Rating Rationale
July 29, 2021 | Mumbai
Pradeep Metals Limited
Rating outlook revised to 'Positive'; Ratings reaffirmed
 
Rating Action
Total Bank Loan Facilities RatedRs.102 Crore
Long Term RatingCRISIL BBB-/Positive (Outlook revised from 'Stable'; Rating reaffirmed)
Short Term RatingCRISIL A3 (Reaffirmed)
1 crore = 10 million
Refer to Annexure for Details of Instruments & Bank Facilities

Detailed Rationale

CRISIL Ratings has revised its outlook on the long term bank facilities of Pradeep Metals Limited (PML, part of PML group) to ‘Positive’ from ‘Stable’ while reaffirming its rating at ‘CRISIL BBB-‘. Short term rating has been reaffirmed at ‘CRISIL A3’.

 

Revision in outlook reflects expectation of improvement in both business as well as financial risk profile supported by improved revenue, enhanced operating profitability resulting in higher accruals coupled with an improved capital structure on back of gradual repayment of term debt, despite incremental capex.

 

Group’s capital structure has seen a substantial improvement over the last three fiscals with total outside liabilities to adjusted networth (TOLANW) of above 3 times at the end of fiscal 2019 to 1.83 times at the end of fiscal 2021, supported by sustained net cash accruals, repayment of term debt obligations and reduced reliance on outside debt to meet working capital requirements. Accordingly, debt protection metrics also strengthened with interest coverage ratio expected to sustain at above 5 times starting fiscal 2021. While, group saw a moderate drop in revenue in fiscal 2021 on account of impact of COVID-19 pandemic induced lockdown and related disruptions, group’s operating profitability improved on back of healthy realisation (especially in the second half of fiscal 2021) and cost saving measures implemented over last couple of years. Revenue is expected to enhance in fiscal 2022 supported by healthy orders while maintaining higher operating margin. Further, cushion in fund based limit will continue to support the financial flexibility despite sizeable repayments.

 

The ratings continue to reflect the promoters' extensive experience in the forging industry and established relations with customers. The ratings also factor in PML's comfortable financial risk profile. These strengths are partially offset by working capital intensive operations and moderate scale of operations.

Analytical Approach

For arriving at the ratings, CRISIL Ratings has combined the business and financial risk profiles of PML; its wholly owned subsidiary, Pradeep Metals Ltd Inc., USA; and its step-down subsidiary, Dimensional Machine works LLC (DMW). The entities are collectively referred to as the PML group.

 

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:

  • Promoters' extensive experience in the forging industry and established relations with customers:  Group is promoted by Mr Pradeep Goyal (Chairman and Managing Director) and his family. Mr Goyal has a B Tech (Metallurgy) from IIT, Kanpur, and MS (Materials Science and Engineering) from Massachusetts Institute of Technology, USA. Over the years, promoters have developed deep understanding of the industry dynamics. Group has developed reputed clientele base with customers such as Flowserve US Inc., Rosemount Inc., Alfa Laval, and Emerson, amongst others. Benefits from the promoters' experience of over three decades, and healthy relations with customers backed by the ability to ensure just-in-time delivery, and supply customised components in small lots should continue to support the business.

 

  • Comfortable financial risk profile: Group has a moderate TOLANW of 1.83 times on a networth base of estimated at around Rs.53 crore as on March 31, 2021. Debt protection metrics is adequate with interest coverage estimated at 5.64 times and net cash accruals to adjusted debt at around 0.3 times in fiscal 2021. Financial risk profile is expected to remain comfortable over the medium term.

 

Weakness:

  • Working capital-intensive nature of operations: Gross current assets have been high at 162-250 days in the three years ended March 31, 2021. Driven by sizeable inventory and moderate debtors, groups operations are expected to remain working capital intensive over the medium term.

 

  • Moderate scale of operations: Scale of operations is moderate, with revenue in range of Rs 156-192 crore in the three years ended fiscal 2021. While, the revenue for the group is expected to improve in fiscal 2022 and fiscal 2023 with enhanced operating profitability, supported by the healthy orders from the existing as well as new customers, the scale will remain moderate over the medium term.

Liquidity: Adequate

Group has adequate liquidity indicated by moderate utilization of fund based limits (Rs 54 crore) averaging at around 56.3 percent for the past twelve months ended March 2021. Cash accrual are expected to be Rs 18.5-20.5 crore which are sufficient  against term debt obligation of Rs 12-16 crore per annum over the medium term. Current ratio was moderate at 1.3 times on March 31, 2021.  Group has capex plans of around Rs 10 crore and Rs 4 crore during fiscal 2022 and fiscal 2023, respectively, to be funded by a mix of debt and internal accruals.

Outlook: Positive

CRISIL Ratings believes the PML group's credit profile will continue to benefit from improved exports demand for its products supported by extensive experience of the promoters and established relations with customers; coupled with cost savings measures implemented over last couple of years, resulting in higher accruals and improved capital structure with gradual repayment of term debt.

Rating Sensitivity Factors

Upward factor

  • Increase in scale of operations with enhanced operating profitability resulting in net cash accruals to remain above Rs. 22 crore 
  • Sustenance of improved financial risk profile particularly TOLANW remaining below 2 times
  • Improvement in working capital cycle

 

Downward factor

  • Cash accruals below Rs 15 crore on account of subdued operating performance
  • Higher-than-expected debt-funded capital expenditure or acquisitions or stretch in working capital cycle weakens key credit metrics.

About the Group

Incorporated in 1982, PML manufactures intricate closed-die stainless, alloy, and carbon steel forgings as finished and semi-finished machined components for multiple sectors, such as oil and gas, petrochemicals, and general engineering. The manufacturing facility is in Navi Mumbai. During 2013-14, PML had set up its 100% subsidiary Pradeep Metals Ltd Inc. USA, in order to identify new potential customers and facilitate growing exports to USA.  DMW, which is a step down subsidiary of PML, is engaged in manufacturing of precision machined components.

Key Financial Indicators

As on/for the period ended March 31

Unit

2021

2020

Operating income

Rs.Crore

156.56

195.10

Reported profit after tax (PAT)

Rs.Crore

7.91

6.32

PAT margin

%

5.1

3.2

Adjusted debt/adjusted networth

Times

1.19

2.07

Interest coverage

Times

5.64

3.86

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.Cr)

Complexity level

Rating assigned with outlook

NA

Bank Guarantee

NA

NA

NA

3

NA

CRISIL A3

NA

Bill Discounting

NA

NA

NA

22

NA

CRISIL BBB-/Positive

NA

Cash Credit

NA

NA

NA

18

NA

CRISIL BBB-/Positive

NA

Foreign Exchange Forward

NA

NA

NA

1.53

NA

CRISIL A3

NA

Long Term Loan

NA

NA

Mar-2023

28.59

NA

CRISIL BBB-/Positive

NA

Packing Credit

NA

NA

NA

28

NA

CRISIL BBB-/Positive

NA

Proposed Long Term Bank Loan Facility

NA

NA

NA

0.88

NA

CRISIL BBB-/Positive

 

Annexure - List of Entities Consolidated

Names of Entities Consolidated

Extent of Consolidation

Rationale for Consolidation

Dimensional Machine Works LLC

Full

Wholly owned step down subsidiary of Pradeep Metals Ltd

Pradeep Metals Limited

Full

Parent company holding 100% stake along with business and financial linkages with Pradeep Metals Ltd Inc, USA and Dimensional Machine works LLC

Pradeep Metals Limited Inc USA

Full

Wholly owned subsidiary of Pradeep Metals Ltd
Annexure - Rating History for last 3 Years
  Current 2021 (History) 2020  2019  2018  Start of 2018
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund Based Facilities LT/ST 99.0 CRISIL BBB-/Positive / CRISIL A3   -- 09-04-20 CRISIL BBB-/Stable / CRISIL A3 05-04-19 CRISIL BBB-/Stable / CRISIL A3 23-11-18 CRISIL A4+ / CRISIL BB+/Positive CRISIL A3+ / CRISIL BBB/Negative
      --   --   --   -- 06-11-18 CRISIL A4+ / CRISIL BB+/Positive --
      --   --   --   -- 09-01-18 CRISIL A4+ / CRISIL BB+/Negative --
      --   --   --   -- 08-01-18 CRISIL A4+ / CRISIL BB+/Negative --
Non-Fund Based Facilities ST 3.0 CRISIL A3   -- 09-04-20 CRISIL A3 05-04-19 CRISIL A3 23-11-18 CRISIL A4+ --
      --   --   --   -- 06-11-18 CRISIL A4+ --
      --   --   --   -- 09-01-18 CRISIL A4+ --
      --   --   --   -- 08-01-18 CRISIL A4+ --
All amounts are in Rs.Cr.
Annexure - Details of Bank Lenders & Facilities
Facility Amount (Rs.Crore) Name of Lender Rating
Bank Guarantee 3 Union Bank of India CRISIL A3
Bill Discounting 22 Union Bank of India CRISIL BBB-/Positive
Cash Credit 18 Union Bank of India CRISIL BBB-/Positive
Foreign Exchange Forward 1.53 Union Bank of India CRISIL A3
Long Term Loan 28.59 Union Bank of India CRISIL BBB-/Positive
Packing Credit 28 Union Bank of India CRISIL BBB-/Positive
Proposed Long Term Bank Loan Facility 0.88 Not Applicable CRISIL BBB-/Positive

This Annexure has been updated on 16-Dec-2021 in line with the lender-wise facility details as on 09-Dec-2021 received from the rated entity.

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 Criteria for rating short term debt
CRISILs Criteria for Consolidation

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