Rating Rationale
November 22, 2023 | Mumbai
Hero Steels Limited
Ratings Reaffirmed
 
Rating Action
Total Bank Loan Facilities RatedRs.450 Crore
Long Term RatingCRISIL A/Stable (Reaffirmed)
Short Term RatingCRISIL A1 (Reaffirmed)
 
Rs.25 Crore Commercial PaperCRISIL A1 (Reaffirmed)
Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings.
1 crore = 10 million
Refer to Annexure for Details of Instruments & Bank Facilities

Detailed Rationale

CRISIL Ratings has reaffirmed its 'CRISIL A/Stable/CRISIL A1' ratings on the bank facilities and commercial paper programme of Hero Steels Ltd (Hero Steels).

 

The ratings continue to centrally factor in 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 established market position of the company in the secondary steel products segment in North India. These strengths are partially offset by weak 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. In its assessment, CRISIL Ratings has also factored in the strong operational and financial linkages the company has with the Hero Enterprise group and its high strategic importance to the group.

Key Rating Drivers & Detailed Description

Strengths:

  • Strong managerial and financial support from the Hero Enterprise group: Hero Steels is wholly owned by the Hero Enterprise group through Global IVY Ventures LLP (Global IVY). It benefits from the ample liquidity of the group, post realignment between the family members of Dr Brijmohan Lall Munjal in August 2016. The company has received unsecured loans from the promoter in the past at lower borrowing cost. Furthermore, Mr. Sunil Kant Munjal is on the board of Hero Steels, signifying strong management support going forward.

 

  • Established market position in the secondary steel products segment in North India: Hero Steels has been diversifying its revenue base and shifting its focus towards open market customers, which has helped in pricing products depending on market conditions. While sales realisations were impacted by volatility in commodity prices, the company has achieved utilisation level of 76% during the first half of the current fiscal (from 71% during fiscal 2023). Further, the company plans to increase the tube mill capacity to meet rising demand. Diversification of the customer base and increase in value-added products should lend stability to revenue and improve profitability over the medium term.

 

Weaknesses:

  • Weak debt protection metrics: Debt protection metrics are weak but are expected to improve with improvement in the operating performance over the medium term. Adjusted gearing stood at 1.9 times as on March 31, 2023 (1.8 times a year ago) and net cash accrual to total debt ratio at 0.03 time for fiscal 2023 (0.06 time in the previous fiscal). However, with growth in the end-user industry, demand for company’s products is expected to increase. Further, Hero Steels is in process of adding two additional lines (~ 18,000 tonne per annum) of tube mill over the medium term; this is expected to support the operating margin. The shift towards higher-margin customers and value-added products, along with the company’s efforts to improve operating efficiency, should 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 as the company was not able to pass on increase in raw material cost to large customers. However, diversification towards the open market and sale of value-added products should improve the operating margin over the medium term. Impact of these measures on operating performance will remain a key rating sensitivity factor.

Liquidity: Adequate

Liquidity is supported by healthy financial flexibility, driven by strong linkages with the Hero Enterprise group. Utilisation of fund-based bank limit of Rs 140 crore averaged around 62% over the 12 months ended September 30, 2023. The company is expected to meet its debt obligation and capital expenditure (capex) requirement for fiscal 2024, through 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 debt funded capex further weakening the financing risk profile
  • Any change in stance of support by the group or change in credit profile of the group (the Hero Enterprises group holds 100% stake in Hero Steels through Global IVY Ventures LLP)

About the Company

Hero Steels was set up after the cold rolled (CR) division of Hero Cycles Ltd ('CRISIL A+/Negative/CRISIL A1') was hived off in August 2012. As part of the realignment among the members of the 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 01, 2019.

Key Financial Indicators*

Particulars

Unit

2023

2022

Operating income

Rs crore

997

1,005

Profit after tax (PAT)

Rs crore

3

8

PAT margin

%

0.3

0.8

Adjusted debt/adjusted networth

Times

1.9

1.8

Adjusted Interest coverage

Times

1.0

1.7

*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 and are included (where applicable) in the 'Annexure - Details of Instrument' in this Rating Rationale.

CRISIL Ratings will disclose complexity level for all securities - including those that are yet to be placed - based on available information. The complexity level for instruments may be updated, where required, in the rating rationale published subsequent to the issuance of the instrument when details on such features are available.

For more details on the CRISIL Ratings` complexity levels please visit www.crisilratings.com. Users may also call the Customer Service Helpdesk with queries on specific instruments.

Annexure - Details of Instrument(s)

ISIN Name of the instrument Date of
Allotment		 Coupon
Rate (%)		 Maturity
Date		 Issue size
(Rs.Crore)		 Complexity
Level		 Rating assigned
with outlook
NA Cash credit^ NA NA NA 106 NA CRISIL A/Stable
NA Cash credit NA NA NA 47.9 NA CRISIL A/Stable
NA Letter of credit$ NA NA NA 15 NA CRISIL A1
NA Letter of credit NA NA NA 50 NA CRISIL A1
NA Non-fund-based limit* NA NA NA 65 NA CRISIL A1
NA Working capital demand loan NA NA NA 25 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 20 NA CRISIL A1
NA Proposed long-term bank loan facility NA NA NA 30.6 NA CRISIL A/Stable
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 limit up to Rs 45 crore

^Fully interchangeable with working capital demand loan

$Interchangeable with bank guarantee

Annexure - Rating History for last 3 Years
  Current 2023 (History) 2022  2021  2020  Start of 2020
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund Based Facilities LT/ST 320.0 CRISIL A1 / CRISIL A/Stable   -- 22-11-22 CRISIL A1 / CRISIL A/Stable 22-11-21 CRISIL A1 / CRISIL A/Stable 31-10-20 CRISIL A/Stable CRISIL A/Stable
      --   -- 22-03-22 CRISIL A1 / CRISIL A/Stable 26-10-21 CRISIL A/Stable   -- CRISIL A/Stable
Non-Fund Based Facilities ST 130.0 CRISIL A1   -- 22-11-22 CRISIL A1 22-11-21 CRISIL A1 31-10-20 CRISIL A1 CRISIL A1
      --   -- 22-03-22 CRISIL A1 26-10-21 CRISIL A1   -- --
Commercial Paper ST 25.0 CRISIL A1   -- 22-11-22 CRISIL A1 22-11-21 CRISIL A1 31-10-20 CRISIL A1 CRISIL A1
      --   -- 22-03-22 CRISIL A1 26-10-21 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 Kotak Mahindra Bank Limited CRISIL A/Stable
Cash Credit 38 State Bank of India CRISIL A/Stable
Cash Credit^ 85 HDFC Bank Limited CRISIL A/Stable
Cash Credit^ 20 Axis Bank Limited CRISIL A/Stable
Cash Credit 4.9 Punjab National Bank CRISIL A/Stable
Cash Credit^ 1 ICICI Bank Limited CRISIL A/Stable
Letter of Credit 20 Axis Bank Limited 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 Long Term Bank Loan Facility 30.6 Not Applicable CRISIL A/Stable
Proposed Short Term Bank Loan Facility 20 Not Applicable CRISIL A1
Receivable Factoring 20 Axis Bank Limited CRISIL A1
Term Loan 50 HDFC 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

*Interchangeable with fund-based limit up to Rs 45 crore

^Fully interchangeable with working capital demand loan

$Interchangeable with bank guarantee

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
Criteria for Notching up Stand Alone Ratings of Companies based on Group Support

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