Rating Rationale 30 Oct 2020

Sugna Metals Limited

Brickwork Ratings upgrades the ratings for the Bank Loan Facilities of Rs 86.49 Crs of
Sugna Metals Limited (SML or ‘the company’) and removes the ratings from Issuer not
cooperating* category

Particulars:
Amount (Rs. Crs.) Rating^
Facilities** Previous
Previous Present Tenure Present
(Aug 2020)
BWR BB+ ISSUER BWR BBB-/ Stable
Fund Based
Long NOT Upgraded and removed from
Term Loans 25.90 21.49
35.00 40.00 Term COOPERATING*/ ISSUER NOT
Cash Credit
Stable COOPERATING* category
BWR A3
Non-Fund BWR A4+ ISSUER
Short Upgraded and removed from
Based NOT
20.00 25.00 Term ISSUER NOT
ILC/ FLC COOPERATING*
COOPERATING* category
Total 80.90 86.49 INR Eighty Six Crores and Forty Nine Lakhs Only
^Please refer to BWR website ​www.brickworkratings.com/​ for definition of the ratings
** Details of Bank Loan facilities are provided in Annexure-I ;
* Issuer did not cooperate, based on best available information

Rating Action/Outlook
The ratings continue to reflect the promoters’ experience in the ferrous metals industry,
operational track record of the company, established relationships with customers and suppliers
and moderate financial risk profile marked by adequate capital structure, moderate gearing and
debt protection metrics. However, the ratings are constrained by the decline in revenues in
FY20(P) due to the volatility in steel prices and subdued demand from end user industries. The
ratings remain further constrained by the high competitive intensity of the industry, susceptibility
of profitability of the company to volatility in raw material prices, cyclical nature of the steel
industry and the potential impact of Covid-19 on the steel industry.

1
BWR notes that SML had availed relief under the Covid-19 moratorium package and its
scheduled payments to the lenders had been deferred. The deferred interest for HDFC Bank has
been repaid in July 2020, the deferred interest for ICICI Bank is expected to be paid in
November 2020 and the deferred interest and principal for SIDBI has been added to the loans
and the tenure has been increased accordingly. Sugna Metals Limited has not applied for loan
restructuring under the RBI’s Resolution Framework for COVID-19-related Stress. The lenders
have confirmed that the company has serviced its obligations for September 2020. BWR will
continue to monitor the developments in this regard and analyse the impact, if any, on the
company’s credit profile.

The ‘Stable’ outlook indicates a low likelihood of rating change over the medium term. BWR
expects that Sugna Metals Limited’ business risk profile will be maintained over the medium
term. The outlook may be revised to ‘Positive’ if the company records significantly better than
expected revenue and profitability, increased scale of operations and improved working capital
management, resulting in better debt coverage metrics and liquidity profile. The outlook may be
revised to ‘Negative’ if Sugna Metals Limited reports significantly lower than expected
performance resulting in lower than estimated coverage indicators and a weaker liquidity
position. Any further impact of Covid-19 on the realisations and any major debt-funded
expenditure resulting in deterioration in capital structure and debt coverage indicators and/or a
sharp reversal in industry operating conditions may exert a downward pressure on the ratings.

Key Rating Drivers

Credit Strengths:

● Experienced management and established operational track record: The

management is well experienced in the ferrous metals industry. The extensive experience
of the promoters and their understanding of the dynamics of the industry will continue to
support the business risk profile. The company is also expected to benefit from its strong
distribution system which includes 600-700 distributors pan India as well as direct sales
channels.

● Operational track record and established relationships with customers: The

company began commercial operations in 2008 and has an operational track record of
over a decade. Its established presence in the industry has aided the development of long
standing relationships with customers and suppliers. The company has relationships of
over a decade with its top four customers and has been able to bag repeat orders which
has facilitated growth in its scale of operations.

2
 ● Group Support and Integrated Operations: ​The company has a backward integration
system in place with its group companies , viz Sugna Sponge & Power Pvt. Ltd. and Shri
Hari Ferro Alloys Pvt. Ltd. Sugna Sponge & Power Pvt. Ltd. supplies 30% of the
company’s sponge iron requirement and Shri Hari Ferro Alloys Pvt. Ltd. supplies all of
the company’s manganese requirements. The group entities are managed/operated by the
same promoters and there are strong managerial and operational synergies.

● Moderate financial risk profile: The financial risk profile of Sugna Metals Limited
continues to be moderate as reflected by modest networth, gearing and adequate debt
protection metrics. Total Revenue improved to Rs. 615.28 crs in FY19 as against total
operating income of Rs. 386.45 crs in FY18. On a provisional basis, the company
achieved total revenue of ~Rs. 458.66 crs in FY20(P). The decline during FY20 is mainly
due to volatility in steel prices, low capacity utilisation owing to the subdued market
demand and the impact of Covid-19 on end user industries. ​However, Tangible Net worth
increased from Rs. 64.57 Crs as on 31 Mar 2019 to Rs. 70.68 Crs as on 31 Mar 2020 (P)
due to accretion of profits. Operating Profit Margin increased from 2.80% in FY19 to
3.59% in FY20 (P) (mainly due to other operating income) and Net Profit Margin
declined marginally from 1.40% in FY19 to 1.35% in FY20 (P) due to increase in interest
and finance charges. Gearing has deteriorated from 1.14 times as on 31Mar2019 to 2.09
times as on 31 Mar 2020(P) in view of increased debt through unsecured loans and
working capital facilities. Debt protection metrics were adequate with DSCR at 1.82
times and ISCR at 2.50 times as on 31 Mar 2020 (P). On a provisional basis, the company
has reported a revenue of ~Rs 208 Crs in ~H1FY21.

Credit Weaknesses:

● Susceptibility to profitability to volatility in raw material prices and cyclicity in the

industry: Profit margins are highly susceptible to volatility in raw material prices and the
performance of the company is exposed to the inherent cyclicity in the steel industry.
Since the demand for steel products depends on end user industries such as infrastructure,
real estate and construction, the company’s operations are vulnerable to any adverse
change in the demand supply dynamics in these sectors.

● Intense competition in the fragmented industry: The industry is highly competitive

with a large number of organised and unorganised players which limits the bargaining
power of the company and places pressure on profitability.

3
 ● Decline in Capacity Utilization: ​The company produced 2.24 lakh MT of MS Billets
and TMT Bars in FY20 as against 2.44 lakh MT in FY19. This led to the decline in
capacity utilization from 94% in FY19 to 86.48% in FY20. In H1FY21, SML produced
1.06 lakh MT of MS Billets and TMT Bars. The marginal decline in production in FY20
was because of the steep decline in steel prices and lower demand from end user
industries. Steel prices are gradually reviving in September 2020 as reflected in the prices
of TMT Bars and MS Billets and the pick-up in economic activities across sectors is
enhancing domestic steel demand.

● Impact of Covid 19: On account of the outbreak of the COVID-19 pandemic and the
subsequent nationwide lockdown, the operations of the company were halted for ~2
months. The operations resumed gradually in May 2020, however, the demand for steel
products in the country was subdued due to uncertain market conditions. The company
operated its manufacturing facilities at 30% capacity and gradually increased it to
60-70% in mid June 2020. The management has informed BWR that their manpower has
now returned and due to the easing of mobility restrictions and gradual improvement in
the domestic demand environment, the operations are back to normal and that the
company has moderate cash reserves to tide over the situation.The company has reported
revenues of ~Rs. 208 crs in H1FY21 on a provisional basis against ~Rs. 200 crs in
H1FY21.

Analytical Approach and Applicable Rating Criteria

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

Rating Sensitivities
Going forward, the ability of the company to increase its scale of operations, improve
profitability, ensure steady order inflow, efficiently manage its working capital requirements and
strengthen its overall credit profile would be the key rating sensitivities.

Positive: Given the ongoing weakness in the macro-economic environment and the Covid-19
impact on the sector, a rating upgrade in the near term appears unlikely.

Negative :
● Subdued market demand, volatility in steel prices or the prolonged impact of Covid 19 on
revenues and cash flows leading to deterioration in the financial risk profile
● Specific credit metrics that may result in a downward rating action include
(1) Total Debt/TNW above 2.50 times on a sustained basis,

4
 (2) ISCR and DSCR below 1.00 time on a sustained basis.
(3) Decline in profitability margins i.e., Operating margin below 2% and net margin
below 0.5%
● Non-submission of No Default Statement on a monthly basis, as per extant guidelines

Liquidity: Stretched
Average utilisation of working capital facilities over the last year was ~85%. Net cash accruals
of ~Rs 12.17 Crs in FY20(P) are sufficient to repay debt obligations of ~Rs. 6.49 Cr in FY21.
EBITDA of Rs 11.23 Crs in FY20 (P) was sufficient to cover the interest and finance charges of
Rs 6.59 Crs. Net cash accruals/Total Debt was low at 0.08 times as on 31 Mar 2020 (P). Current
ratio was moderate at 1.39 times as on 31 Mar 2020 (P). The firm had availed moratorium for
interest and principal payments under the Covid 19 Regulat​ory package by RBI from Mar 2020 -
June 2020 from HDFC Bank and from Mar 2020 to Aug 2020 from ICICI Bank and SIDBI.
Cash and cash equivalents were modest at Rs 5.91 Crs as on 31 Mar 2020 (P) as against Rs 3.74
Crs as on 31 Mar 2019. The conversion cycle of the company has increased from 36 days as on
31 Mar 2019 to 67 days as on 31 March 2020(P). This is due to an increase in inventory holding
period because of higher stock held by the company in line with increased manufacturing
capacities.

Company Profile
Sugna Metals Limited (SML) was incorporated in October 2006 by Mr. Bharat Kumar, Ms.Saroj
Sonthalia and Mr. Mudit Sonthalia at Hyderabad initially as a private limited company and
converted into a public limited company in 2013. The company is engaged in the manufacturing
of MS Billets, TMT Bars and other rolled steel products. The manufacturing unit is located in
Narayanpur village, Pargi Mandal, Telangana. The manufacturing plant has an installed capacity
of 1,30,000 MT for MS Billets and 1,30,000 MT for TMT bars. The Group has an established
marketing network for the sales and distribution of their products across Andhra Pradesh,
Telangana, Karnataka and other states in India. The finished products are sold under the brand
name ‘Sugna TMT’.

Mr Bharat Kumar is the Managing Director. The company is a family owned business.

5
 Key Financial Indicators
Key Parameters Units 31 Mar 2018 31 Mar 2019 31 Mar 2020
Result Type Audited Audited Provisional
Operating Revenue Rs Crs 386.45 615.28 458.66
EBITDA Rs Crs 16.05 17.25 16.48
PAT Rs Crs 3.15 8.61 6.12
TNW Rs Crs 55.96 64.57 70.68
Total Debt/ TNW Times 1.06 1.14 2.09
Current Ratio Times 1.41 1.39 1.39

The company has reported total revenue of ~Rs. 208 crs for H1FY21, on a provisional basis.

Key Covenants of the facility rated: ​The terms of sanction include standard covenants
normally stipulated for such facilities.

Status of non-cooperation with previous CRA (if applicable) - ​Nil

Rating History for the previous three years [including withdrawn and suspended]
Facilities Current Rating (October 2020) Rating History

Tenure Amount
Rating 10Aug2020 08Aug2019 2018 2017
(Rs. Crs.)

BWR BB+
Fund Based
Long BWR BBB-/ ISSUER NOT BWR BBB-/ Not Not
Term Loans 21.49
Term Stable COOPERATING* Stable Rated Rated
Cash Credit 40.00
/ Stable

Non-Fund BWR A4+

Short Not Not
Based BWR A3 ISSUER NOT BWR A3
term 25.00 Rated Rated
ILC/ FLC COOPERATING*

Total 86.49 Rs Eighty Six Crores and Forty Nine Lakhs Only

*Issuer did not cooperate; based on best available information

Note: Initial ratings of BWR BBB-/Stable/A3 were assigned on 08 August 2019.

6
Complexity Levels of the Instruments​:
For more information, visit ​www.brickworkratings.com/download/ComplexityLevels.pdf

Hyperlink/Reference to applicable Criteria

● General Criteria
● Approach to Financial Ratios
● Manufacturing Companies
● Short Term Debt

Analytical Contacts

Shivangi Gupta Rajee R

Ratings Analyst Senior Director - Ratings
B :+91 80 4040 9940 B: +91 80 4040 9940
shivangi.g@brickworkratings.com rajee.r@brickworkratings.com

1-860-425-2742 I media@brickworkratings.com

7
 Sugna Metals Limited
Annexure I
Details of Bank Loan Facilities rated by BWR

Sl. No. Name of the Type of Facilities Long Term Short Term Total^
Bank (Rs. Crs.) (Rs. Crs.) (Rs. Crs.)

1 Cash Credit 35.00 - 35.00

HDFC Bank,
2 Secunderabad ILC/FLC - 10.00 10.00
Branch
3 Term Loan 1 6.59 - 6.59
4 Term Loan 2 4.29 - 4.29
5 ICICI Bank Cash Credit 5.00 - 5.00
Nanakramguda
6 Branch 15.00
Letter Of Credit - 15.00
7 Subordinated Debt* 0.26 - 0.26

8 Term Loan 1.27 - 1.27

SIDBI,
9 Term Loan 5.19 - 5.19
Hyderabad
10 Branch Office Subordinated Debt* 2.81 - 2.81
11 Soft Loan 0.14 - 0.14

Term Loan 0.95 - 0.95

Total: Rupees Eighty Six Crores and Forty Nine Lakhs Only 86.49
*​Subordinated to senior lenders
^The company also has a working capital loan of Rs 14.81 Crs from TATA Capital financial services that
has not been rated by BWR.

8
For print and digital media The Rating Rationale is sent to you for the sole purpose of dissemination through your
print, digital or electronic media. While it may be used by you acknowledging credit to BWR, please do not change
the wordings in the rationale to avoid conveying a meaning different from what was intended by BWR. BWR alone
has the sole right of sharing (both direct and indirect) its rationales for consideration or otherwise through any print
or electronic or digital media.

About Brickwork Ratings ​: Brickwork Ratings (BWR), a Securities and Exchange Board of India [SEBI]
registered Credit Rating Agency and accredited by Reserve Bank of India [RBI], offers credit ratings of Bank Loan,
Non- convertible / convertible / partially convertible debentures and other capital market instruments and bonds,
Commercial Paper, perpetual bonds, asset-backed and mortgage-backed securities, partial guarantees and other
structured / credit enhanced debt instruments, Security Receipts, Securitisation Products, Municipal Bonds, etc.
BWR has rated over 11,400 medium and large corporates and financial institutions’ instruments. BWR has also
rated NGOs, Educational Institutions, Hospitals, Real Estate Developers, Urban Local Bodies and Municipal
Corporations. BWR has Canara Bank, a leading public sector bank, as one of the promoters and strategic partners.
BWR has its corporate office in Bengaluru and a country-wide presence with its offices in Ahmedabad, Chandigarh,
Chennai, Hyderabad, Kolkata, Mumbai and New Delhi along with representatives in 150+ locations.

DISCLAIMER Brickwork Ratings (BWR) has assigned the rating based on the information obtained from the
issuer and other reliable sources, which are deemed to be accurate. BWR has taken considerable steps to avoid any
data distortion; however, it does not examine the precision or completeness of the information obtained. And hence,
the information in this report is presented “as is” without any express or implied warranty of any kind. BWR does
not make any representation in respect to the truth or accuracy of any such information. The rating assigned by
BWR should be treated as an opinion rather than a recommendation to buy, sell or hold the rated instrument and
BWR shall not be liable for any losses incurred by users from any use of this report or its contents. BWR has the
right to change, suspend or withdraw the ratings at any time for any reasons.