Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AA/Stable/CRISIL A1+’ ratings on the bank facilities and commercial paper programme of Shyam Sel and Power Limited (SSPL; part of the Shyam Metalics group). The Shyam Metalics group includes SSPL and its parent, Shyam Metalics and Energy Ltd (SMEL; ‘CRISIL AA/Stable/CRISIL A1+’), and their subsidiaries.

 

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

 

In fiscal 2023, revenue grew by 23.7%, largely led by better realisations. Operating margin however, declined to 14.2%, from 25% in fiscal 2022 (21.5% in fiscal 2021), owing to a steep rise in energy cost and iron ore prices, which more than offset the rise in realisations. In comparison, fiscal 2022 was a historical high for the steel industry.

 

The company incurred capital expenditure (capex) of nearly Rs 1,100 crore along with acquisition of Ramsarup Industries Ltd (Ramsarup), which led to an outgo of nearly Rs 380 crore. Moderate cash accrual and continued capex resulted in debt rising to around Rs 560 crore as on March 31, 2023, against Rs 350 crore as on March 31, 2022.

 

That said, despite moderation, EBITDA in absolute terms remained robust at Rs 1,000 crore in fiscal 2023 (Rs 1,451 crore in fiscal 2022 and Rs 701 crore in fiscal 2021), supporting the healthy credit profile. The balance-sheet continued to remain net cash positive, in line with expectations. Further, ratings factor in the adequate liquidity of the company, marked by cash and equivalents of around Rs 570 crore as on March 31, 2023.

 

The company has announced the acquisition of Mittal Corp, a manufacturer of stainless steel long products with a total capacity of 150,000 tonne per annum. Total outgo in fiscal 2024 towards completion of the acquisition is ~Rs 351 crore. It is awaiting final order from the National Company Law Tribunal (NCLT) for the legal process to complete.

 

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

Analytical Approach

To arrive at its ratings, CRISIL Ratings has applied its parent notch-up framework to factor in the support from its parent, SMEL. SMEL, SSPL and their subsidiaries, together referred to as the Shyam Metalics group, are in the same business, under a common management. The companies have significant operational and financial linkages and SMEL also holds 100% shareholding in SSPL.

Key Rating Drivers & Detailed Description

Strengths:

• Established market position of the group

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 capacity of the group have increased to 12.7 million tonne per annum (MTPA) in fiscal 2022, from 2.3 MTPA in fiscal 2017. The diversified product mix includes pellets (~8% of sales in fiscal 2023), sponge iron (~15%), billets (~8%), TMT 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, planned capacity addition (taking total capacity to 14.4 MTPA at group level), and operationalisation of acquired capacities over the next couple of fiscals. Contribution from TMT bars, structural products and ferro alloys should also improve over the medium term, with the group focusing on increasing the share of finished/value-added products in the sales mix. Clientele is also diversified, with no single customer accounting for more than 5% of revenue.

 

• Healthy operating efficiencies driven by integrated operations

SSPL has integrated operations with presence in steel value chain right from pellets to long products. It provides the company with a flexibility to sell intermediate products and also, use them for captive consumption. The facilities are also supported by captive power plants, waste heat recovery plants, coal washery, and railway sidings, which result in cost efficiencies. Profitability is further supported by low power cost of Rs 2.5-3/unit, improving product mix and healthy proportion of high margin ferro alloys.

 

Working capital management has been prudent. The company sells mainly on advance/letter of credit basis and hence, receivables are low between 15 and 30 days. Inventory is maintained for 65-75 days, and mainly comprises raw material. While SSPL does not have captive iron ore mines, proximity to raw material sources provides easy access to iron ore at competitive rates. This, coupled with lower logistic cost, supports the healthy operating margin.

 

• Healthy and improving financial risk profile

Despite the lower cash flow, the company has maintained a healthy balance sheet, with consolidated networth of Rs 3,704 crore against debt of Rs 559 crore as on March, 31 2023, along with sizeable cash surplus of around Rs 570 crore. Adjusted gearing stood at 0.15 time as on March 31, 2023, as against 0.11 time a year ago. Debt/EBITDA rose to 0.52 time in fiscal 2023, compared to 0.24 time in the previous fiscal.

 

Financial risk profile is expected to remain healthy, despite high capex over the medium term. The company plans to fund capex plans of ~Rs 2,500 crore over the next couple of fiscals, largely from annual internal accrual. This should continue to support healthy debt protection metrics and strong capital structure. Also, CRISIL Ratings notes the management articulation that the gearing will remain below 0.5 time even in case of any sizeable capex. Larger-than-expected debt-funded capex or acquisition, resulting in higher debt levels and weakening of debt metrics and capital structure, will remain a key rating sensitivity factor.

 

• Strong support from parent, SMEL

SMEL holds a 100% stake in SSPL and extends strong operational, managerial and financial support. Both companies are in the same business, under a common management with significant operational and financial linkages. CRISIL Ratings expects SMEL to extend support to the company if required.

 

Weaknesses:

• Vulnerability to inherent cyclicality in the steel sector and fluctuations in prices of raw material and finished goods

SSPL's performance remains vulnerable to cyclicality in the steel sector given the close linkage between demand for steel products and growth trends in the domestic and global economy. The end-user segments such as real estate, civil construction and engineering also display cyclicality.

 

Further, the operating margin remains vulnerable to volatility in input prices (iron ore and coal) as well as realisations from finished goods. Operating margin fell to 14.2% in fiscal 2023 from 25.0% in fiscal 2022 owing to rise in input prices. Prices and supply of key raw material, iron ore, directly impacts realisations of finished goods. Further, the steel sector remains exposed to movement in steel prices globally, as witnessed in fiscal 2016, wherein steel prices declined significantly and hit realisations and operating margin of SSPL (declined to 12.2%). To maintain market share, industry participants have to routinely carry out capacity expansion and debottlenecking activities.

 

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

Liquidity: Strong

Liquidity is supported by sufficient internal accrual and cash and cash equivalents of around Rs 570 crore as on March 31, 2023. Moderate utilisation of fund-based working capital limit (about 57% as on April 30, 2023) also supports liquidity. The company has limited long-term debt obligation over the medium term. Annual cash accrual should suffice to meet the capex requirement and debt servicing.

Outlook: Stable

SSPL will continue to benefit from its established market position in key long steel products, diversity in revenue streams, robust demand and the integrated nature of operations. The financial risk profile should remain healthy, driven by adequate cash accrual and prudent funding of capex. SSPL will remain strategically important to, and continue to receive strong managerial, operational and financial support from its parent SMEL.

Rating Sensitivity factors

Upward factors

• Improved credit risk profile of the parent, SMEL, resulting in 1 notch upgrade in credit rating of SMEL
• Significantly higher than expected operating performance with continued volume growth, supported by high-capacity utilisation, and increased level of integration
• Sustenance of healthy financial risk profile with no material debt funded capex or acquisition, along with healthy operating cash accruals supporting strong debt metrics and liquidity levels

 

Downward factors

• Deterioration in credit risk profile of the parent, SMEL, resulting in 1 or more notches downgrade in credit rating of SMEL.
• Significantly lower than expected operating performance due to weakened demand, and intense competition, leading to a decline in operating margins
• Higher than expected debt-funded capex/acquisition deteriorating debt metrics and weakening the financial risk profile, with sharp reduction in liquidity surpluses.

About the Company

SSPL was incorporated in 1991, and started commercial production in 1996, with steel-melting shops. Over the years, the company has added rolling mills, ferro alloy furnaces, sponge iron kilns, billet and ingot capacities, and a captive power plant and railway siding to ensure operational and business integration. Manufacturing units are at Raniganj, Pakuria and Jamuria in West Bengal.

About the Group

The Shyam Metalics group has diversified business interests, comprising production of iron and steel, ferro alloys, and power. SMEL was set up 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 a power plant.

Key Financial Indicators – SSPL (Standalone) – CRISIL Ratings adjusted figures

As on/for the period ended March 31	Units	2023	2022
Revenue	Rs crore	7,054	5,704
PAT	Rs crore	1,000	980
PAT margin	%	8.5	17.2
Adjusted debt/adjusted networth	Times	0.15	0.11
Adjusted interest coverage	Times	24.2	366.2
Gross debt / EBTIDA	Times	0.52	0.24

 

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	Bank Guarantee	NA	NA	NA	200	NA	CRISIL A1+
NA	Letter of Credit	NA	NA	NA	1,000	NA	CRISIL A1+
NA	Cash Credit	NA	NA	NA	600	NA	CRISIL AA/Stable
NA	Capex Letter Of Credit	NA	NA	NA	435	NA	CRISIL AA/Stable
NA	Commercial paper	NA	NA	7-365 days	50	Simple	CRISIL A1+
NA	Proposed Letter of Credit*	NA	NA	NA	65	NA	CRISIL AA/Stable

*Capex LC