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Ratings Facilities Long-term Bank Facilities Short-term Bank Facilities Long-term/ Short-term Bank Facilities Total Rating Rationale The above ratings continue to draw strength from the experience and long track record of the promoters of MSP Metallics Ltd (MML), strategic location of plant and commissioning of almost all the backward integration projects. The ratings continue to be constrained by short track record in manufacturing operations, under utilisation of major capacities and volatile input & finished goods prices. The ratings also take into account the decline in operating margins in FY11 (refers to the period April 1 to March 31) which witnessed significant improvement in 9MFY12, improvement in leverage ratios as on March 31, 2011 and risk associated with the new project undertaken. Improving capacity utilisation and profitability, successful completion of ongoing projects, deriving benefit from the recently completed projects and effective management of working capital are the key rating sensitivities. Background MML, incorporated in 1996, was promoted by MSP group of Kolkata. The company commenced commercial operation in 2008 and is engaged in manufacturing of sponge iron (3,84,000 tpa), pig iron (1,20,992 tpa) and billets (2,63,400 tpa) besides having a railway siding, coal washery (6,91,200 tpa), sinter plant (5,00,000 tpa), pellet plant (7,50,000 tpa), captive power plant (27 MW) and iron ore beneficiation unit (10,00,000 tpa) at its manufacturing facility at Jharsuguda, Orissa. MSP Cokes Pvt. Ltd. (MCPL), a group company of MML, engaged in manufacturing of coke, was merged with MML with retrospective effect from April 01, 2010. Credit Risk Assessment Experience of the promoters & long track record of the group in steel business MML belongs to Kolkata based MSP group, promoted by Shri Puranmal Agarwal and his brother Shri S. K. Agarwal, both having over two decades of experience in steel business. The group is an established steel manufacturer in secondary sector in eastern India with a number of companies engaged in manufacturing/trading of intermediate and finished steel products. Besides MML, other major companies in the group are MSP Steel and Power Ltd. (MSPL rated CARE BBB+/A2), MSP Sponge Iron Ltd. (MSIL rated CARE BBB /A3+) and Howrah Gases Ltd. (rated CRISIL BBB-/A3) with MSPL being the flagship company of the group. MML commenced manufacturing operation in 2008 and the track record remains short with about four years of operation. The company is essentially a closely held family managed business. Strategic location of plants with proximity to market and source of raw materials MML has manufacturing facilities for intermediate products like sponge iron, pig iron and billets. The plant is located in the mineral rich state of Orissa where various other steel players with upstream products are operating. Accordingly, proximity to the source of raw materials & end user market provides a competitive edge to MML. Volatility in prices of inputs & finished goods Raw material consumption (including trading purchases) is the single largest cost component for MML, constituting about 95% Amount (Rs. crore) 938.4 (enhanced from 645.1) 251.0 (enhanced from 195.0) 15.0 1,204.4 Ratings 1 CARE BBB- (Triple B Minus) CARE A3 (A Three) CARE BBB- / CARE A3 (Triple B Minus / A Three) Remarks Reaffirmed Reaffirmed Reaffirmed

Complete definitions of the ratings assigned are available at and in other CARE publications.

of total cost of sales in FY11. MML has taken steps towards backward integration in the form of pellet plant, sinter plant, captive power plant, coke oven, coal washery and gas pipeline (all commissioned in FY11) and is expected to realise significant cost benefits from these facilities. However, the company is exposed to volatile prices of its basic raw materials (iron ore & coal) for which it does not have backward integration. Though the prices of finished goods move in tandem with raw material prices, there is a time lag which exposes the company to volatility risk. Under utilisation of major capacities The capacity utilisation (CU) of sponge iron & billets declined substantially in FY11 due to closure of plant for over three months on account of fire accident at the plant site. On commencement, the plants were operating at low CU due to stabilisation issues coupled with significant rise in input prices & power cost in H2FY11 which had rendered production of sponge iron & billets non-remunerative. However, the CU of pig iron increased in view of higher demand of the same from group companies & secondary steel producers in Orissa. Ongoing projects nearing completion and undertaking of new project MML was implementing certain cost-optimisation backward integration projects and has already commissioned majority of them comprising a pellet plant, sinter plant, captive power plant, coal washery, gas pipeline, iron-ore beneficiation plant, material handling system, 132 KVA connectivity with grid, coal shed and upgradation of WHRB Boiler. The balance portion comprising upgradation of railway siding is expected to be completed by September 2012. MML incurred Rs.637.7 crore (financed by term loans Rs.402.7 crore & equity infusion by promoters Rs.235.0 crore) on the projects till December 31, 2011 as against total project cost of Rs.651.9 crore. The company has taken up further projects costing Rs.170.9 crore for developing the existing infrastructure at its plant site comprising construction of housing colony, road (both internal & approach road), water pipeline from the river, water hydrant system & installation of additional processing line in the iron ore beneficiation plant. The project is being financed at debt equity ratio of 2:1 and financial closure has been achieved. Till December 31, 2011, MML incurred about Rs.30.0 crore on the project financed out of term loans of Rs.5 crore and equity infusion of Rs.25 crore by promoters. The project is expected to be completed by April, 2013. Decline in operating margins in FY11 Net sales witnessed a y-o-y increase of about 51% in FY11 on account of increase in price realisation of major products, higher sales quantity of pig iron and increase in trading sales. PBILDT margin, however, declined considerably owing to low margin nature of trading sales, relatively higher raw material expense & under absorption of fixed overheads due to closure of sponge iron and billets unit for over three months in FY11 on account of a fire accident at the plant site. Inspite of lower PBILDT margin and significant increase (about 46%) in capital charge (pursuant to completion of various projects and higher interest expenses on borrowings to finance increased business volume), the company witnessed improvement in PAT margin due to non-operating income of Rs.24.4 crore (mainly income from transactions in commodity exchange). MML earned PAT of Rs.32.0 crore on net sales of Rs.850.0 crore in 9MFY12. PBILDT margin improved significantly on account of benefits derived from the backward integration projects and sale of excess pellets & surplus power available from CPP. Improvement in capital structure Increase in networth by Rs.39 crore pursuant to merger as well as infusion of equity of Rs.209.6 crore by the promoters in FY11 led to improvement in both debt-equity and overall gearing ratios as on Mar.31, 2011 inspite of disbursement of term loans for the ongoing projects. However, the overall gearing ratio as on Mar.31, 2011 is still on the higher side due to increases in short term loans and higher working capital borrowings to finance the increased level of operation. Prospects MML is a manufacturer of intermediate products having end use mainly in the construction and infrastructure sector which is currently exhibiting slow growth. In the last one year there is considerable weakening in credit profile of steel players mainly due to combined effect of shortage in raw materials and high interest rates. However, the company has certain amount of cost advantage by virtue of recently completed cost saving backward integration projects. Further, the company expects to garner higher income in future by selling excess power available from the CPP and pellets & washed coal remaining after captive use. Going forward, ability of the company to improve profitability and capacity utilization, manage rising input costs alongwith deriving benefit from the recently completed projects and ongoing projects and managing working capital will be crucial.

Financials Year ending/As on Mar.31, Working Results Net sales Total income PBILDT Depreciation Interest PBT PAT (after defd. tax) Gross Cash Accruals (GCA) Financial Position Equity share capital Tangible Net worth (incl. share application) Total capital employed Key Ratios Growth (%) Growth in total income (%) Growth in PAT (after defd. tax) (%) Profitability (%) PBILDT / Total operating income PAT- after defd tax / Total income ROCE Solvency Debt equity ratio Overall gearing ratio (excl. acceptances) Interest coverage (times) Long term debt/GCA Liquidity Current ratio Quick ratio Turnover Average collection period (days) Average creditors (days) Average inventory period (days) Working capital cycle Note: 2009 2010 [12m, A] 379.6 379.8 36.1 8.8 21.4 6.0 1.8 13.8 30.7 305.4 866.5

(Rs. crore) 2011

220.8 221.1 30.4 6.7 15.1 8.9 4.3 14.6 28.9 214.3 577.7

574.6 599.0 39.0 8.9 35.1 19.3 3.7 24.5 34.6 573.4 1,391.5

559.31 316.17 13.79 1.95 11.50 1.39 1.70 2.02 20.42 1.29 0.66 39 64 114 89

71.76 -58.70 9.50 0.47 8.72 1.31 1.84 1.68 29.02 1.00 0.41 29 14 111 126

57.72 106.53 6.79 0.61 3.91 0.97 1.43 1.11 22.75 1.18 0.78 48 40 107 115

Creditors for capital goods, as on last three account closing dates, have been excluded from current liabilities while calculating liquidity ratios since the same has been/shall be repaid out of term loans availed for the projects.

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