| Shri Rathi Steel (Dakshin) Limited | ||||||
| Ratings downgraded to 'CRISIL BBB /Stable / CRISIL A3+' | ||||||
| Rating Action | ||||||
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| 1 crore = 10 million | ||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed rationale CRISIL Ratings has downgraded its ratings on the bank facilities of Shri Rathi Steel (Dakshin) Ltd (SRDL; part of the Shri Rathi group) to ‘CRISIL BBB/Stable/CRISIL A3+’ from ‘CRISIL BBB+/Negative/CRISIL A2’.
The downgrade reflects the continuous deterioration in the group’s business risk profile as indicated by its subdued operating margin of 1.63% in fiscal 2022. The operating profitability declined from 1.91% in fiscal 2021 due to lower absorption of fixed overhead and high volatility in raw material prices. The second wave of Covid-19 and low demand in the first half of fiscal 2022 led to a decline in sales volume and modest operating income of around Rs 940 crore for the fiscal. Consequently, debt protection metrics deteriorated with interest coverage falling to 1.99 times in fiscal 2022 from 2.10 times in fiscal 2021.
Steady revenue growth driven by capacity expansion undertaken in fiscal 2022 and revival in demand from the construction sector and real estate segment in fiscal 2023, leading to improvement in the operating margin and increase in cash accrual, will remain key monitorables.
The ratings reflect the Rathi group’s established brand, Shri Rathi, in the thermo-mechanically treated (TMT) bars industry, efficient working capital management, and comfortable financial risk profile. These strengths are partially offset by exposure to risks inherent in the steel industry and low operating margin and return on capital employed (RoCE). |
Analytical approach
Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation. |
Key rating drivers and detailed description Strengths: Strong market presence of the brand and distribution network The promoters have been in the steel manufacturing business since 1942. Rathi Eurotherm, the flagship brand of the group, was set up by the main promoter, Mr Anil Rathi, and has strong presence in the north Indian states of Rajasthan, Haryana, Uttar Pradesh, Punjab, Madhya Pradesh and Delhi. The group has introduced 7 Star, a more premium brand with higher realisations. The group sells its products through an extensive dealer-distribution network of more than 500 traders, retailers and around 50 institutional customers in north India. Extensive experience of the promoters, strong brand recall, established market presence and healthy relationships with suppliers and customers will continue to support the strong market position of the Rathi group in the steel industry.
Comfortable financial risk profile: The Rathi group had a strong networth of Rs 103 crore and comfortable gearing and total outside liabilities to tangible networth ratio of 0.79 time and 1.44 times, respectively, as on March 31, 2022. The capital structure has remained healthy despite debt-funded capital expenditure (capex), supported by sustained accretion of profits to reserves. Debt protection metrics, however, weakened in fiscal 2022 due to fall in operating margin and cash accrual over the previous fiscal. Interest coverage and net cash accrual to adjusted debt (NCAAD) ratio were 1.99 times and 0.09 time, respectively, in fiscal 2022, compared with 2.10 times and 0.12 time, respectively, in the previous fiscal. Improvement in the debt protection metrics remains a key monitorable. In the absence of major, debt-funded capex and capital withdrawal, and with working capital funded through internal accrual, the financial risk profile should remain stable over the medium term. The promoters have supported operations by way of unsecured loans and intercorporate deposits of Rs 30.5 crore as on March 31, 2022, which will remain in the business over the medium term.
Efficient working capital management: The working capital management is supported by efficient receivables collection and inventory management. Gross current assets (GCAs) were at 74 days as on March 31, 2022, compared with 80 days a year earlier, driven by low receivables of around 45 days and inventory of 22 days, and supported by payables of 22 days. Sustenance of efficient working capital management is a key rating sensitivity factor.
Weaknesses: Susceptibility to economic cycles and exposure to intense competition: The Shri Rathi group primarily caters to the real estate, civil construction and engineering sectors. The demand for TMT bars is linked to capex plans of end-user industries, which are strongly correlated to economic cycles. Demand for long-steel products depends on the level of construction and infrastructure activities and economic cycles. Furthermore, the steel industry is susceptible to global steel prices. Intense competition restricts bargaining power with suppliers and customers.
Low operating margin and RoCE: Operating margin of the group remained low in fiscal 2022 due to volatility in the cost of inputs such as iron ingot/billets and coal, as well as high power tariffs in Uttar Pradesh. The Shri Rathi group’s operating margin was low at 1.63%, leading to modest RoCE of 5.8%, in fiscal 2022. These metrics are likely to remain weak over the medium term. However, the group started purchasing power from the Indian Energy Exchange (IEX) in fiscal 2022 to lower its power consumption cost. The management is in advanced stage of planning to set up a captive solar power plant of 6 MW to reduce dependance on state distribution companies. Increase in revenue due to capacity expansion undertaken in fiscal 2022 and revived demand form the construction sector, particularly the real estate segment, leading to improvement in the operating margin and increase in cash accrual will remain a key monitorable |
Liquidity: Adequate Bank limit utilisation was moderate at 80% on average for the 12 months through March 2022. Cash accrual was around Rs 7.4 crore in fiscal 2022 (Rs 9.7 crore in fiscal 2021) against debt obligation of Rs 4.9 crore. Cash accrual is expected over Rs 12.5 crore against term debt obligation of Rs 7.9 crore over the medium term. Bank limits were enhanced in March 2022 and their utilisation is expected at 80%-85% over the medium term. |
Outlook Stable CRISIL Ratings believes the Shri Rathi group’s profitability and cash accrual will remain constrained, leading to stretched liquidity. |
Rating Sensitivity factors Upward factors:
Downward factors:
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About the Group SRDL, a closely held public limited company, was incorporated in 1992 as Baldev Investments Pvt Ltd and got its present name in 2007. It started operations in 2008. SRSL, also a closely held public limited company, was incorporated in 1992 as Static Holdings Pvt Ltd. The company got its present name in 2002 and started operations in 2003. The companies are managed by Mr Anil Rathi, Mr Gopal Rathi and Mr Dhruv Rathi. The Shri Rathi group manufactures and markets TMT bars under the Rathi Eurotherm 500 and 500+, and 7 Star brands. SRSL’s manufacturing facility is in Ghaziabad, Uttar Pradesh, while SRDL's unit is in Bhiwadi, Rajasthan. |
Key Financial Indicators
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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)
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Annexure – List of entities consolidated
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| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| All amounts are in Rs.Cr. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annexure - Details of Bank Lenders & Facilities | ||||||||||||
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Criteria Details
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