February 06, 2020

Vinayak Steels Limited: Ratings reaffirmed; removed from ‘Issuer Not Cooperating’
category

Summary of rating action

Previous Rated Amount Current Rated Amount
Instrument Rating Action
(Rs. crore) (Rs. crore)
Long Term –Fund Based- Cash [ICRA]BB+ (Stable) reaffirmed;
27.00 27.00
Credit removed from Issuer Not
Long Term - Fund Based TL 11.70 10.11 Cooperating
[ICRA]A4+ reaffirmed; removed
Short Term- Non Fund Based 6.00 7.00
from Issuer Not Cooperating
[ICRA]BB+ (Stable); reaffirmed;
Long Term -Unallocated 3.58 4.17 removed from Issuer Not
Cooperating
Total 48.28 48.28
*Instrument details are provided in Annexure-1

Rationale
The reaffirmation of ratings factors in the healthy growth in Vinayak Steels Limited’s (VSL) operating income (OI)
to Rs. 174.17 crore and Rs. 282.89 crore in 7M FY2020 and FY2019, respectively, from Rs. 139.65 crore in FY2017
driven by increased sales volume and realisation in FY2019. Although realisation declined in 7M FY2020, the
increased sales volume has supported the revenue growth and the company is expected to achieve an OI of Rs.
295.19 crore in FY2020. The ratings consider the decline in working capital intensity to 9% in 7M FY2020 from
28% in FY2017 owing to decrease in inventory days and improved financial risk profile with the gearing
improving to 1.07 times as on October 31, 2019 from 1.55 times as on March 31, 2017 and interest coverage of
4.20 times in 7M FY2020 compared to 1.37 times in FY2018. The ratings consider the fully-integrated nature of
VSL operations with presence in iron pellet, sponge iron, billets and TMT bars.

However, the ratings are constrained by decline in operating profit margin to 3.10% in 7M FY2020 from 6.32% in
FY2017 due to a decline in realisation, high geographical concentration risk with sales primarily limited to
Telangana. Moreover, intense competition in the fragmented and commoditised steel industry limits VSL’s
pricing flexibility. The ratings are constrained by the vulnerability of the company’s profitability to volatility in
the raw material prices and cyclicality inherent in the steel industry.

Key rating drivers and their description

Credit strengths
Fully-integrated plant with capacity to manufacture pellets, sponge iron, MS ingots and TMT bars – The
company has a fully-integrated continuous casting steel manufacturing facility with a capacity of 90,000 metric
tonnes per annum (MTPA) pellets, 33,000 MTPA sponge iron, 95,000 MTPA ingots and 86,000 MTPA TMT bars. It
uses pellets as a feedstock for manufacturing of sponge iron. Sponge iron and MS scrap are used for

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manufacturing of MS ingots, which is further processed to produce TMT bars. VSL sells TMT bars under Vinayak
brand to traders and real estate players and sells ingots to steel processors.

Increased scale of operation – The scale of operation has increased with revenues increasing to Rs. 282.89 crore
in FY2019 from Rs. 139.65 crore in FY2017 owing to increased sales volume and realisation. The TMT sales
volume increased to 62,082 MT in FY2019 from 45,973 MT in FY2017, while the gross realisation improved to Rs.
45,590/MT in FY2019 from Rs. 32,032/MT in FY2017. The revenues increased marginally to Rs. 174.17 crore in
7M FY2020 on account of increased sales volume, despite reduction in realisations in 7M FY2020. The sale of
TMT bars accounted for predominant share of revenues during the past four years.

Improved working capital intensity – The net working capital intensity decreased to 9% in 7M FY2020 from 28%
in FY2017 owing to a decline in inventory days, given the lower stock of finished goods and raw material
maintained by the company. Further, the liquidity position is adequate with average monthly utilisation of fund-
based working capital limits at 29% during the 12-month period that ended in November 2019.

Moderate capitalisation and coverage indicators – The gearing improved to 1.07 times as on October 31, 2019
from 1.55 times as on March 31, 2017 owing to a decline in total debt to Rs. 38.68 crore as on October 31, 2019
from Rs. 50.43 crore as on March 31, 2017. Moreover, the interest coverage ratio improved to 4.20 times and
4.00 times in 7M FY2020 and FY2019, respectively, from 1.98 times in FY2017 due to decline in the interest
expense. The Total Debt/OPBDITA improved to 2.97 times in FY2019 from 5.71 times in FY2018 owing to decline
in debt levels. However, the same increased to 4.17 times in 7M FY2020 owing to decline in operating
profitability levels.

Credit challenges
Decline in profitability margins – The operating profit margin declined to 3.10% in 7M FY2020 from 5.01% in
FY2019 and 6.32% in FY2017 owing to a decline in realisation and increased input cost in 7M FY2020. The
company’s ability to improve the profitability margins will remain a key rating monitorable in the near term.

High geographical concentration risk – VSL is exposed to high geographical concentration risk given the
company’s sales are mainly limited to Telangana.

Susceptibility of margins to raw material fluctuations – VSL’s operation is raw material intensive with
consumption of raw materials and consumables accounting for over 60%-70% of its OI over the last four fiscals.
Thus, VSL’s profitability margins are exposed to fluctuation in raw material prices.

Intense competition and exposure to cyclicality in steel industry – The steel industry is characterised by intense
competition and low product differentiation limiting the pricing flexibility of the players, including VSL. The
domestic steel industry is cyclical in nature and is likely to impact the cash flows of the steel players, including
VSL.

Liquidity position: Adequate

VSL liquidity position is adequate with average monthly utilisation of fund-based working capital limits at 29%
during the 12-month period that ended in November 2019. The company has annual debt repayments of Rs.

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4.49 crore in FY2020 and Rs.3.52 crore in FY2021, while the cash flows are expected to be comfortable to meet
the repayment obligations. The absence of capex plans will support the liquidity position to an extent.

Rating sensitivities
Positive triggers – ICRA could upgrade VSL’s rating if the company demonstrates improvement in profitability
margins on a sustained basis. Specific credit metrics that could lead to an upgrade of VSL’s rating include interest
coverage ratio of more than 3.00 times and Total Debt/OPBDITA of less than 3.00 times on a sustained basis.

Negative triggers – Negative pressure on VSL’s rating could arise if there is decline in revenues or profitability on
a sustained basis. Any capex or investment, which would adversely impact its liquidity position, might result in
negative pressure on VSL’s rating. The company’s inability to maintain DSCR of above 1.20 times on a sustained
basis shall trigger a downward revision in ratings.

Analytical approach
Analytical Approach Comments
Rating Methodology for Entities in the Ferrous Metals Industry
Applicable Rating Methodologies
Corporate Credit Rating Methodology
Parent/Group Support Not applicable
Consolidation/Standalone Standalone

About the company

VSL was incorporated in 1985 by Mr. Gulzari Lal Kedia. The company manufacturers TMT bars, with an installed
capacity of 86,000 MTPA. The company has integrated continuous casting facility to manufacture ingots (95,000
TPA), sponge iron (33,000 TPA) and pellets (90,000 TPA). Its manufacturing facility is located in Kothur, near
Hyderabad. VSL is managed by Mr. Vinod Kedia and his family.

Key financial indicators

FY2018 FY2019 7M FY2020*
Operating Income (Rs. crore) 196.78 282.89 174.17
PAT (Rs. crore) -2.18 4.74 1.10
OPBDIT/OI (%) 3.09% 5.01% 3.10%
RoCE (%) 2.89% 13.10% 6.20%

Total Outside Liabilities/Tangible Net Worth (times) 1.95 1.91 1.70

Total Debt/OPBDIT (times) 7.05 2.97 4.17
Interest Coverage (times) 1.37 4.00 4.20
*provisional

Status of non-cooperation with previous CRA: Not applicable

Any other information: None

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Rating history for past three years
Current Rating (FY2020) Rating History for the Past 3 Years
Instrument Amount Amount Rating FY2019 FY2018 FY2017
Type
Rated Outstanding 06-Feb-2020 30-Oct-2018 24-Apr-2017 -
- [ICRA]BB+ (Stable)ISSUER [ICRA]BB+
1 Cash Credit Long Term 27.00 [ICRA]BB+(Stable) -
NOT COOPERATING (Stable)
[ICRA]BB+ (Stable)
[ICRA]BB+
Term Loan Long Term 10.11 9.29 [ICRA]BB+ (Stable) ISSUER NOT -
(Stable)
COOPERATING
Non Fund [ICRA]A4+ ISSUER NOT
2 Short Term 7.00 - [ICRA]A4+ [ICRA]A4+
based COOPERATING
- [ICRA]BB+ (Stable)
[ICRA]BB+
3 Unallocated Long Term 4.17 [ICRA]BB+ (Stable) ISSUER NOT -
(Stable)
COOPERATING
Amount in Rs. crore

Complexity level of the rated instrument

ICRA has classified various instruments based on their complexity as "Simple", "Complex" and "Highly Complex". The classification of instruments according
to their complexity levels is available on the website www.icra.in

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Annexure-1: Instrument details
Date of Amount
Coupon Maturity
ISIN No Instrument Name Issuance / Rated Current Rating and Outlook
Rate Date
Sanction (Rs. crore)
NA Cash Credit - 10.20% - 27.00 [ICRA]BB+ (Stable)
October
NA Term Loan August 2019 9.75% 10.11 [ICRA]BB+ (Stable)
2023
NA Non Fund based - - 7.00 [ICRA]A4+
NA Unallocated - - - 4.17 [ICRA]BB+ (Stable)
Source: Vinayak Steels Limited

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Analyst Contacts
K. Ravichandran Srinivasan R
+91 44 4596 4301 +91 44 4596 4315
ravichandran@icraindia.com r.srinivasan@icraindia.com

Vinay Kumar G Tejal Shree

+91 40 4067 6533 +91 40 40676523
vinay.g@icraindia.com tejal.shree@icraindia.com

Relationship Contact
Jayanta Chatterjee
+91 80 4332 6401
jayantac@icraindia.com

MEDIA AND PUBLIC RELATIONS CONTACT

Ms. Naznin Prodhani
Tel: +91 124 4545 860
communications@icraindia.com

Helpline for business queries:

+91-9354738909 (open Monday to Friday, from 9:30 am to 6 pm)

info@icraindia.com

About ICRA Limited:

ICRA Limited was set up in 1991 by leading financial/investment institutions, commercial banks and financial services
companies as an independent and professional investment Information and Credit Rating Agency.

Today, ICRA and its subsidiaries together form the ICRA Group of Companies (Group ICRA). ICRA is a Public Limited
Company, with its shares listed on the Bombay Stock Exchange and the National Stock Exchange. The international Credit
Rating Agency Moody’s Investors Service is ICRA’s largest shareholder.

For more information, visit www.icra.in

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