Rating Rationale

4 Nov 2019

Welspun Specialty Solutions Ltd (earlier known as RMG Alloy Steel Ltd)

Brickwork Ratings assigns the ratings for the Bank Loan Facilities of Rs.239.37 Crores of
Welspun Specialty Solutions Ltd (earlier known as RMG Alloy Steel Ltd)

Particulars
Amount
Facility Tenure Rating*
(₹ Crs)

BWR BBB+(CE) Stable

Fund based 117.77 Long Term
Credit Watch With Developing Implications

Non Fund BWR A3+(CE)

121.60 Short Term
Based Credit Watch With Developing Implications

Total 239.37 Rupees Two Hundred Thirty Nine Crores and Thirty Seven Lakhs Only

*Please refer to BWR website ​www.brickworkratings.com/​ for definition of the ratings

BWR has assigned the long term rating at BWR BBB+(CE) and short term rating as BWR A3+(CE) under
credit watch with developing implications for the bank loan facilities of Welspun Specialty Solutions
Limited (earlier known as RMG Alloy Steel Ltd) (‘WSSL’ or ‘the company’).

Rating Action/Outlook

Prefix to the rating CE is credit enhancement derived from Debt Service Reserve Account (DSRA) and
Corporate guarantee as structured below:
● The borrower shall maintain in the ‘Debt Service Reserve Account’(DSRA), an amount equivalent
to ensuing 2 quarters of interest payment and principal repayment in respect of debt. The
borrower shall build ensuing 1 quarter DSRA from promoters fund prior to first scheduled
repayment for Term loan.
● Any shortfall in DSRA at any stage to be funded by promoter (Welspun Steel Ltd) from its own
source. The borrower shall additionally build ensuing 1 quarter DSRA through cash flow of the
company prior to 30th September 2020. Any shortfall in DSRA creation to be funded by promoter
funds if the company's cash flows are inadequate.
● If at any time, the amount in the DSRA is utilised to make payments towards making the debt
service payments as a result of shortfall in cash flow of borrower, the borrower shall immediately
replenish the DSRA from its cash flows/promoter funds (as applicable), to the extent of the
amounts utilised, within a period of 10 days from the date of utilisation, such that the DSRA shall
always stands credited/restored with the amount equivalent to DSRA to the satisfaction of the
lenders.
● Corporate Guarantee of Welspun Steel Ltd covering the facility as well as replenishment of DSRA
of 1 quarter funded by promoters from their own sources.

Credit watch with developing implications reflects proposed merger of Welspun Steel Ltd into Welspun
Specialty Solutions Ltd (earlier known as RMG Alloy Steel Ltd).

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The rating factors in comfort from extensive experience of promoters of the company in steel industry for
more than two decades, the company's financial flexibility being the part of welspun group and
improvement in scale of operations in FY18 and FY19.

The rating has also positively factored in the expected improvement in the company’s profitability and
operational profile going forward, on account of ongoing capex to revive its seamless pipe plant and
modernisation of existing plants. The ratings, however, are constrained by the intense competition in the
fragmented and commoditised steel industry, exposure of profitability to foreign exchange rate fluctuation
risks given a part of its raw material requirement being met through imports and vulnerability of profit
margins to the volatility in input raw material prices.

Rating is further constrained by the slowdown in the steel industry due to higher input costs and reducing
prices for steel products on the back of low demand.

Key Rating Drivers

Credit Strengths:
● Experienced promoters in the steel industry: ​The promoters have more than two decades
of experience in the steel manufacturing business. WSSL has manufacturing capacity of 150,000
MTPA for structural steel, 100,000 MTPA for rolling mill and 50,000 MTPA for steel pipes.

● Financial and operational flexibility being a part of Welspun Group: Welspun Steel
Limited has increased its stake to 49.86% as on June 2019 becoming the sole promoter
shareholder/parent for WSSL. The two erstwhile promoters named as Saraf Group and
Widescreen Holdings Pvt Ltd have been classified as public shareholders. Welspun Steel Ltd and
other investors have infused the fund intune of Rs. 509 Crs by way of preferential issue of
securities and share warrants, which is further used for the retirement of debt and in ongoing
capex.

● DSRA and Corporate guarantee: ​The debt of the borrower shall be backed by the corporate
guarantee from Welspun Steel Ltd with a structured payment mechanism in the form of DSRA to
ensure timely servicing of debt obligations.

● Improved scale of operations in FY19: The company’s total operating income witnessed a
growth of 82% in FY19 to Rs.436.21 Crs in FY19 from Rs. 240.09 Crs in FY18, driven by the
increase in capacity utilisation of billets. During Q1FY20, the company has achieved revenue of
Rs. 99 Crs. The assigned ratings also consider expected growth in topline and overall profitability
as benefits of capex accrue to the business.

● Capital Structure: Gearing is expected to be below 1 time over the medium term on account of
moderate debt funded capex, repayment of existing loans and conversion of share warrants.

Credit Risks:
● Susceptibility of margins to fluctuations in raw material prices and foreign
exchange rates: The company imports a part of its raw material requirement through imports,

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 which exposes the company to fluctuations in exchange rates. Although the company has adopted
foreign exchange hedging policy, the company is exposed to foreign exchange fluctuation risk.

● Exposure to cyclicality inherent in the steel industry: The domestic steel industry is
cyclical in nature and is likely to impact the cash flows of WSSL and other steel players.

● Intense competition: ​The steel industry is highly fragmented and commoditised, leading to
intense competition, which may restrict WSSL’s pricing flexibility.

Analytical Approach
BWR has principally relied upon the audited financials from FY17 to FY19, projected financials till FY21,
publicly available information and information/clarification provided by the management of the
company.

The ratings are based on the unconditional and irrevocable guarantee from Welspun Steel Ltd covering
the facility as well as replenishment of DSRA of 1 quarter funded by promoters from their own sources.

For arriving at its ratings, BWR has applied its rating methodology as detailed in the Rating Criteria
detailed below (hyperlinks provided at the end of this rationale).

Rating Sensitivities
The ability of the company, to achieve the targeted COD for the ongoing capex without any cost overrun,
and to achieve envisaged topline and profitability for WSSL as well as Welspun Steel Ltd would be key
rating sensitivities. The rating has taken comfort from the corporate guarantee provided by Welspun Steel
Ltd for the credit facility and DSRA replenishment and hence the rating of WSSL will depend on the
operational and financial performance of the guarantor.

Positive:​ The outlook may be revised to Positive if the company is able to achieve significant growth in
revenue and profitability backed by a favourable industry scenario and optimum utilisation of capacities,
and sustained improvement in capital structure, coverage indicators and working capital management.

Negative: The rating may be downgraded if the company achieve lower revenue than projected,
deterioration in the financial risk profile such as Debt/Equity ratio, debt protection metrics and profit
margins and if there is any deterioration in operating and financial performance of Welspun Steel Ltd.

Liquidity Position: Poor

Currently the company’s liquidity profile is poor and is expected to be improved considering no further
debt funded capex and improvement in cash accruals over the medium term. Additionally presence of
DSRA provides some comfort. The liquidity of the company is also expected to be driven by the liquidity
profile of the guarantor.

About the Company:

Welspun Specialty Solutions Ltd (earlier known as RMG Alloy Steel Ltd) was incorporated on 29
December 1980 in Bharuch, Gujarat as Remi Metals Gujarat Ltd by Saraf Group. Currently, Welspun Steel
Ltd is the sole promoter of the company and holds 49.86% equity stake. The company operates Electric
Arc Furnace based steel melting shop, rolling mill and seamless pipe manufacturing facility.

The company has proposed capex of Rs. 180 Crs in a combination of various maintenance works of sizable
nature and new production facilities spread across all the main plants of the company. The expansion

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project is at a very advance stage and upon start of commercial production, the company’s operational
performance is expected to improve.

About Welspun Steel Ltd (Corporate Guarantor):

Welspun Steel Limited is a part of Welspun Group. It was incorporated on 3rd June 2004 by Mr. B.K.
Goenka. It is engaged in manufacturing of Sponge Iron, TMT Bars, and structural steel like billets/ingots.
The company is mainly catering to constructional requirements of many private, semi-government and
Government Customers. The manufacturing facility is located at Anjar, Gujarat.

Proposed Demerger of Identified business from Welspun Steel Ltd into MGN Agro
Properties Pvt Ltd: ​The company has proposed demerger of its Identified Investing undertaking into
MGN Agro Properties Pvt Ltd (MGN). The identified Investment undertaking would comprise all the
identified assets and identified liabilities pertaining to Investment business of Welspun Steel Ltd and
remaining business of it would be the steel manufacturing business. The said demerger is not expected to
have any material impact on the financial profile of the company. Consequent to the demerger, Welspun
Steel Ltd will be purely engaged the business of manufacturing of steel products. The scheme is already
filed and yet to be approved by NCLT.

Proposed Merger of Welspun Steel Ltd into WSSL: Welspun Group has proposed the merger of
Welspun Steel Ltd into Welspun Specialty Solutions Ltd, however the merger date is not yet decided.
WSSL is strategically important to Welspun Steel Ltd. After the completion of an ongoing capex at WSSL,
the Welspun group will enter into the stainless steel and stainless steel seamless pipe/tube segments. The
merger once completed, would be beneficial for both entities, given the synergies in their operations.

Company Financial Performance

In FY19, the company registered a total operating income of Rs. 436.21 Crs and a net loss of Rs.4.62 Crs as
against total operating income of Rs.240.09 Crs and a net loss of Rs. 22.70 Crs in FY18.

Key Financial Indicators- Welspun Specialty Solutions Ltd (earlier known as RMG Alloys
Steel Ltd)
Key Parameters 2018 2019
Units
Result Type Audited Audited

Total Operating Revenue ₹ Cr 240.09 436.21

EBITDA ₹ Cr -10.74 -36.56

PAT ₹ Cr -22.70 -4.62

Key Financial Indicators- Welspun Steel Ltd

Key Parameters 2018 2019
Units
Result Type Audited Audited

Total Operating Revenue ₹ Cr 332.89 873.28

EBITDA ₹ Cr 24.59 50.63

PAT ₹ Cr 55.31 27.97

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Key Covenants of the Facility rated: NA

Non-Cooperation with previous rating agency: NA

Rating History:

S.No Facility Current Rating (2019) Rating History

Amount
Tenure Rating 2018 2017 2016
(₹ Crs)

Fund Long BWR BBB+ (CE) Stable

1. 117.77 NA NA NA
Based Term (Credit Watch with developing implications)

Non Fund Short BWR A3+(CE)

2. 121.60 NA NA NA
Based Term (Credit Watch with developing implications)

Rupees Two Hundred Thirty Nine Crores and Thirty Seven

Total 239.37
Lakhs Only

Complexity Levels of the Instrument

For more information, visit ​https://www.brickworkratings.com/download/ComplexityLevels.pdf

COMPLEXITY LEVELS OF THE INSTRUMENTS

For more information, visit ​www.brickworkratings.com/download/ComplexityLevels.pdf

Hyperlink/Reference to applicable Criteria

Analytical Contacts Investor and Media Relations

Balkrishna Pipariya
Sr. Director – Ratings
Board: +91 22 2831 1426, +91 22 2831 1439 Liena Thakur
piparaiya.bk@brickworkratings.com Assistant Vice President - Corporate Communications
+91 84339 94686
Megha S Biradar liena.t@brickworkratings.com
Ratings Analyst
D : +91 22 6745 6651
B :+91 22 2831 1426, +91 22 2831 1439

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megha.b@brickworkratings.com

Welspun Specialty Solutions Ltd

Annexure I- Details of Bank Facilities rated by BWR

Particulars Corporation Bank Yes Bank Total

Fund Based

Term Loan 30.70 75.00 105.70

Cash Credit 12.07 - 12.07

Sub Limit_Capex LC Sight - (75.00) (75.00)

Sub Limit_Capex LC Usance - (75.00) (75.00)

Sub Limit_CC - (25.00) (25.00)

Sub Limit_Purchase invoice financing - (25.00) (25.00)

Sub limit_Export packing credit - (25.00) (25.00)

Total Fund Based 42.77 75.00 117.77

Non Fund Based

Import/Inland LC/BG 8.30 75.00 83.30

Forward Sale contract 8.30 (25.00) 8.30

Bills of exchange under LC 30.00 - 30.00

Sub Limit_Letter of Credit - (75.00) (75.00)

Sub Limit_Performance/Financial BG - (30.00) (30.00)

Total Non Fund Based 46.60 75.00 121.60

Total Facility 89.37 150.00 239.37

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