Rating Rationale
March 22, 2022 | Mumbai
Hero Steels Limited
 
Rating Action
Total Bank Loan Facilities RatedRs.450 Crore
Long Term RatingCRISIL A/Stable
Short Term RatingCRISIL A1
 
Rs.25 Crore Commercial PaperCRISIL A1
1 crore = 10 million
Refer to Annexure for Details of Instruments & Bank Facilities
This Rating Rationale is published solely to update the bank-wise facility details as provided by the rated entity; other sections are same as the previous Rating Rationale dated November 22, 2021.

Detailed Rationale

CRISIL Ratings on the bank facilities and commercial paper programme of Hero Steels Ltd (Hero Steels) continue to reflect the strong managerial and financial support that Hero Steels receives as part of the Hero Enterprise group, promoted by Mr Sunil Kant Munjal. The ratings also reflect the company's established market position in the secondary steel products segment in North India. These strengths are partially offset by weak but improving debt protection metrics and exposure to risks inherent in the steel industry.

Analytical Approach

CRISIL Ratings has considered the standalone business and financial risk profiles of Hero Steels. CRISIL Ratings has also factored in the company’s high strategic importance to, and strong operational and financial linkages with, the Hero Enterprise group in its assessment.

Key Rating Drivers & Detailed Description

Strengths:

  • Strong managerial and financial support from the Hero Enterprise group: The company is wholly owned by the Hero Enterprise group through Global IVY Ventures LLP. It benefits from the group’s ample liquidity, post-realignment between the members of Dr Brijmohan Lall Munjal's family in August 2016. The promoter-backed loan of Rs 48 crore as on March 31, 2021, carries a lower cost and has thus, helped bring down the overall cost of debt. The company has received unsecured loans from the promoter in the past. Furthermore, Mr Sunil Kant Munjal is on the board of Hero Steels, signifying strong management support.

 

  • Established market position in the secondary steel products segment in North India: The company has healthy relationships with large customers such as Hero MotoCorp Ltd ('CRISIL AAA/FAAA/Stable/CRISIL A1+') and Maruti Suzuki India Ltd ('CRISIL AAA/Stable/CRISIL A1+'). Sales to these entities was higher (accounting for 60% of total revenue) in the past, but has dropped to below 10% in fiscal 2021. The company has been diversifying its revenue base and shifting its focus towards open market customers; this has helped in pricing products depending on market conditions. Furthermore, the company is ramping up the tube mill (facility with rated capacity of 24000 tonne per annum commissioned in October 2019; operated at around 40% utilisation in fiscal 2021 despite lower production during national shutdown due to Covid-19 during first quarter), leading to higher realisations and lower wastage. The company also plans to increase the tube mill capacity to cater to the increasing demand. Diversification in customer base and increase of value-added products should lend stability to revenue and improve profitability over the medium term.

 

Weaknesses:

  • Weak but improving debt protection metrics: The debt protection metrics are weak but have started improving with improvement in the operating performance. Adjusted interest coverage and net cash accrual to total debt ratios improved to at 1.7 time and 0.04 time, respectively, in fiscal 2021 from 1 time and 0.01 time, respectively, in the previous fiscal. The improvement in operating performance during fiscal 2021 is driven by ramp-up of the tube-mill leading to higher production as compared previous fiscal supported by demand growth in the steel industry. The operating performance continues to remains strong during the first half of fiscal 2022 as well. Company is commissioning 2 additional lines of tube-mill and this is expected to support the operating margins. The shift towards higher-margin customers and value-added products, along with the company’s efforts to improve operating efficiencies, should further enhance debt protection metrics over the medium term. 

 

  • Exposure to risk inherent in the steel industry: The steel industry is inherently cyclical and remains vulnerable to volatility in raw material prices and price realisations. Also, Hero Steels has limited bargaining power with its suppliers and customers, given the small scale of operations. Earnings before interest, taxes, depreciation, and amortisation margin has declined over the years through fiscal 2018 as the company was not able to pass on any hike in raw material cost to large customers. However, diversification towards the open market and sale of value-added products has improved the margin over the past 3 years through fiscal 2021. This is expected to further support the margins over the medium term. The impact of these measures on operating performance will remain a key rating sensitivity factor.

Liquidity: Adequate

Liquidity remains adequate because of healthy financial flexibility, driven by strong linkages with the Hero Enterprise group. Cash and cash equivalents stood at Rs 4.5 crore as on September 30, 2021. Utilisation of bank limit of Rs 144 crore averaged 54% over the 12 months through July 31, 2021. The company is expected to meet its debt obligation and capital expenditure (capex) requirements for fiscal 2022, through its annual cash accrual and need-based funding support from the group.

Outlook Stable

CRISIL Ratings believes Hero Steel’s overall operating performance should sustain over the medium term, driven by its established market position, ramp-up of the tube mill facility, and need-based support from the Hero Enterprise group.

Rating Sensitivity factors

Upward factors

•             Significant improvement in operating performance with interest coverage ratio of over 3 times on a sustainable basis

•             Higher-than-expected ramp-up of the tube mill facility, driving significant improvement in net cash accrual and debt protection metrics

 

Downward factors

•             Considerable drop in scale of operations or profitability leading to operating losses

•             Larger-than-expected capex weakening the financing risk profile

•             Any change in stance of support by the promoter

About the Company

Hero Steels was set up after the cold rolled (CR) division of Hero Cycles Ltd ('CRISIL AA/Stable/CRISIL A1+') was hived off in August 2012. As part of the realignment among the members of Munjal family, the CR division of Hero Cycles Ltd was transferred to Dr Brijmohan Lall Munjal's family, which set up Hero Steels for housing this business. In August 2016, there was a realignment among the family members of Dr Brijmohan Lall Munjal. Hero Steels is now owned by Global IVY, which is owned by the companies promoted by the Hero Enterprise group. Hero Steels manufactures CR strips from hot-rolled steel. It has an installed capacity of 180,000 tonne per annum. The company commissioned a tube mill facility with an annual capacity of 24,000 tonne per annum on October 1, 2019.

Key Financial Indicators*

Particulars

Unit

2021

2020

Operating income

Rs crore

655.6

591.5

Profit after tax (PAT)

Rs crore

2.3

(3.4)

PAT margin

%

0.3

(0.6)

Adjusted debt/adjusted networth

Times

1.87

1.57

Adjusted Interest coverage

Times

1.7

1.0

*as per analytical adjustments made by CRISIL Ratings

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL Ratings' complexity levels are assigned to various types of financial instruments. The CRISIL Ratings' complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL Ratings' 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 crore) Complexity levels Rating assigned with outlook
NA Cash Credit ^ NA NA NA 106 NA CRISIL A/Stable
NA Cash Credit NA NA NA 18 NA CRISIL A/Stable
NA Letter of Credit $ NA NA NA 25 NA CRISIL A1
NA Letter of Credit NA NA NA 50 NA CRISIL A1
NA Non fund based limits* NA NA NA 65 NA CRISIL A1
NA Working Capital Demand Loan NA NA NA 45 NA CRISIL A/Stable
NA Working Capital Term Loan NA NA 27-Mar-26 20.5 NA CRISIL A/Stable
NA Term Loan NA NA Dec-26 50 NA CRISIL A/Stable
NA Proposed Short Term Bank Loan Facility NA NA NA 30.5 NA CRISIL A1
NA Sales Bill Discounting NA NA NA 20 NA CRISIL A1
NA Receivables Factoring NA NA NA 20 NA CRISIL A1
NA Commercial Paper NA NA 7-365 days 25 Simple CRISIL A1

*Interchangeable with fund based limits upto Rs. 45 crores

^Fully interchangeable with working capital demand loan

$ Interchangeable with bank guarantee

Annexure - Rating History for last 3 Years
  Current 2022 (History) 2021  2020  2019  Start of 2019
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund Based Facilities ST/LT 310.0 CRISIL A1 / CRISIL A/Stable   -- 22-11-21 CRISIL A1 / CRISIL A/Stable 31-10-20 CRISIL A/Stable 07-10-19 CRISIL A/Stable CRISIL A/Stable
      --   -- 26-10-21 CRISIL A/Stable   -- 31-01-19 CRISIL A/Stable --
Non-Fund Based Facilities ST 140.0 CRISIL A1   -- 22-11-21 CRISIL A1 31-10-20 CRISIL A1 07-10-19 CRISIL A1 CRISIL A1
      --   -- 26-10-21 CRISIL A1   -- 31-01-19 CRISIL A1 --
Commercial Paper ST 25.0 CRISIL A1   -- 22-11-21 CRISIL A1 31-10-20 CRISIL A1 07-10-19 CRISIL A1 CRISIL A1
      --   -- 26-10-21 CRISIL A1   -- 31-01-19 CRISIL A1 --
All amounts are in Rs.Cr.
Annexure - Details of Bank Lenders & Facilities
Facility Amount (Rs.Crore) Name of Lender Rating
Cash Credit 5 Punjab National Bank CRISIL A/Stable
Cash Credit& 5 Kotak Mahindra Bank Limited CRISIL A/Stable
Cash Credit^ 85 HDFC Bank Limited CRISIL A/Stable
Cash Credit^ 20 Axis Bank Limited CRISIL A/Stable
Cash Credit^ 1 ICICI Bank Limited CRISIL A/Stable
Cash Credit 8 State Bank of India CRISIL A/Stable
Letter of Credit 20 Axis Bank Limited CRISIL A1
Letter of Credit# 10 Punjab National Bank CRISIL A1
Letter of Credit# 15 ICICI Bank Limited CRISIL A1
Letter of Credit 30 HDFC Bank Limited CRISIL A1
Non-Fund Based Limit! 65 Kotak Mahindra Bank Limited CRISIL A1
Proposed Short Term Bank Loan Facility 9.5 Not Applicable CRISIL A1
Proposed Short Term Bank Loan Facility 21 Not Applicable CRISIL A1
Receivable Factoring 20 Axis Bank Limited CRISIL A1
Sales Bill Discounting 20 The Federal Bank Limited CRISIL A1
Term Loan 50 HDFC Bank Limited CRISIL A/Stable
Working Capital Demand Loan 20 IndusInd Bank Limited CRISIL A/Stable
Working Capital Demand Loan 25 The Federal Bank Limited CRISIL A/Stable
Working Capital Term Loan 20.5 HDFC Bank Limited CRISIL A/Stable
This Annexure has been updated on 22-Mar-2022 in line with the lender-wise facility details as on 22-Nov-2021 received from the rated entity.
& - Interchangeable with working capital demand loan, short-term loan, sale bill discounting, and purchase bill discounting upto Rs 50 Crore
^ - Fully interchangeable with working capital demand loan
# - Interchangeable with bank guarantee
! - Interchangeable with fund based limits upto Rs. 45 crores
Criteria Details
Links to related criteria
CRISILs Approach to Financial Ratios
Rating criteria for manufaturing and service sector companies
CRISILs Bank Loan Ratings - process, scale and default recognition
CRISILs Bank Loan Ratings
Rating Criteria for Steel Industry
CRISILs Criteria for rating short term debt

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