| Super Smelters Limited | ||||||
| 'CRISIL BBB+/Stable/CRISIL A2' assigned to Bank Debt | ||||||
| Rating Action | ||||||
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| 1 crore = 10 million | ||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has assigned its ‘CRISIL BBB+/Stable/CRISIL A2’ ratings to the bank facilities of Super Smelters Limited (SSL, part of SAI Group).
The ratings reflect healthy business risk profile, marked by established market position, improving operating profitability, supported by integrated nature of operations and longstanding experience of promoters in the steel sector. The rating also factors in the company’s average albeit improving financial risk profile. These strengths are partially offset by high working capital intensity of operations, marked particularly by high inventory level, vulnerability to fluctuations in price of raw material and finished goods and exposure to inherent cyclicality as well as competitive nature of the steel industry.
The business risk profile remains healthy with diversification across product segments, established brand presence in Eastern India and diversified customer base. The revenue has grown at compound annual growth rate (CAGR) of 19% over the last 5 fiscals, supported by capacity additions as well as improving market conditions in the industry. Further, the operating margin has also remained healthy at 16 – 22% over fiscals 2015 – 2021 (except for fiscal 2017 which was impacted by downturn in steel industry), higher than similar sized peers owing to vertical integration in the value chain as well as efficiencies in the operations.
For fiscal 2022, the revenue is expected to grow by more than 20% due to upcycle in steel industry leading to increased product realisations driven by healthy demand scenario, minor capacity enhancements and improvements undertaken by SSL. Operating margin is expected to remain in range of 18-20% in the current fiscal.
Financial risk profile of SSL is on the improving trend, marked by adjusted gearing (ratio of total debt to networth) of 1 time as on March 31, 2021. However same has been improving from 1.6 times as on March 31, 2017 owing to no major debt funded capital expenditure carried out by company. Debt metrics are also on improving trend, for instance, adjusted interest coverage and net cash accrual to total debt (NCATD) ratios have improved to 3.2 and 0.17 times respectively in fiscal 2021 from 1.1 and 0.02 time in fiscal 2017.
The company would be incurring a capex of 5%-10% of its gross block per annum over the medium term, funded through internal accruals and equity support from shareholders and the dependence on external borrowings will be minimal. With improved profitability in the recent fiscals which is expected to continue over medium term and no new additional debt to be availed, the debt protection metrics are expected to remain healthy with interest cover of more than 3 times and NCATD of around 0.2 times.
While the group is carrying out large capital expenditure to the tune of ~Rs 900 crore to set up capacities in a group company – Giridhan Metal Pvt Ltd, no support in the form of investments, loans & advances or corporate guarantee / letter of comfort will go from SSL to other group companies. The extension of support to group companies, if any, will remain a key monitorable.
Liquidity is adequate with average bank limit utilisation of 75-80% for the 12 months ended June 2021 and unutilized limits backed by drawing power amounting to Rs 50-70 crore. The company is expected to generate cash accruals of Rs 180 – 200 crore per annum to service its debt obligations of Rs 45 – 60 crore over medium term. |
Analytical Approach For arriving at the ratings of SSL, CRISIL Ratings has considered standalone business and financial risk profiles of SSL as there are no financial linkages in the form of investment, support or guarantee presently as well as expected in future with other group companies. |
Key Rating Drivers & Detailed Description Strengths Healthy business risk profile, marked by established market position and longstanding experience of promoters in the steel sector The promoters have been in the industry for almost three decades and have set up vertically integrated operations over the years which has led to the revenue growing from Rs ~780 crore in fiscal 2016 to Rs 1600 crore in fiscal 2021. The company has a strong brand, Super Shakti, in Eastern India, especially in Bihar, Jharkhand, and West Bengal, and commands a premium over its peers in the region. Over the medium term, the revenue is expected to exceed Rs 2,000 crore.
The capacities for final products has increased over the years with the capacity of rolling mill increasing from 120,000 tonnes per annum (TPA) in fiscal 2015 to 240,000 TPA currently. Over the medium term, the revenue growth will be supported by recent capacity enhancements done by SSL and upcycle in the steel industry.
Improving operating profitability, supported by integrated nature of operations The company has integrated operations with presence in steel value chain right from pellets to long/flat products. It provides SSL flexibility to sell intermediate products and use them for captive consumption. The facilities are also supported by captive power plants and railway siding, which result in cost efficiencies besides presence across value chain. This has helped in operating margin increasing from around 16% in fiscal 2016 to 21.8% in fiscal 2021. The operating margin is expected to remain healthy at above 17-18% over the medium term.
Average albeit improving financial risk profile Debt protection metrics have remained average in the past fiscals with interest coverage of less than 2 times and NCATD of less than 0.2 time. It is expected to improve over the medium term with improving scale and better profitability along with repayment of debt and no additional debt to be availed. Debt/EBITDA, too, has improved from around 8 times in fiscal 2016 to 3 times in fiscal 2021 and is expected to improve further. Interest cover and NCATD are expected to remain above 3 times and 0.18 time respectively.
No debt funded capex over the medium term, no support to group companies and management’s policy of maintaining long term debt to equity of less than 1 will further support the financial risk profile.
The existing private equity investor is expected to remain invested in SSL atleast till fiscal 2025. Any possible share buyback prior to fiscal 2025, having material impact on the capital structure, will remain key monitorable.
Weaknesses High working capital intensity of operations, marked particularly by high inventory level Gross current assets (GCA) days remained high at around 200 days in fiscal 2021 due to high inventory holding period of around 6 months. The company does bulk procurement to benefit from prices leading to higher inventory holding. The company maintains higher inventory compared to its peers at around 180-200 days (compared to peers’ inventory of less than 120 days). Hence, the company is exposed to higher risk in case of downturn in the industry. For instance, in fiscal 2017; SSL incurred a loss at net level partially impacted due to inventory losses owing to sharp downside in the prices in the steel value chain owing to downcycle in the industry.
Operations are likely to remain working capital intensive over the medium term on account of high inventory level.
Vulnerability to fluctuations in prices of raw material and finished goods Operating margin is vulnerable to fluctuations in the prices of inputs (such as iron ore and coal) as well as realisation from finished goods. The prices and supply of the main raw material, iron ore, directly impacts the realisations of finished goods. For instance, the operating margin fell to 12% in fiscal 2017 from 16% in the previous fiscal. Any significant change in the demand-and-pricing scenario, resulting in moderation in operating margin, will remain a key monitorable.
Exposure to inherent cyclicality in and competitive & capital-intensive nature of steel sector The company’s performance remains vulnerable to cyclicality in the steel sector given the close linkage between the demand for steel products and the domestic and global economy. The end-user segments such as real estate, civil construction and engineering also display cyclicality. While there has been a significant push by the government on steel-intensive sectors such as railways and infrastructure, any sustained downturn in demand will adversely impact performance of steel companies. During the steel industry downcycle in fiscal 2016-2017, the operations of SSL were impacted and SSL incurred a loss at net level.
The competitive intensity in the Indian steel sector is significant owing to presence of large steel companies such as Tata Steel Ltd, JSW Steel Ltd, Jindal Steel and Power Ltd (CRISIL A-/Stable/CRISIL A2+). Also, steel imports from other countries, mainly China, add to the competition. Additionally the domestic steel sector is fairly capital intensive. To maintain/improve market share, the industry participants have been observed to routinely carry out the capacity expansion and debottlenecking activities. SSL too would be incurring capex over the medium term for capacity enhancements and maintenance purpose. |
Liquidity: Adequate The liquidity remains adequate with average bank limit utilisation of 75-80% for the 12 months ending June 2021 and drawing power backed unutilised fund based limits of Rs 50-70 crore. As of June 30, 2021, the company had cash and equivalents of Rs 32 crore, however the same were encumbered towards margin money for non-funded bank facilities. The company is expected to generate cash accruals of Rs 180 – 200 crore per annum over the medium term to service its debt obligations of Rs 45-60 crore.
The company had availed moratorium on its debt instalments between March 2020 and August 2020 which was extended by RBI in the wake of covid-19 pandemic. |
Outlook: Stable CRISIL Ratings believes SSL's business risk profile will continue to benefit from integrated nature of operations and healthy operating margins. The company’s financial risk profile will remain adequate with prudently funded capex, gradual repayment of existing term debt and steady cash generation. |
Rating Sensitivity factors Upward Factors
Downward Factors
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About the Company Incorporated in 1995, SSL is a part of the SAI group of companies, promoted by Mr. Sitaram Agarwal. It is managed by Mr. Sitaram Agarwal and his sons, Mr. Deepak Agarwal and Mr. Dilipp Agarwal. It is an integrated iron and steel manufacturer with one manufacturing unit at Jamuria (West Bengal) producing Pallets, Sponge Iron, Billets, Slabs, Ferro Alloys, HR coils, ERW Pipes, TMT Bar, Angle, Channels and allied products under the brand name of “Super Shakti”.
The company has facilities for manufacturing 0.8 million tonnes per annum (MTPA) of iron ore pellets with 1 MTPA grinding/beneficiation facility, 330,000 tonnes per annum (TPA) of sponge iron, 249,728 TPA of billet/slab, 28,500 TPA of ferro alloys and 240,000 TPA of rolled products.
The company also has captive power plants (CPP) of 53 MW. SSL’s Jamuria plant was set up in five phases between fiscal 2009 and fiscal 2017.
The main operating companies under SAI group umbrella are Super Smelters Limited, Supershakti Metaliks Ltd (SML), Sai Electrocasting Pvt Ltd (SEPL), Giridhan Metal Pvt Ltd (GMPL) and Sai Sponge India (Pvt) Ltd (SSIPL). The flagship company of the group is SSL. Super Shakti Metaliks Ltd and Sai Electrocasting Private Ltd were demerged from SSL in August 2016. |
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)
*Includes Covid emergency line of Rs 3.5 crore **Includes Covid emergency line of Rs 5.5 crore ***Includes Covid emergency line of Rs 2.5 crore #Includes Covid emergency line of Rs 3 crore ##Includes Covid emergency line of Rs 2.5 crore ###Includes Covid emergency line of Rs 1.5 crore |
| 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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*Includes Covid emergency line of Rs 3.5 crore
**Includes Covid emergency line of Rs 5.5 crore
***Includes Covid emergency line of Rs 2.5 crore
#Includes Covid emergency line of Rs 3 crore
##Includes Covid emergency line of Rs 2.5 crore
###Includes Covid emergency line of Rs 1.5 crore
Criteria Details
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