Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL BBB/Stable/CRISIL A3+’ ratings on the bank loan facilities of Jai Balaji Industries Ltd (JBIL).

 

The ratings factor in the sustenance of healthy operating performance, as reflected in revenue of over Rs 6,400 crore in fiscal 2024 supported by 6% growth on-year and 3-year compound annual growth rate of 33%, driven by higher blended realisation as contribution from specialised ferroalloy and ductile iron (DI) pipe segments to operating income improved to 47% in fiscal 2024 from 39% in the previous fiscal. Growth has been sustained in the first quarter of fiscal 2025 with revenue of Rs 1,718 crore, which has grown by 16% on-year. Increasing revenue from value-added products, cost reduction strategies and economies of scale resulted in rise in adjusted operating profitability to 18.4% in the first quarter of fiscal 2025 from 14.6% in fiscal 2024 and 5.4% in fiscal 2023. Prudent working capital management and capital expenditure (capex) funded by internal accrual drove up return on capital employed to 59% in fiscal 2024 from 21% in fiscal 2023 while sustaining operating income to gross block ratio at 2.4 times. With steady accretion to reserve in fiscal 2024 and repayment of term debt, gearing and total outside liabilities to tangible networth ratio improved to 0.3 time and 1.1 times, respectively, as on March 31, 2024, from 1.6 times and 3.8 times, respectively, a year earlier. Sustenance of market position and operating profitability, reducing net debt and improving financial flexibility, will be monitorable over the medium term.

 

The ratings continue to reflect the extensive experience of the promoters in the iron and steel industry, the integrated operations of the company and its improving market position in value-added products. These strengths are partially offset by modest, albeit improving, financial risk profile and exposure to risks related to ongoing capex.

Analytical Approach

CRISIL Ratings has evaluated the standalone business and financial risk profiles of JBIL.

Key Rating Drivers & Detailed Description

Strengths:

• Extensive experience of the promoters and integrated operations: The promoters have experience of more than two decades in the iron and steel industry and are supported by a well-qualified and experienced management team. This has given them understanding of market dynamics and enabled them to establish relationships with customers, suppliers and other stakeholders. Healthy relationships have been instrumental in driving improvement in scale of operations, supported by integrated operations spread across four units; three units in West Bengal and one unit in Chhattisgarh and a diverse portfolio of value-added products of DI pipes and special-grade ferroalloys, including basic steel products such as DRI (sponge iron), pig iron, mild steel billet, reinforcement steel TMT bars and wire rods. Thus, JBIL has a healthy market position allowing it to penetrate deep into the value chain. Furthermore, captive power plants and railway sidings have controlled cost of production, strengthening its market position, which should continue to aid the business over the medium term.

 

• Improving market position in value-added products: JBIL has moderately healthy market share in DI pipes and special-grade ferroalloy segments, backed by its ability to manufacture higher grades and value-added products. It makes DI pipes and specialised chrome-based ferroalloys (with application in superior grade stainless steel used in aerospace, aviation defence sectors, among others). Capacity for DI pipes is 3 lakh tonne per annum (TPA), which accounts for ~9% of the domestic capacity, and the company plans to add 3.6 lakh TPA by fiscal 2026. For ferroalloys, JBIL has increased capacity to 1.66 lakh TPA and plans to add 0.3 lakh TPA in fiscal 2025. This reflects the improving market position and partly protects revenue from demand slowdown. However, timely installation and stabilisation of capacities, translating into better fixed cost absorption; sustenance of earnings before interest, tax, depreciation and amortisation (Ebitda) margin over 15% and higher cash accrual remain monitorables.

 

Weaknesses:

• Modest, albeit improving, financial risk profile and exposure to risks related to ongoing capex: The financial risk profile was weak, constrained by sizeable debt, consequent to significant capex post incorporation while returns in fiscal 2014 were subdued owing to lower steel realisation and de-allocation of coal mines. Consequently, debt to Ebitda ratio rose to 95 times in fiscal 2014. Over the years, JBIL has taken steps to improve its capital structure through refinancing, including capital infusion through preferential issue of share warrants.. This, coupled with ramp-up of operations, reduced debt to Ebitda ratio to 0.5 time in fiscal 2024 from 2.6 times in fiscal 2023.

 

However, the debt profile of the company is restricted by large repayments, which yielded current ratio of 1 time as on March 31, 2024. The company has also envisaged capex of Rs 1,000 crore, funded by internal accrual, to be spent in phases by fiscal 2026 and of this, around Rs 500 crore was incurred in fiscal 2024 and about Rs 112 crore in the first quarter of fiscal 2025. Along with regular debt repayment, there is high dependence on internal accrual for meeting working capital requirement and capex while limited working capital lines constrain the financial flexibility. Given the ongoing capex, sustenance of healthy cash flow from operations and steady accretion to reserve further strengthening the financial flexibility remain key rating sensitivity factors.

 

• Susceptibility to demand and price risks: Demand for steel products depends on the level of construction and infrastructure activities in the country. While there has been a significant push by the government on steel-intensive sectors such as railways and infrastructure, downturns in economic cycles will adversely affect demand. The steel industry remains exposed to fluctuations in the prices of key inputs (such as iron ore and coal), which impacts realisation from finished goods. Any adverse movement in the industry can have a direct bearing on the company’s performance; this risk is partly mitigated by the company’s increasing focus on value-added products like DI pipe and ferro alloy, and integrated operations.

Liquidity: Adequate

Bank limit disbursed in January 2024 was utilised 44% on average over the seven months through July 2024. Cash accrual, expected over Rs 800 crore per fiscal, will sufficiently cover yearly term debt obligation of Rs 168 crore over the medium term. In addition, the surplus will cushion the liquidity and support working capital requirement and capex. Current ratio was modest at 1 time as on March 31, 2024. Cash and balance is estimated to be around Rs 55 crore as on June 30, 2024.

Outlook: Stable

CRISIL Ratings believes JBIL will continue to benefit from its established relationships with stakeholders.

Rating sensitivity factors

Upward factors:

• Track record of operations, sustenance of market position and sound operating efficiency, with revenue of over Rs 6000 crore and Ebitda margin of around 14%
• Sustenance of healthy cash accrual, reduction of term debt and prudent working capital management improving financial flexibility.

 

Downward factors:

• Decline in revenue and fall in profitability below 10% leading to lower net cash accrual
• Large, debt-funded capex or stretched working capital cycle or sizeable dividend payout or acquisitions weakening the capital structure and liquidity

About the Company

JBIL, the flagship company of the Jai Balaji group, was incorporated in July 1999. The company manufactures various value-added products of DI pipes and special-grade ferroalloys, including basic steel products such as sponge iron, pig iron, mild steel billets, reinforcement steel TMT bars and wire rods. It has a sinter and captive power plant and four integrated steel plants in Burdwan, West Bengal, and Durg, Chhattisgarh. The company is listed on the Bombay Stock Exchange and National Stock Exchange. It is headed by Mr Aditya Jajodia (Chairman and MD) and his family members.

Any other information: Not Applicable