Detailed Rationale

CRISIL Ratings has revised its rating outlook on the long-term bank facilities of Shyam Metalics and Energy Ltd (SMEL; SMEL and its subsidiaries are collectively referred to as the Shyam Metalics group) to ‘Positive’ from ‘Stable’, and reaffirmed the rating at ‘CRISIL AA’; the rating on the short-term facilities and commercial paper programme has been reaffirmed at ‘CRISIL A1+’.

 

The outlook revision factors in a likely improvement in the business risk profile of the group with increasing scale of operations and product diversification amid the ongoing capacity expansion plan, while sustaining the strong financial risk profile and liquidity. Timely commissioning of planned capital expenditure (capex) supporting the better-than-expected improvement in business risk profile and operating earnings can result in a rating upgrade.

 

The group has been witnessing sustained growth in its steel-making capacities over the past few years, and is currently focusing on increasing share of value-added products and bringing in higher diversity in its product mix. The ongoing expansion plans are expected to support revenue visibility by increasing capacities as well as by moving up the product value chain. The group’s recent foray into the aluminium and stainless-steel businesses further aides the same. Additionally, the group continues to focus on sustaining the high level of integration (forward and backward), which, along with increasing product diversity, will support operational efficiency and some risk mitigation to operating profitability.

 

During fiscal 2024, the share of finished products remained steady at 48% in total sales volume (48% in fiscal 2023 and 38% in 2022), and is expected to increase to 50% by fiscal 2026 with the ongoing expansion plans. Furthermore, the consolidated earnings before interest, tax, depreciation and amortisation (Ebitda) was Rs 1,587 crore and Ebitda per tonne was Rs 4,438 for fiscal 2024 (Rs 1,486 crore and Rs 4,462 per tonne, respectively, in fiscal 2023). CRISIL Ratings expects the blended consolidated Ebitda per tonne to increase to more than Rs 5,000-5,500 per tonne by fiscals 2025 and 2026 with commissioning of the planned capacities. That said, timely progress on capex (most of it to be completed by fiscal 2026), resulting in expected improvement in blended realisation with higher share of value-added products, and material increase in consolidated Ebitda and Ebitda per tonne, will be key factors for a rating upgrade.

 

CRISIL Ratings has also taken note of the sustenance of strong consolidated financial risk profile and liquidity, with consolidated adjusted gearing (ratio of TOL to TNW) of ~ 0.4 time as on March 31, 2024, while interest coverage and net cash accrual to total debt ratios were more than 10 times for fiscal 2024. The metrics have remained steady over the past three fiscals despite the ongoing capex.

 

CRISIL Ratings understands that the management will continue to fund the ongoing capex (expected growth outlay to be around Rs 5,500 crore over fiscals 2025-2027) through internal accrual (expected to be more than Rs 2,000-2,200 crore per annum), with limited reliance on external debt. Hence, financial risk profile will remain strong over the medium term, with adjusted gearing below 0.5 time, interest coverage ratio more than 10-12 times, and sustenance of net cash position. Any deviation from these will be a key rating sensitivity factor.

 

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 the promoters in the steel sector; the ratings also factor in the comfortable financial risk profile backed by healthy debt protection metrics. 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, increasing product diversification, 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 ~13.66 million tonne per annum (MTPA, including pellets of 6 MTPA, sponge iron of 2.9 MTPA, billets of 2 MTPA and other finished steel capacities of ~2.07 MTPA) as on June 30, 2024, from ~2.9 MTPA in fiscal 2019. Furthermore, the group has been focusing on increasing the product diversity and higher share of finished and value-added products in the overall sales. During fiscal 2024, the share of finished and value-added products in consolidated sales remained steady at ~48% ( up from 38% in fiscal 2022). Diversified product mix includes pellets (~5.5% of sales in fiscal 2024), sponge iron (~18.2%), billets (~5%), TMT (thermo mechanically-treated) bars and structural products (~47.5%), ferro alloys (13.7%), stainless steel (~5.8%) and aluminum foils (~4.3%).

 

Revenue growth is expected to continue over the medium term given the recent capacity expansion and planned capacity addition (taking total combined capacity to 21 MTPA), including operationalisation of acquired capacities over the next couple of fiscals. Furthermore, contribution from finished carbon steel, stainless steel and aluminum is expected to rise as the group is focusing on increasing the share of finished/value-added products in the sales mix. Additionally, the business benefits from diversified client mix, with no single customer accounting for more than 5% of consolidated 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 finished 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 margins of finished steel and stainless steel, and moderated input prices. CRISIL Ratings expects consolidated operating profitability to improve and remain healthy over the medium term, with blended Ebitda per tonne to increase to more than Rs 5,000-5,500 by fiscals 2025 and 2026. 

 

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 and setting up of railway siding gives it access to iron ore at competitive rates because of lower logistics cost, thereby supporting profitability.

 

• Strong financial risk profile, expected to sustain despite ongoing capex: The group benefits from sustenance of strong balance sheet, with consolidated networth of Rs 10,221 crore against debt of Rs 645 crore as on March 31, 2024, along with sizeable cash surplus of ~Rs 2,081 crore. The cash balance has also been supported by fundraise of Rs 1,385 crore through qualified institutional placement (QIP) done in the previous fiscal. Adjusted gearing stood at 0.06 time as on March 31, 2024, against 0.15 time previous fiscal. Gross debt/Ebitda declined to 0.4 time from 0.8 time.

 

Financial risk profile is expected to remain strong despite large capex planned over the medium term. Consolidated capex of ~Rs 5,500 crore over fiscals 2025-2027 is likely to be funded largely through annual cash accrual of more than Rs 2,000-2,200 crore. This should continue to support healthy debt protection metrics and a strong capital structure. Also, CRISIL Ratings notes the management articulation that gearing will remain below 0.5 time and net leverage will be limited with consolidated balance sheet to remain net cash positive, despite the planned capex. Larger-than-expected debt-funded capex or acquisition weakening debt metrics and capital structure will remain monitorable.

 

Weaknesses:

• Exposure to project execution risk with sizeable capex planned over the medium term: The group is exposed to execution and stabilisation risks associated with the capex planned over the medium term. The company is undertaking total planned capex of around Rs 7,500 crore between fiscals 2024 and 2027, out of which capex of ~ Rs 5,500 crore was pending for execution as of June 2024. The planned capex is for inorganic brownfield expansion across product segments, including power plant set-up, intermediate steel capacities, blast furnace, and finished product capacities under carbon steel, stainless steel and the aluminium segment. Though the said capex is expected to improve the product profile while sustaining cost efficiencies, its timely completion without material cost overrun will be monitorable. That said, the group’s past track record of project execution while sustaining strong financial risk profile, as well as availability of resources such as land bank, brownfield nature of capex and healthy internal accrual, provide comfort against the project risk.

 

• Vulnerability to inherent cyclicality in the 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 margin is vulnerable to volatility in input prices (iron ore and coal) as well as realisation from finished goods. 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 (operating margin fell to 9.4%). To maintain market share, industry participants must routinely carry out capacity expansion and debottlenecking activities.

 

Any significant reduction in demand and prices adversely impacting operating margin and cash accrual will remain monitorable.

Liquidity: Strong

Liquidity is supported by consolidated cash and equivalent of ~Rs 2,200 crore as on June 30, 2024 (Rs 2,080 crore as on March 31, 2024). Expected annual cash accrual of more than Rs 2,000-2,200 crore will largely suffice for capex and debt obligation. Furthermore, low utilisation of fund-based working capital limit after QIP-based fund raise (Rs 1,385 crore) has left substantial cushion in the limit (Rs 1,621 crore as of May 2024).

 

ESG profile

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

 

The company’s manufacturing activities have a significant impact on the environment owing to high greenhouse gas 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 IE-2 low efficiency motors with highly efficient IE-3 motors
• The company has also adopted to set up ZLD at its plants. It has set wastewater treatment plants of design capacity 3,000 KLD and 4,000 KLD. It also sells fly ash to brick manufacturers and looks forward to recycling and reusing the material, leading to conservation of resources.
• The gender diversity has has improved to ~0.8 (0.67% in 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: Positive

The Shyam Metalics group may benefit from increasing diversification and focus on value-added products and integrated nature of operations, thereby improving overall cash generation. Strong liquidity, coupled with measured internal accrual-based capex plans, will keep financial risk profile strong. 

Rating sensitivity factors

Upward factors:

• Timely completion of ongoing capex without material cost overrun, ramping up of newer capacities supporting healthy volume growth and increased level of integration resulting in consolidated Ebitda per tonne rising beyond Rs 5,000-5,500 on a steady basis
• Phased capex, prudently funded, leading to sustenance of strong debt metrics in line with expectation, with consolidated net debt to Ebitda and adjusted gearing remaining below 0.5 times, respectively, on sustained basis, along with healthy liquidity

 

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 4,500 on a steady basis
• Time or cost overruns or higher-than-expected debt-funded capex/acquisition leading to deterioration in debt metrics; with consolidated net debt to Ebitda and adjusted gearing increasing to above 0.5 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