Rating Rationale
March 30, 2019 | Mumbai
Shri Rathi Steels Limited
Ratings Reaffirmed
 
Rating Action
Total Bank Loan Facilities Rated Rs.52 Crore
Long Term Rating CRISIL BBB+/Stable (Reaffirmed)
Short Term Rating CRISIL A2 (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has reaffirmed its 'CRISIL BBB+/Stable/CRISIL A2' ratings on the bank facilities of Shri Rathi Steels Limited (SRSL; part of the Shri Rathi group).

The ratings continue to reflect an established brand in the thermo-mechanically treated (TMT) bars industry, a healthy financial risk profile, efficient working capital management, and large funding support from the promoters. Revenue is likely to grow 10-12%, to over Rs 930 crore in fiscal 2019 from Rs 855 crore in fiscal 2018. The financial risk profile is expected to remain robust; the networth and total outside liabilities to adjusted networth ratio were Rs 88.2 crore and 1.37 time, respectively, as on March 31, 2018. These rating strengths are partially offset by a low operating margin and return on capital employed (RoCE), which are expected to remain at similar levels over the medium term, and exposure to cyclicality in the steel industry and to slowdown in offtake.

Analytical Approach

* For arriving at the ratings, CRISIL has combined the business and financial risk profiles of SRSL and Shri Rathi Steel (Dakshin) Ltd (SRDL). That's because the two companies, together referred to as the Shri Rathi group, are in the same line of business and have common products, brands, and management teams. They also have the same customer and supplier bases, with miniscule intra group transactions as part of business requirement.

* Unsecured loans of Rs 33.13 crore from the promoters as on March 31, 2018, have been treated as 75% equity and 25% debt. These loans are subordinated to bank debt and are expected to be retained in the business over the medium term. Moreover, interest on them may be deferred during times of stress.

Key Rating Drivers & Detailed Description
Strengths:
* Established brand and a strong distribution network:
The Rathi brand was established in the 1940s when the late Mr Govardhan Das Rathi set up a rolling mill in Delhi. Thereafter, Mr. Anil Rathi, the main promoter, set up Rathi Eurotherm as his flagship brand. This brand continues to have strong recall among intermediaries and end-users, which is reflected in the large turnover and penetration in the North Indian market. Management has set up another brand, 7 Star, with the objective of a slightly premium positioning leading to higher realisations. The products are being sold through an extensive distribution network comprising of around 500 traders and retailers and more than 50 institutional customers spread across Rajasthan, Haryana, Uttar Pradesh, Punjab, Madhya Pradesh, and Delhi. Benefits from the promoters' experience of around three decades and the healthy relationship with suppliers and customers should continue, and the strong market position in the steel industry is likely to be maintained over the medium term.

* Prudently managed working capital requirement:
Gross current assets were at 72 days as on March 31, 2018, against 66 days as on March 31, 2017. The efficient working capital management is primarily driven by prudent inventory management and quick realisations on account of limited credit extended to customers. Receivables are estimated at 50 days as on March 31, 2018, against 40 days as on March 31, 2017. Inventory was also minimal at 14 days as on March 31, 2018. Further, the group receives adequate credit from suppliers, thus supporting working capital requirement and leading to positive cash flow from operations, and hence, low dependence on working capital borrowing.  Continued efficient management of working capital requirement will be a key rating sensitivity factor over the medium term.

* Strong financial risk profile:
The financial risk profile is likely to remain strong over the medium term, backed by substantial cash accrual, moderate capital expenditure (capex), and limited reliance on working capital limit. The capital structure was robust because of a healthy networth and low gearing, of Rs 88.2 crore and 0.59 time, respectively, as on March 31, 2018. Debt protection metrics were strong, with interest coverage and net cash accrual to adjusted debt ratios of 3.27 times and 0.20 time, respectively, in fiscal 2018.

Weaknesses:
* Exposure to risks inherent in the steel industry:
 The steel industry is inherently cyclical and is exposed to risks such as volatility in raw material prices and lower price realisations. The group has limited bargaining power with suppliers and customers due to intense competition from domestic and international players. The EBITDA (earnings before interest, tax, depreciation, and amortisation) margin has been declining, as any increase in raw material cost could not be passed on to large customers. Revenue has been stagnant during the five fiscals through 2018 due to decline in the prices of steel products. Moreover, demand for products, such as TMT bars, is linked to the capex programmes of end-users such as the real estate, civil construction, and engineering industries; which are cyclical. Slowdown in capex in these segments due to economic downturns and the expected gradual recovery will continue to constrain revenue. However, turnover is estimated to have improved in fiscal 2019 with better market conditions.

* Low operating margin and RoCE:
The margin remained low due to intense completion and high power tariff in Uttar Pradesh. Also, there is little product differentiation and limited value addition in the steel products industry, and inability to pass on increase in input prices. Moreover, the margins also remains low due to increased focus towards marketing & branding like opening of new branch office or change in distribution and marketing strategies, resulting in low operating margins. The margin was 1.9%, leading to a modest RoCE of 7.4%, in fiscal 2018. These metrics are likely to remain low over the medium term.
Liquidity

Liquidity remains adequate. As of March 31, 2018, total borrowings stood at Rs 52.34 crore, of which Rs 8.28 crore comprised unsecured loans from the promoters and Rs 44.02 crore loans from banks. Net cash accrual'expected at Rs 12.0-13.0 crore each in fiscals 2019, 2020, and 2021'should be sufficient to meet repayment obligation of Rs 5.2-5.3 crore in each of these fiscals and to fund incremental working capital requirement. Utilisation of cash credit limit averaged 88% in the nine months through February 2019. Unsecured loans stood at Rs 33.13 crore and the cash and bank balance at Rs 1.01 crore as on March 31, 2018.

Outlook: Stable

CRISIL believes the Shri Rathi group will continue to benefit from its established brand over the medium term. A conservative financial policy should ensure the financial risk profile remains stable. The outlook may be revised to 'Positive' if turnover and profitability improve substantially and sustainably, while the capital structure and working capital cycle remain stable. The outlook may be revised to 'Negative' if a sharp decline in profitability or revenue, or any large capex weakens the financial risk profile, particularly liquidity.

About the Group

SRSL, a closely held public limited company, was set up in 1992 as Static Holdings Pvt Ltd; the name was changed in 2002 and operations began in 2003. SRDL, also a closely held public limited company, was set up in 1992 as Baldev Investments Pvt Ltd and got its current name in 2007. It started operations in 2008. The companies are managed by Mr. Anil Rathi and his sons, Mr Gopal Rathi and Mr Dhruv Rathi. The two companies manufacture and market TMT bars under the brands, Rathi Eurotherm 500 and 500+, and 7 star. SRSL has its manufacturing facility in Ghaziabad, Uttar Pradesh, while SRDL's facility is at Bhiwadi, Rajasthan.

Key Financial Indicators
As on / for the period ended March 31  Unit 2018 2017
Operating income Rs crore 855 894
Profit after tax (PAT) Rs crore 4.1 3.4
PAT margin % 0.48 0.39
Adjusted debt/adjusted networth Times 0.59 0.72
Interest coverage Times 3.27 3.5

Status of non cooperation with previous CRA:
SRSL has not cooperated with Brickwork Ratings, which has published its ratings as an issuer not co-operating vide a release dated June 21, 2018. The reason provided by Brickwork Ratings was non-furnishing of information by SRSL for monitoring the ratings.

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL 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 crore)		 Rating assigned
 with outlook
NA Cash credit NA NA NA 32.0 CRISIL BBB+/Stable
NA Long Term Loan NA NA
 		 Mar-2023 9.0 CRISIL BBB+/Stable
NA Letter of credit NA NA NA 11.0 CRISIL A2
 
Annexure - List of entities consolidated
Entities Consolidated
  • Shri Rathi Steels Ltd (SRSL) and
  • Shri Rathi Steel (Dakshin) Ltd (SRDL).
Annexure - Rating History for last 3 Years
  Current 2019 (History) 2018  2017  2016  Start of 2016
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund-based Bank Facilities  LT/ST  41.00  CRISIL BBB+/Stable          27-12-17  CRISIL BBB+/Stable  19-09-16  CRISIL BBB+/Stable  CRISIL BBB+/Stable 
Non Fund-based Bank Facilities  LT/ST  11.00  CRISIL A2          27-12-17  CRISIL A2  19-09-16  CRISIL A2  CRISIL A2 
All amounts are in Rs.Cr.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Cash Credit 32 CRISIL BBB+/Stable Cash Credit 32 CRISIL BBB+/Stable
Letter of Credit 11 CRISIL A2 Letter of Credit 11 CRISIL A2
Long Term Loan 5.7 CRISIL BBB+/Stable Long Term Loan 1.97 CRISIL BBB+/Stable
Proposed Cash Credit Limit 3.3 CRISIL BBB+/Stable Proposed Long Term Bank Loan Facility 7.03 CRISIL BBB+/Stable
Total 52 -- Total 52 --
Links to related criteria
CRISILs Approach to Financial Ratios
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating criteria for manufaturing and service sector companies
Rating Criteria for Steel Industry
CRISILs Criteria for Consolidation
CRISILs Criteria for rating short term debt

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