arc and ladle furnaces, structural rolling mills, bar and wire rod mills, among others. Furthermore, the company also provides after-sales services and spares for the projects executed by it or by Danieli. The combination provides suitable expertise and experience for eligibility in bidding for large steel projects in India and neighbouring countries. DIL has set up a large manufacturing unit in Sricity, to reduce outsourcing, control quality and to cater to the group's requirements in the Asian markets.

Weakness
* Weak operating performance
DIL's operating performance remains weak because of lower operating efficiencies and modest revenue visibility due to persistent slowdown in the end-user industry. Operating margins of the company fluctuates based on order book and clienele and the companies continues to generate PAT losses. The company had a net loss of Rs 38 crore in fiscal 2018 as against a net loss of Rs 28 crore in fiscal 2017. The operating margins have been impacted from weaker absorption of fixed costs, due to extended stabilisation process for Sricity plant and weak demand from industry leading to a weak order book.
Going forward, operating margins to improve aided by improvement in order book and impact of operating leverage

* Working capital intensive operations
DIL operates in a highly working-capital'intensive industry, as reflected in its gross current assets (GCAs) of 397 days as on March 31, 2018. The high working capital intensity is mainly because of large receivables cycle. DIL works with public sector companies, which normally keep 15 percent of the project value as retention money which is payable only after successful commissioning of the entire plant. As the execution period ranges from 12 to 36 months, a substantial amount of money is blocked with customers in the form of retention money. DIL also provides 8 to 10 percent of the purchase value as advance to its suppliers, thus increasing its working capital requirements. The company's large working capital requirements are partially offset by advances 10 to 15 percent of the project value received from customers against orders.
CRISIL believes that DIL's operations will remain working capital intensive. High working capital intensity coupled with weak operating profitability constrains DIL's financial risk profile.

* Vulnerability to cyclicality in end-user industry
DIL's performance is closely linked with the investment climate in its end-user steel industry which is cyclical in nature.  India's steel industry has been facing tough times over the last three years owing to slower investments and economic slowdown. Fiscal 18 was a good year for steel industry and capex is expected to take place over next two years. CRISIL believes that DIL's revenue will remain susceptible to fluctuation in demand in its end-user steel industry.
Outlook: Positive

CRISIL believes DIL's operating performance will be weak albeit improvement over the medium term due to improving order book and improvement in end user industry.

Upside Scenario
* Translation of improvement in orderbook position to significant increase in operating income and profitability
* Sustenance of financial profile and working capital cycle

Downside Scenario
* Lower-than-expected ramp up in operations, profitability or support from parent
* More than expected increase in indebtedness levels.

About the Company

DIL was set up in Kolkata in 1996. The company undertakes turnkey projects'engineering, manufacturing, procurement, supply, commissioning, establishment of performance parameters, and handing over of plants, furnaces, and equipment'for plants and equipment in the steel industry.

In India, DIL has implemented equipment supply and erection works for several steel manufacturers including Rashtriya Ispat Nigam Ltd, Steel Authority of India Ltd, and a few private players such as JSW Steel and Bhushan Steel among others. The company has set up a plant in Andhra Pradesh at a cost of Rs.500 crore in 2013-14.

Italy-based Danieli SpA, through its subsidiary, Industrielle Beteiligung SA, holds 100 per cent stake in DIL. Danieli SpA designs and constructs plants and caters to all equipment requirements for the iron and steel industry. The company also produces special steel.

Danieli SpA has subsidiaries in the US, Holland, Germany, Sweden, the UK, France, India, Thailand, China, Austria, Vietnam, and Japan. It is the third-largest supplier of plants and equipment to the metal industry, and is the market leader in the mini-mill and long-product rolling plant sector.

Key Financial Indicators
As on / for the period ended March 31 2018 2017
Revenue Rs crore 610 674
Adjusted profit after tax Rs crore -38 -28
PAT margins % -6.2 -4.1
Adjusted Debt/Adjusted Net worth Times 0.8 0.7
Interest coverage Times 0.5 0.9

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 Bank Guarantee NA NA NA 345 CRISIL A2
NA Bank Guarantee % NA NA NA 110 CRISIL A2
NA Bank Guarantee * NA NA NA 113 CRISIL A2
NA Bank Guarantee ^ NA NA NA 75 CRISIL A2
NA Proposed Long Term Bank Loan Facility NA NA NA 7 CRISIL BBB+/Positive
NA Cash Credit NA NA NA 35 CRISIL BBB+/Positive
NA Cash Credit @ NA NA NA 40 CRISIL BBB+/Positive
NA Letter of Credit* NA NA NA 45 CRISIL A2
NA Overdraft # NA NA NA 150 CRISIL BBB+/Positive
NA Working Capital Demand Loan $ NA NA NA 55 CRISIL BBB+/Positive
NA Working Capital Demand Loan NA NA NA 50 CRISIL BBB+/Positive
* fully interchangeable between bank guarantee and Letter of credit
@ includes corporate card facility of Rs 1.4 crores
# fully interchangeable with Bill discounting, PCFC, Export Bill Purchased, Buyer's Credit & Invoice financing
^interchangeable with letter of credit and upto Rs 50 crore with WDCL facility
% interchangeable with letter of credit upto Rs 20 crore, WDCL facility upto Rs 100 crore and Packing credit facility upto Rs 40 crore
$ fully interchangeable with Packing credit facility
Annexure - Rating History for last 3 Years
  Current 2018 (History) 2017  2016  2015  Start of 2015
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund-based Bank Facilities  LT/ST  337.00  CRISIL BBB+/Positive  23-08-18  CRISIL BBB+/Positive  26-04-17  CRISIL BBB+/Stable      21-12-15  CRISIL BBB+/Negative  CRISIL A-/Stable 
                    03-02-15  CRISIL A-/Negative   
Non Fund-based Bank Facilities  LT/ST  688.00  CRISIL A2  23-08-18  CRISIL A2  26-04-17  CRISIL A2      21-12-15  CRISIL A2  CRISIL A2+ 
                    03-02-15  CRISIL A2+   
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
Bank Guarantee 345 CRISIL A2 Bank Guarantee 340 CRISIL A2
Bank Guarantee % 110 CRISIL A2 Cash Credit 160 160
Bank Guarantee * 113 CRISIL A2 Letter of Credit 200 CRISIL A2
Bank Guarantee ^ 75 CRISIL A2 Long Term Loan** 150 CRISIL BBB+/Positive
Cash Credit 35 CRISIL BBB+/Positive Proposed Long Term Bank Loan Facility 50 CRISIL BBB+/Positive
Cash Credit @ 40 CRISIL BBB+/Positive -- 0 --
Letter of Credit * 45 CRISIL A2 -- 0 --
Overdraft # 150 CRISIL BBB+/Positive -- 0 --
Proposed Long Term Bank Loan Facility 7 CRISIL BBB+/Positive -- 0 --
Working Capital Demand Loan $ 55 CRISIL BBB+/Positive -- 0 --
Working Capital Demand Loan 50 CRISIL BBB+/Positive -- 0 --
Total 1025 -- Total 900 --
**Loan from parent company (Danieli & C. Officine Meccaniche SPA)
* fully interchangeable between bank guarantee and Letter of credit
@ includes corporate card facility of Rs 1.4 crores
# fully interchangeable with Bill discounting, PCFC, Export Bill Purchased, Buyer's Credit & Invoice financing
^interchangeable with letter of credit and upto Rs 50 crore with WDCL facility
% interchangeable with letter of credit upto Rs 20 crore, WDCL facility upto Rs 100 crore and Packing credit facility upto Rs 40 crore
$ fully interchangeable with Packing credit facility
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
Criteria for Notching up Stand Alone Ratings of Companies based on Parent Support

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