Rating Rationale
December 13, 2021 | Mumbai
Vardhman Special Steels Limited
Ratings Reaffirmed
 
Rating Action
Total Bank Loan Facilities RatedRs.546.52 Crore
Long Term RatingCRISIL AA/Stable (Reaffirmed)
Short Term RatingCRISIL A1+ (Reaffirmed)
 
Rs.150 Crore Commercial PaperCRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to Annexure for Details of Instruments & Bank Facilities

Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AA/Stable/CRISIL A1+’ ratings on the bank facilities and commercial paper of Vardhman Special Steels Limited (VSSL).

 

The ratings continue to reflect VSSL’s established market position and customer base, healthy financial risk profile, and continued support from the Vardhman group. These strengths are partially offset by susceptibility to fluctuations in raw material prices and exposure to cyclicality in demand in the automotive industry.

 

 The ratings reflect the expected improvement in the operating performance of VSSL in fiscal 2022, driven by steady recovery in the automobile industry and higher prices of long steel product. Automobile production in the domestic market will recover with ease in mobility restrictions, subsiding chip shortage issue and preference for personal vehicles. Hence, sales volume of the company is likely to increase by ~10% year-on-year in fiscal 2022. Steel prices on the other hand are expected to grow by 20-22% due to strong global realisations, export potential and soaring coking coal prices before correcting in fiscal 2023. Therefore, revenue is likely to grow by ~35% in 2022.

 

With better operational efficiency and favorable market conditions, the EBITDA (earnings before interest, taxes, depreciation, and amortisation) margin improved to 14.7% in the first-half of fiscal 2022 from 12% in fiscal 2021. This was backed by higher realisations, changes in raw material procurement strategy and benefits accruing from the technical know-how of Aichi Steel Corporation, Japan (ASC, a Toyota group associate). The higher margin is in line with guidance issued by the company for EBITDA per tonne to improve from Rs 5,000-7,000 per tonne to Rs 7,000-9,000 per tonne over the medium term. The company is also expanding capacity to 2.5 lakh MT by fiscal 2024 from 2 lakh MT, which will be funded by Rs.50 crore equity infusion done by ASC in fiscal 2020 and the rest through internal accrual. Increased capacity coupled with higher operating margin of ~10% will improve net cash accrual to Rs 100-140 crore over the medium term

 

Financial risk profile is marked with improving debt protection metrics. Gearing is expected to improve to about 0.31 time in fiscal 2022 and interest coverage to about 11.4 times in fiscal 2022 compared to 6.1 times in fiscal 2021. The liquidity remains comfortable at Rs 79 crore at October  end (Rs 39 crore in the form of cash & equivalents while Rs 40 crore in unutilized bank lines). Cash accruals are expected in the range of Rs 100-140 crore per annum over the fiscal 2022-24 to be sufficient to cover annual debt obligations of Rs 25-35 crore. The equity infusion of Rs 50 crore has also improved the financial risk profile of the company and the proceeds would be utilized for funding any capex under this collaboration.

 

The ratings of VSSL continue to reflect the parentage of the Vardhman group, whose flagship company, Vardhman Textiles Ltd (VTXL; rated 'CRISIL AA+/FAAA/Stable/CRISIL A1+') is the largest shareholder in VSSL. The ratings also factor in established market position coupled with considerable backward integration as well as healthy financial risk profile. These rating strengths are partially offset by susceptibility to cyclicality in end-user industries.

Analytical Approach

CRISIL Ratings has applied its parent notch-up framework to factor in the parentage of Vardhman Group (whose flagship company, VTXL is the largest shareholder in the VSSL) with 59% shareholding in VSSL.

Key Rating Drivers & Detailed Description

Strengths:

  • Strong support from Vardhman group:

Prior to its demerger from VTXL, VSSL was its steel division. Operations continue to be largely controlled by the management of VTXL even after the demerger. This is because around 59% of VSSL’s equity shares are owned by the flagship company, its promoters, and other promoter-holding/investment companies; while the rest is owned by the public. VSSL receives strong support from the group, such as using the Vardhman group logo, and common banking and treasury operations with VTXL. Any major change in the shareholding will be a key rating sensitivity factor.

 

  • Established market position:

Market position is supported by a strong customer base, including automotive original equipment manufacturers and other established players in the engineering segment. Contribution from the top 5 clients remain at about 30%. Presence across segments is diversified, with 70-75% of the contribution coming from passenger vehicles and two-wheelers. In-house manufacturing of ingots and billets, along with ability to pass on price increases to clients resulted in moderate operating efficiency. The management focus on the steel business, high capacity utilisation (around 95%) and considerable backward integration (around 90%) should drive growth in operating income and improve business risk profile over the medium term.

 

  • Healthy financial risk profile:

The interest coverage ratio is expected to improve to about 11.4 times in fiscal 2022 compared to 6.1 times in fiscal 2021. Gearing improved on account of equity infusion of Rs 50 crore by ASC in fiscal 2020 and reduced debt obligations. The gearing to remain at 0.31 time at the end of fiscal 2022 with no additional debt expected over the medium. With moderate capex plan of Rs.250 crore over the 5-year period, to be funded through equity infusion and internal accruals, the long term debt levels are expected to reduce from Rs.130 crore in fiscal 2021 to Rs. 100-70 crore in fiscal 2022-2023, in line with the company’s goal to become debt free by fiscal 2025-2026 with current plans. ST Debt is expected to sustain at same levels with average BLU of ~80% over the medium term.

 

Weakness:

  • Susceptibility to cyclicality in end-user industries:

The company is a small player in the alloy steel industry, with only about 3% of the total capacity in India. Products are used in the automotive, tractor, bearings, engineering and allied industries, with higher dependence on the automotive sector (accounts for over 85% of the company’s total revenue). This exposes VSSL to cyclicality in the automotive industry, as witnessed during the recent economic slowdown. Vulnerability to fluctuations in input prices also persists.

Liquidity: Strong

VSSL has adequate liquidity driven by expected cash accruals of Rs 100-140 crore per annum over medium term. The company has a working capital limits of Rs 200 crore with average BLU of 80% for 12 months ended October 2021. Further, VSSL also maintains Rs 39 crore in the form cash and equivalents. Capex plans of Rs 250 crore are to be funded through equity infusion and internal accruals. As indicated by management, the Company has no plans of availing any new LT debt over the medium term.

Outlook: Stable

CRISIL Ratings believes the operating performance will recover in line with the recovery in end user industry, while support from Vardhman group should continue. The tie-up with ASC is also expected to support business and financial risk profile.

Rating Sensitivity factors

Upward factors:

  • Substantial increase scale of operations and sustained RoCE of over 15% leading to higher strategic importance to group and improved market position of the company
  • Improvement in credit profile of VTXL by one notch

 

Downward factors:

  • Operating margin remaining below 7-8% on consistent basis or fall in market position due to higher competition from competitors
  • Weakening of the capital structure such as gearing increasing beyond 1 times
  • Reduction in support from, or downward rating action on, VTXL

About the Company

The Vardhman group had set up Oswal Steels in 1972 to manufacture special and alloy steels with initial capacity of 0.5 lakh tonne per annum (tpa). In 1986, the firm acquired a plant in Ludhiana which increased capacity to 1 lakh tpa. Oswal Steels became a division of VTXL in 1992. VTXL demerged its steel division as VSSL effective January 1, 2011. VSSL has capacity to manufacture 2 lakh tpa of steel billets and also 2 lakh tpa of steel rolled products. Manufacturing unit is equipped with a 30-tonne ultra-high-power electric arc furnace with an electro-magnetic stirrer, a vacuum degassing system and a bloom caster.

 

For the six months ended 30th September 2021, VSSL posted revenue of Rs 666 crore and operating profit of Rs 98 crore as against Rs 315 crore and Rs. 12 crore respectively for similar period in corresponding year.

Key Financial Indicators

Particulars

Unit

2021

2020

Revenue

Rs.Crore

937

846

Profit After Tax (PAT)

Rs.Crore

44

3

PAT Margin

%

4.7

0.3

Adjusted debt/adjusted networth

Times

0.41

0.64

Interest coverage ratio

Times

6.14

1.93

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)

ISIN Name of Instrument Date of Allotment Coupon Rate (%) Maturity Date Issue Size (Rs.Crore) Complexity Level Rating Assigned with Outlook
NA Commercial Paper NA NA 7-365 days 150 Simple CRISIL A1+
NA Cash Credit NA NA NA 200 NA CRISIL AA/Stable
NA Corporate Loan NA NA Sep-2024 37 NA CRISIL AA/Stable
NA Corporate Loan NA NA Jun-2025 52.6 NA CRISIL AA/Stable
NA Letter of credit & Bank Guarantee NA NA NA 100 NA CRISIL A1+
NA Term Loan NA NA Jul-2026 33 NA CRISIL AA/Stable
NA Proposed Long Term Bank Loan Facility NA NA NA 123.92 NA CRISIL AA/Stable
Annexure - Rating History for last 3 Years
  Current 2021 (History) 2020  2019  2018  Start of 2018
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund Based Facilities LT 446.52 CRISIL AA/Stable 08-09-21 CRISIL AA/Stable 21-05-20 CRISIL AA/Negative 10-12-19 CRISIL AA/Negative 28-12-18 CRISIL AA/Stable CRISIL AA-/Positive
      -- 22-01-21 CRISIL AA/Stable   --   -- 26-06-18 CRISIL AA/Stable --
      --   --   --   -- 16-02-18 CRISIL AA-/Positive --
Non-Fund Based Facilities ST 100.0 CRISIL A1+ 08-09-21 CRISIL A1+ 21-05-20 CRISIL A1+ 10-12-19 CRISIL A1+ 28-12-18 CRISIL A1+ CRISIL A1+
      -- 22-01-21 CRISIL A1+   --   -- 26-06-18 CRISIL A1+ --
      --   --   --   -- 16-02-18 CRISIL A1+ --
Commercial Paper ST 150.0 CRISIL A1+ 08-09-21 CRISIL A1+ 21-05-20 CRISIL A1+ 10-12-19 CRISIL A1+ 28-12-18 CRISIL A1+ --
      -- 22-01-21 CRISIL A1+   --   -- 26-06-18 CRISIL A1+ --
      --   --   --   -- 16-02-18 CRISIL A1+ --
Short Term Debt (Including Commercial Paper) ST   --   --   --   --   -- CRISIL A1+
All amounts are in Rs.Cr.
Annexure - Details of Bank Lenders & Facilities
Facility Amount (Rs.Crore) Name of Lender Rating
Cash Credit 65 ICICI Bank Limited CRISIL AA/Stable
Cash Credit 45 Axis Bank Limited CRISIL AA/Stable
Cash Credit 30 HDFC Bank Limited CRISIL AA/Stable
Cash Credit 25 YES Bank Limited CRISIL AA/Stable
Cash Credit 35 State Bank of India CRISIL AA/Stable
Corporate Loan 37 State Bank of India CRISIL AA/Stable
Corporate Loan 52.6 ICICI Bank Limited CRISIL AA/Stable
Letter of credit & Bank Guarantee 30 ICICI Bank Limited CRISIL A1+
Letter of credit & Bank Guarantee 5 State Bank of India CRISIL A1+
Letter of credit & Bank Guarantee 37 HDFC Bank Limited CRISIL A1+
Letter of credit & Bank Guarantee 13 YES Bank Limited CRISIL A1+
Letter of credit & Bank Guarantee 15 Axis Bank Limited CRISIL A1+
Proposed Long Term Bank Loan Facility 123.92 Not Applicable CRISIL AA/Stable
Term Loan 33 HDFC Bank Limited CRISIL AA/Stable

This Annexure has been updated on 13-Dec-2021 in line with the lender-wise facility details as on 05-Aug-2021 received from the rated entity.

Criteria Details
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 rating short term debt
Criteria for Notching up Stand Alone Ratings of Companies based on Parent Support

Media Relations
Analytical Contacts
Customer Service Helpdesk

Pankaj Rawat
Media Relations
CRISIL Limited
B: +91 22 3342 3000
pankaj.rawat@crisil.com

 


Naireen Ahmed
Media Relations
CRISIL Limited
D: +91 22 3342 1818
B: +91 22 3342 3000
naireen.ahmed@crisil.com


Anuj Sethi
Senior Director
CRISIL Ratings Limited
B:+91 44 6656 3100
anuj.sethi@crisil.com

Gautam Shahi
Director
CRISIL Ratings Limited
B:+91 124 672 2000
gautam.shahi@crisil.com

Gauri Gupta
Senior Rating Analyst
CRISIL Ratings Limited
B:+91 22 3342 3000
Gauri.Gupta@crisil.com		Timings: 10.00 am to 7.00 pm
Toll free Number:1800 267 1301

For a copy of Rationales / Rating Reports:
CRISILratingdesk@crisil.com
 
For Analytical queries:
ratingsinvestordesk@crisil.com

 

Note for Media:
This rating rationale is transmitted to you for the sole purpose of dissemination through your newspaper / magazine / agency. The rating rationale may be used by you in full or in part without changing the meaning or context thereof but with due credit to CRISIL Ratings. However, CRISIL Ratings alone has the sole right of distribution (whether directly or indirectly) of its rationales for consideration or otherwise through any media including websites, portals etc.


About CRISIL Ratings Limited (A subsidiary of CRISIL Limited)

CRISIL Ratings pioneered the concept of credit rating in India in 1987. With a tradition of independence, analytical rigour and innovation, we set the standards in the credit rating business. We rate the entire range of debt instruments, such as, bank loans, certificates of deposit, commercial paper, non-convertible / convertible / partially convertible bonds and debentures, perpetual bonds, bank hybrid capital instruments, asset-backed and mortgage-backed securities, partial guarantees and other structured debt instruments. We have rated over 33,000 large and mid-scale corporates and financial institutions. We have also instituted several innovations in India in the rating business, including rating municipal bonds, partially guaranteed instruments and infrastructure investment trusts (InvITs).
 
CRISIL Ratings Limited ("CRISIL Ratings") is a wholly-owned subsidiary of CRISIL Limited ("CRISIL"). CRISIL Ratings Limited is registered in India as a credit rating agency with the Securities and Exchange Board of India ("SEBI").
 
For more information, visit www.crisilratings.com 



About CRISIL Limited

CRISIL is a global analytical company providing ratings, research, and risk and policy advisory services. We are India's leading ratings agency. We are also the foremost provider of high-end research to the world's largest banks and leading corporations.

CRISIL is majority owned by S&P Global Inc., a leading provider of transparent and independent ratings, benchmarks, analytics and data to the capital and commodity markets worldwide

For more information, visit www.crisil.com

Connect with us: TWITTER | LINKEDIN | YOUTUBE | FACEBOOK

CRISIL PRIVACY NOTICE
 
CRISIL respects your privacy. We may use your contact information, such as your name, address, and email id to fulfil your request and service your account and to provide you with additional information from CRISIL.For further information on CRISIL’s privacy policy please visit www.crisil.com.

DISCLAIMER

This disclaimer forms part of and applies to each credit rating report and/or credit rating rationale (each a "Report") that is provided by CRISIL Ratings Limited  (hereinafter referred to as "CRISIL Ratings") . For the avoidance of doubt, the term "Report" includes the information, ratings and other content forming part of the Report. The Report is intended for the jurisdiction of India only. This Report does not constitute an offer of services. Without limiting the generality of the foregoing, nothing in the Report is to be construed as CRISIL Ratings providing or intending to provide any services in jurisdictions where CRISIL Ratings does not have the necessary licenses and/or registration to carry out its business activities referred to above. Access or use of this Report does not create a client relationship between CRISIL Ratings and the user.

We are not aware that any user intends to rely on the Report or of the manner in which a user intends to use the Report. In preparing our Report we have not taken into consideration the objectives or particular needs of any particular user. It is made abundantly clear that the Report is not intended to and does not constitute an investment advice. The Report is not an offer to sell or an offer to purchase or subscribe for any investment in any securities, instruments, facilities or solicitation of any kind or otherwise enter into any deal or transaction with the entity to which the Report pertains. The Report should not be the sole or primary basis for any investment decision within the meaning of any law or regulation (including the laws and regulations applicable in the US).

Ratings from CRISIL Ratings are statements of opinion as of the date they are expressed and not statements of fact or recommendations to purchase, hold, or sell any securities / instruments or to make any investment decisions. Any opinions expressed here are in good faith, are subject to change without notice, and are only current as of the stated date of their issue. CRISIL Ratings assumes no obligation to update its opinions following publication in any form or format although CRISIL Ratings may disseminate its opinions and analysis. Rating by CRISIL Ratings contained in the Report is not a substitute for the skill, judgment and experience of the user, its management, employees, advisors and/or clients when making investment or other business decisions. The recipients of the Report should rely on their own judgment and take their own professional advice before acting on the Report in any way. CRISIL Ratings or its associates may have other commercial transactions with the company/entity.

Neither CRISIL Ratings nor its affiliates, third party providers, as well as their directors, officers, shareholders, employees or agents (collectively, "CRISIL Ratings Parties") guarantee the accuracy, completeness or adequacy of the Report, and no CRISIL Ratings Party shall have any liability for any errors, omissions, or interruptions therein, regardless of the cause, or for the results obtained from the use of any part of the Report. EACH CRISIL RATINGS' PARTY DISCLAIMS ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY, SUITABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE. In no event shall any CRISIL Ratings Party be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs) in connection with any use of any part of the Report even if advised of the possibility of such damages.

CRISIL Ratings may receive compensation for its ratings and certain credit-related analyses, normally from issuers or underwriters of the instruments, facilities, securities or from obligors. CRISIL Rating's public ratings and analysis as are required to be disclosed under the regulations of the Securities and Exchange Board of India (and other applicable regulations, if any) are made available on its web sites, www.crisil.com (free of charge). Reports with more detail and additional information may be available for subscription at a fee - more details about ratings by CRISIL Ratings are available here: www.crisilratings.com.

CRISIL Ratings and its affiliates do not act as a fiduciary. While CRISIL Ratings has obtained information from sources it believes to be reliable, CRISIL Ratings does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives and / or relies in its Reports. CRISIL Ratings has established policies and procedures to maintain the confidentiality of certain non-public information received in connection with each analytical process. CRISIL Ratings has in place a ratings code of conduct and policies for analytical firewalls and for managing conflict of interest. For details please refer to: http://www.crisil.com/ratings/highlightedpolicy.html

Rating criteria by CRISIL Ratings are generally available without charge to the public on the CRISIL Ratings public web site, www.crisil.com. For latest rating information on any instrument of any company rated by CRISIL Ratings you may contact CRISIL RATING DESK at CRISILratingdesk@crisil.com, or at (0091) 1800 267 1301.

This Report should not be reproduced or redistributed to any other person or in any form without a prior written consent of CRISIL Ratings.

All rights reserved @ CRISIL Ratings Limited. CRISIL Ratings Limited is a wholly owned subsidiary of CRISIL Limited.

CRISIL Ratings uses the prefix ‘PP-MLD’ for the ratings of principal-protected market-linked debentures (PPMLD) with effect from November 1, 2011 to comply with the SEBI circular, "Guidelines for Issue and Listing of Structured Products/Market Linked Debentures". The revision in rating symbols for PPMLDs should not be construed as a change in the rating of the subject instrument. For details on CRISIL Ratiings' use of 'PP-MLD' please refer to the notes to Rating scale for Debt Instruments and Structured Finance Instruments at the following link: www.crisil.com/ratings/credit-rating-scale.html