Detailed Rationale

CRISIL Ratings has revoked the suspension of its rating on the bank facilities of OCL Iron and Steel Limited (OCL) and has assigned its 'CRISIL A3’ rating to the short-term bank facilities of OCL. CRISIL Ratings had suspended the ratings on August 8, 2012, on account of non-cooperation by OCL with CRISIL Ratings efforts to undertake are view of the ratings. OCL has now shared the requisite information enabling CRISIL Ratings to assign ratings to the bank facilities.

 

The rating reflects the extensive industry experience of the promoters, the growing market presence of the group and healthy financial profile. These strengths are partially offset by susceptibility of operating margin and revenue to volatility in commodity prices, fluctuations in forex rates, regulatory policies, & cyclicality in the steel sectors, short track record of operations of Nilachal Iron and Power Limited (NIPL), its average operating efficiency and risk associated with OCL Iron and Steel Limited (OCL).

Analytical Approach

For arriving at the ratings, CRISIL Ratings has combined the business and financial risk profiles of OCL with S M Niryat Private Limited (SMNPL, CRISIL A-/Stable/CRISIL A2+), as these companies, together referred to as the S M Group, have significant operational and financial linkages.

 

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:

Extensive industry experience of the promoters and growing market presence of the group: The promoters have extensive experience of around two decades in the coal and iron ore trading industry. This has helped them to understand the dynamics of the market and to establish a market position for the S M Group. The group’s product basket is diversified, it trades coal, iron ore fines and lumps, sponge iron, sponge pellet, MS billets, etc. Group is also manufacturing sponge iron (since fiscal 2018), MS Billet and TMT rebar through subsidiary of SMNPL, Nilachal Iron and Power Limited (NIPL) and has launched its own brand ‘Govvinda TMT’ to market its products. To further strengthen its market position and brand visibility, the group has acquired ‘OCL Iron and Steel Limited’ (OCL), from NCLT in Q1 of fiscal 2024. Long standing market presence and diversified product base is expected to support the business risk, over the medium term.

 

Healthy financial profile: Strong networth of Rs 1472 crore as on March 31, 2023 and healthy cash generation ability has curtailed group’s exposure to external borrowings despite moderately working capital intensive operations, yielding low gearing and total outside liabilities to adj tangible networth (TOL/ANW) of 0.3 time and 0.8 time, respectively for year ending on March 31, 2023. The group’s debt protection measures have also been at a healthy level due to low leverage and healthy profitability. The interest coverage and net cash accrual to adjusted debt (NCAAD) ratio are at 14.6 times and 0.8 time for fiscal 2023. Acquisition of NIPL in fiscal 2018 and capital expenditure (capex) of about Rs 550 crore during fiscals 2022 and 2023 were largely funded by internal accruals and promoters funding support. Moreover, the recent acquisition of OCL was also funded by profits generated within the group. Furthermore, capex of about Rs 300 crore in OCL during fiscals 2024-25 is also expected to be largely funded by internal accruals and/or by infusion of funds by the promoters. In the absence of a rise in external term debt borrowings and working capital enhancement in line with improvement in scale of operations, healthy accretion to reserves is expected to sustain the group’s overall financial flexibility over the medium term. However, ramp up in production capacity utilization of NIPL and timely stabilization of OCL is critical for strengthening of financial risk profile of the group.

 

Weaknesses

Susceptibility of operating margin and revenue to volatility in commodity prices and changes in regulatory policies, and vulnerability to cyclicality in the steel sectors: The business risk profile remains exposed to fluctuations in prices of coal, iron ore and other commodities and fluctuation in forex rates. The group is an exporter and importer of minerals/ores thus there is a natural hedge to some extent. Revenue and margins are also susceptible to regulatory policies of the government and are linked to the fortunes of the inherently cyclical steel industry, which has strong correlation with overall growth in gross domestic product. However, the group’s sound risk management practices aid the sustenance of the operating margin; operating margin has ranged between 7.6%-14.3% during three fiscals through fiscal 2023 and is expected to sustain around 6-7% going ahead. Revenue of the group was over Rs 3588 crore for fiscal 2023, marked by 30% growth on year, and is estimated to be over Rs 600 crore in Q1 fiscal 2024. However, for instance, when custom duties were revised on iron ore exports in fiscal 2023, players in the industry suffered and revenues of Praful Enterprises Private Limited (PEPL), subsidiary of SMNPL, were adversely impacted during May-November 2022. Hence, the group’s ability to continue to navigate through the cyclical industry and stringent regulations is a key monitorable.

 

Short track record of operations of NIPL and average operating efficiency and risk associated with OCL: NIPL restarted operations under the current promoters in fiscal 2018 as a distressed asset. The company incurred capex to improve integration for maximizing profitability. The capex concluded in March 2023 and fiscal 2024 is the first full year of the integrated plant. As a result, RoCE was average around 7% and operating income to gross block ratio of 2.4 times (against 4-7 times for most peers) for NIPL for year ending of March 31, 2023. Improvement in capacity utilization and ramp up in scale of operations is a key rating sensitivity factor. Furthermore, dilution of liquidity position to fund capex associated with OCL, and timely stabilization of operations is critical.

Liquidity: Adequate

Bank limit utilization is moderate at around 51 percent for the past twelve months ended Jul-23. Cash accruals are expected to be about Rs 500 crore in fiscal 2024 due to extraordinary income of around Rs 450 crore. Cash accruals are expected in range between Rs 160-200 crore in fiscals 2025-26. Repayment obligations are low around Rs 7-10 crore over the medium term. Current ratio is moderate around 1.3 times on March 31, 2023. The promoters are likely to extend support in the form of equity and unsecured loans to meet its working capital requirements and capital expenditure. Moderate cash and bank balance of around Rs 55 crore as on March 31, 2023. Low gearing and strong net worth support the group’s financial flexibility and provides the financial cushion available in case of any adverse conditions or downturn in the business.

Rating Sensitivity factors

Upward factor

• Strong revenue growth driven by a rise in volume sales and ramp up of operations in NIPL and OCL coupled with improvement and sustenance of margin over 8-9% resulting in healthy accretion to reserves.
• Significant improvement in liquidity position and sustenance of financial risk profile.

 

Downward factor

• Significant decline in revenue or decline in operating margin leading to net cash accruals of less than Rs 120 crore for the group.
• Sizeable debt-funded capex and/or stretch in working capital requirement affecting financial risk profile, especially liquidity.
• Change in shareholding adversely affecting support driven from synergies at the group level.

About the Group

S M Niryat Private Limited (SMNPL) is the flagship company of the group which was incorporated in 2005. The company is engaged in trading coal, sponge iron, sponge pellet, MS billet, metal scrap, etc.

 

The company has also diversified into multiple businesses related to iron and steel through its subsidiaries.  It has two subsidiaries i.e., Praful Enterprises Private Limited (PEPL), 51% holding of SMNPL and Nilachal Iron and Power Limited (NIPL), 100% holding of SMNPL.

 

PEPL was incorporated in 1996 and it commenced its business activities in fiscal 2022. The company is involved in the export of minerals, mainly iron ore fines and iron ore pellets. Recently, in February 2023, SMNPL acquired 51% stake in PEPL.

 

NIPL was incorporated in 2002. NIPL was taken over by the current management from ARC in fiscal 2018. Commercial operations started in fiscal 2018 with sponge iron manufacturing plant at Ratanpur, Jharkhand and is currently engaged in manufacturing of sponge iron, MS billets and TMT bars. Its total manufacturing capacity is 1750 TPD for sponge iron, 720 TPD for billets and 2,00,000 MTPA for TMT bars.

 

OCL Iron and Steel Private Limited (OCL), incorporated in 2001, was acquired by the S M Group from NCLT in 2023. It’s an integrated TMT rebar manufacturing plant with installed capacity for billet, sponge iron, coal washery, iron ore crusher and mines. The commercial operations are expected to begin from Q3 fiscal 2025.

 

The group is promoted by Mr. Manish Khemka and family, ably supported by line of executives.

Any other information: Not applicable