Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AA/Stable/CRISIL A1+’ ratings on the bank facilities and commercial paper programme of Shyam Metalics and Energy Ltd (SMEL; part of the Shyam Metalics group).

 

The ratings continue to reflect the established market position of the group in the steel sector, diversified product and customer profiles, healthy operating efficiency supported by integrated operations and strategic locations of manufacturing units, and the longstanding experience of promoters in the steel sector. The ratings also factor in the comfortable financial risk profile backed by healthy debt protection metrics.

 

Company had reported consolidated revenue growth of 20.4% in fiscal 2023, backed by rise in average realisation (blended realisation grew ~17%) and modest volume growth (~3%). Consolidated operating margin, however, had declined to 11.8% from 24.5% in fiscal 2022 owing to steep rise in energy costs and iron ore prices last fiscal, which more than offset the rise in realisations; also, fiscal 2022 was a historical high for the steel industry. While consolidated Ebitda (earnings before interest, taxes, depreciation, and amortisation) per tonne (on blended volumes) fell to Rs 4,462 from Rs 8,264 in fiscal 2022, this was broadly in line with the long-term average of Rs 4,500-4,700 per tonne for the company. Rise in the share of finished steel in sales mix to ~48% from ~38% in fiscal 2022 also supported operating profitability.

 

Further, during first half of fiscal 2024, consolidated revenue stood healthy at ~Rs. 6,274 crore and Ebitda of ~ Rs 721 crore (Rs 1,486 crore in fiscal 2023), with stable operating margin of ~ 11.5% and Ebitda per tonne of Rs 4,200, largely in line with expectations. Profitability during the period was supported by steady realisation and robust volumes. Going forward, with increasing capacities and expected rise in the share of finished steel in sales mix (~48% in fiscal 2023 from ~38% in fiscal 2022) operating profitability is expected to remain at Rs 4,500-5,500 per tonne for the company over the medium term and will be a key monitorable.

 

The ratings also factor in the robust operating performance, which supports healthy credit risk profile with limited leverage and strong liquidity. While the company turned net debt positive (was net cash positive as on March 31, 2023) as on September 30, 2023, this was mainly due to increase in short term working capital debt to support its working capital requirements. Long term debt has remained largely at similar levels as that of March 31, 2023. However, no material increase in consolidated debt is expected going forward which will be a key monitorable. The ratings also factor in the healthy liquidity, backed by cash and equivalent of ~Rs 1,650 crore as on September 30, 2023.

 

The group has completed the acquisition of Mittal Corp (under National Company Law Tribunal process), a manufacturer of stainless steel long products with total capacity of 150,000 tonne per annum. The entity was acquired for ~Rs 351 crore.

 

That said, the group has sizeable capital expenditure (capex) plans of ~Rs 6,000 crore over fiscals 2024-2027, which include operationalisation of the recently acquired plant of Ramsarup Industries along with other organic capex (brownfield as well as greenfield expansion). CRISIL Ratings expects the annual capex is mainly to be supported by internal cash accrual of Rs 1,500-Rs 1,800 crore per annum, and healthy liquidity. CRISIL Ratings understands the company is expected to maintain strong debt metrics with sustenance of net cash positive position over the medium term as well. Any material debt-funded capex or acquisition impacting capital structure and debt protection metrics will remain a key rating sensitivity factor.

 

Healthy demand, increased contribution from the recently enhanced capacities, better product diversity, improving sales realisations driven by higher share of value-added products and moderating input prices (especially energy prices) are expected to improve operating profitability and will remain key monitorable over the medium term.

 

These strengths are partially offset by vulnerability to fluctuations in raw material and finished goods prices, exposure to inherent cyclicality as well as competitive and capital-intensive nature of the steel industry.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of SMEL and its subsidiaries because these companies, together referred to as the Shyam Metalics group, are in the same business and under a common management and 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:

• Established market position in eastern India and extensive experience of the promoters: The Shyam Metalics group is one of the largest players in the steel and steel intermediates industry in eastern India. The promoters have been associated with the steel industry for over three decades and have established forward as well as backward integrated operations. Combined capacities increased to 13.2 million tonnes per annum (MTPA) as on September 30, 2023 from 2.3 MTPA in fiscal 2017. Diversified product mix includes pellets (~8% of sales in fiscal 2023), sponge iron (~15%), billets (~8%), TMT (thermo mechanically treated) bars and structural products (~48%), ferro alloys (14%) and aluminum foils (~4%).

 

Revenue growth is expected to continue over the medium term given the recent capacity expansion, and planned capacity addition (taking total capacity to 21 MTPA), including operationalisation of acquired capacities over the next couple of fiscals. Furthermore, contribution from TMT bars, structural products and ferro alloys is expected to rise as the group is focusing on increasing the share of finished/value-added products in the sales mix. The clientele is also diversified, with no single customer accounting for more than 5% of revenue.

 

• Healthy operating efficiency driven by integrated operations and prudent working capital management: Operations are integrated with presence across the steel value chain (from pellets to long products). This provides the group flexibility to sell intermediate products and use them for captive consumption. Moreover, the facilities are supported by captive power and waste heat recovery plants, coal washery and railway sidings, which result in cost efficiency. Profitability will be supported by low power cost of Rs 2.5-3 per unit (captive power to contribute ~80% of its requirement over the medium term), improving product mix and healthy proportion of high margin ferro alloys, and moderated input prices. CRISIL Ratings expects operating margin to remain healthy over the medium term with blended Ebitda per tonne of Rs 4,500-5,500.

 

Working capital management has been prudent. The group sells mainly on advance/letter of credit basis, leading to low receivables of 15-30 days. Inventory, at 70-90 days, mainly comprises raw materials. While the group does not have captive iron ore mines, its proximity to raw material sources gives it access to iron ore at competitive rates because of lower logistics cost, thereby supporting profitability.

 

• Healthy financial risk profile: Despite lower cash flows, balance sheet strength continues to sustain, with consolidated networth of Rs 7,547 crore against consolidated debt of Rs 1,152 crore, as on March 31, 2023, along with sizeable cash surplus of ~Rs 1,500 crore. Adjusted gearing stood at 0.15 time against 0.1 time as on March 31, 2022. Debt/Ebitda rose to 0.8 time in fiscal 2023 against 0.23 time previous fiscal. Further, for the half year ended September 30,2023 consolidated networth stood at ~Rs. 8,150 crore with cash and equivalents of ~Rs 1,650 crore.

 

Financial risk profile is expected to remain stable despite large capex over the medium term. Consolidated capex of ~Rs 6,000 crore over fiscals 2024-27 is likely to be funded largely through annual cash accrual of Rs 1,500-1,800 crore. This should continue to support healthy debt protection metrics and strong capital structure. Also, CRISIL Ratings notes the management articulation that gearing will remain below 0.5 time even in case of any sizeable capex. Larger-than-expected debt-funded capex or acquisition, resulting in sustained high net debt levels, weakening of debt metrics and capital structure, will remain a key rating sensitivity factor.

 

As per listing norms, the company needs to reduce promoter stake to 75% by June 2024. CRISIL Ratings understands that the management intends to do this through a mix of fresh capital raise and promoter equity dilution. The promoters had diluted their stake by around 7% by making an offer for sale (OFS) in the first half of fiscal 2024. Further development on stake dilution and fund raise via qualified institutional placement (QIP) will remain a key monitorable. Any incremental cash inflows from the proposed capital raise will be used to support capex plans and incremental working capital requirement.

 

Weaknesses:

• Vulnerability to inherent cyclicality in steel sector and fluctuations in raw material and finished goods prices: The group's performance remains vulnerable to cyclicality in the steel sector given the close linkage between demand for steel products and the domestic and global economies. End-user segments such as real estate, civil construction and engineering are also cyclical.

 

Furthermore, operating margins are vulnerable to volatility in input prices (iron ore and coal) as well as realisation from finished goods. For instance, margin fell to 12% in fiscal 2023 from 24.5% in fiscal 2022 owing to rise in input prices. Price and supply of the main raw material, iron ore, directly impacts the realisations of finished goods. The steel sector also remains exposed to steel prices globally, as was seen in fiscal 2016 when steel prices declined significantly and had impacted realisations and operating profitability (the group’s operating margin fell to 9.4%). To maintain market share, industry participants have to routinely carry out capacity expansion and debottlenecking activities.

 

Any significant reduction in demand and prices adversely impacting operating margin and cash accruals of the group will remain a key monitorable.

Liquidity: Strong

Liquidity is supported by consolidated cash and equivalent of ~Rs 1,650 crore as on September 30, 2023 (Rs 1,506 crore as on March 31, 2023). Annual cash accrual of Rs 1,500-1,800 crore will largely suffice for capex and debt obligation. Moderate utilisation of fund-based working capital limit (about 56% as on April 30, 2023) also supports liquidity. The group has limited repayment obligation over the next few fiscals.

 

ESG profile

CRISIL Ratings believes the environment, social and governance (ESG) profile of SMEL supports its credit risk profile.

 

SMEL manufacturing has a significant impact on the environment owing to high greenhouse gas (GHG) emissions, waste generation and water consumption. This is because of the energy-intensive manufacturing process and its dependence on natural resources. The sector also has a significant social impact because of its large workforce across operations and value chain partners, and as its operations affect the local community and involve health hazards.

 

Key ESG highlights:

•    It is taking initiatives to reduce its energy consumption and emissions by installing VFD in Centrifugal pump and replacing of IE-2 low efficiency motors with Highly efficient IE-3 Motors,
•    The company has also adopted to set up ZLD at their plants. They have set wastewater treatment plants of design capacity 3000 KLD and 4000 KLD respectively. The also sell fly ash to brick manufacturers and looks forward to recycling and reusing of material leading to conservation of resources.
•    The Gender diversity at the company has reduced to 0.67% as compared to previous year. However, attrition rate has improved from 6.21% to 2.69%.
•    Its governance structure is characterised by 58% of the board members comprising independent directors with no independent director's tenure exceeding 10 years; chairman and CEO positions are split.
•    There is growing importance of ESG among investors and lenders. The company’s commitment to ESG will play a key role in enhancing stakeholder confidence, given high access to domestic capital markets.

Outlook: Stable

The Shyam Metalics group will continue to benefit from its established market position in key long steel products, diversified revenue streams, robust demand and integrated nature of operations, thereby ensuring healthy cash generation. The financial risk profile is likely to remain healthy, driven by prudently funded capex plans and strong liquidity.

Rating Sensitivity Factors

Upward factors

• Healthy operating performance supported by volume growth with high-capacity utilisation, and increased level of integration resulting in consolidated Ebitda per tonne rising to beyond Rs 7,000-7,500 on a steady basis.
• Phased capital spending and prudently funded, leading to sustenance of comfortable debt metrics with consolidated debt to Ebitda remaining below 0.5 time on sustained basis along with healthy liquidity levels.

 

Downward factors

• Deterioration in operating performance due to weakened demand and intense competition, leading to significant decline in operating profitability, with consolidated Ebitda per tonne below Rs 4,000 on a steady basis.
• Large, debt-funded capex/acquisition leading to deterioration in debt metrics; with consolidated debt to Ebitda increasing above 1.0-1.5 times on a sustained basis.

About the Group

The Shyam Metalics group has diversified businesses comprising production of iron and steel, ferro alloys, and power. SMEL was established in 2002 as Shyam DRI Power Ltd when the group expanded its operations to Odisha; the company got its present name in January 2010. It manufactures sponge iron, billets, TMT steel bars, and ferro alloys and has captive power plants supporting ~80% of its power requirements.

 

Shyam Sel and Power Ltd, a wholly owned subsidiary of SMEL, was incorporated in 1991 and started commercial production in 1996 with steel-melting shops. Over the years, it added rolling mills, ferro alloy furnaces, sponge iron kilns, billet and ingot capacities, and a captive power plant and capital railway sidings to ensure operational and business integration. Manufacturing units are in Raniganj, Pakuria and Jamuria in West Bengal.

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs.Crore)	Complexity level	Rating outstanding with outlook
NA	Cash Credit*	NA	NA	NA	1000	NA	CRISIL AA/Stable
NA	Letter of credit & Bank Guarantee*	NA	NA	NA	1850	NA	CRISIL A1+
NA	Capex Letter Of Credit	NA	NA	NA	350	NA	CRISIL AA/Stable
NA	Commercial paper	NA	NA	7-365days	50	Simple	CRISIL A1+
NA	Proposed Long Term Bank Loan Facility*	NA	NA	NA	100	NA	CRISIL AA/Stable

*Fully Interchangeable between Fund Based and Non-Fund Based facilities to the extent of Rs.2950 cr