| Sarda Metals and Alloys Limited | ||||||
| Ratings upgraded to 'CRISIL A/Stable/CRISIL A1' | ||||||
| Rating Action | ||||||
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| Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings. | ||||||
| 1 crore = 10 million | ||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has upgraded its ratings on the bank loan facilities of Sarda Metals and Alloys Limited (SMAL) to ‘CRISIL A/Stable/CRISIL A1’ from ‘CRISIL BBB+/Positive/CRISIL A2’.
The rating upgrade reflects the expectation that the business risk profile shall improve with the commissioning of the third furnace in the current fiscal increasing the scale of operations. The operating efficiency shall be supported by the recently commissioned Gare Palma coal mine housed under the parent entity, Sarda Energy and Minerals Ltd (SEML; ‘CRISIL AA-/Stable/CRISIL A1+’), which will be utilised for the captive consumption of SMAL as well. The rating also factors the sustenance of the improved financial risk profile driven by enhancement in the rating of SEML as well.
Operating performance of the company improved during fiscal 2022 marked by the rise in operating income by 87% driven by the increase in both volume and realization. This supported by backward integration resulted in significant jump in the operating profit before depreciation interest and tax (OPBDIT) margin to ~25% from 19% the previous fiscal. Supported by robust operating performance, the adjusted interest coverage and gearing ratios improved to 10.1 times and 0.82 time compared to 2.9 and 1.43 times, respectively, during the previous fiscal. While realisations have witnessed moderation during the current fiscal, cash accrual is expected to comfortably cover capital expenditure (capex) requirements and scheduled debt repayments. Overall, financial risk profile is expected to remain healthy over the medium term with adjusted interest cover at 4-5 times and gearing ratio likely to reduce further with no major capex plans.
The ratings continue to reflect the strong financial and operational support from the parent, SEML and the integrated nature of operations and healthy financial risk profile. These strengths are partially offset by exposure to cyclicality in the ferroalloys industry, and to fluctuations in foreign exchange (forex) rates. |
Analytical Approach CRISIL Ratings has applied its parent notch-up framework to factor in the strategic importance of SMAL to, and the likely support from, SEML, which owns a 100% stake in the company. Both entities are engaged in the same line of business and share a common management, brand name and procurement network. SEML has also guaranteed Rs 52 crore (o/s debt against the guarantee as on March 31, 2022 is Rs. 24.65 crore) of long-term debt of SMAL and has extended unsecured loans in the past. The companies collectively are referred to as the Sarda group. |
Key Rating Drivers & Detailed Description Strengths: Healthy operating efficiency driven by the integrated nature of operations: SMAL operates a 2x33-MVA ferroalloy plant, whose entire power requirement is met by an 80-megawatt (MW) captive thermal power plant. Integration has further improved post the commissioning of the Gare Palma IV/7 coal mine by the parent SEML, which meets the full requirement of domestic coal. The surplus power is currently traded on the Indian Energy Exchange. This has helped the company successfully maneuver business cycles by altering the revenue mix. The existing captive source is adequate to meet the power requirement for the additional 1x36 MVA ferro alloy furnace, which is likely to be commissioned in the current fiscal. Moreover, bulk procurement of raw materials saves cost, and proximity to the port cuts down logistics cost and helps target global markets.
Healthy financial risk profile: Debt protection metrics are healthy, indicated by adjusted interest coverage and net cash accrual to total debt ratios of 10.1 times and 0.49 time, respectively, in fiscal 2022 (2.9 times and 0.14 time, respectively, during fiscal 2021). The capital structure is comfortable, with gearing at 0.82 time as on March 31, 2022 (1.43 times a year earlier). The financial risk profile is expected to remain healthy with moderate capex plans (to be funded largely through internal sources), driven by above-average cash accrual.
Strong financial and operational support from SEML: SEML has extended unsecured loans to SMAL in the past, and has provided a corporate guarantee of Rs 60 crore (reduced to Rs 52 crore as on March 31, 2022) towards the latter’s debt. Operational support is also extended in the form of common raw material procurement and exports being largely carried out through SMAL. The five-decade-long experience of the promoters in the steel and ferroalloys industry and their healthy relationships with customers and suppliers have helped SMAL establish its market position amidst competition. CRISIL Ratings believes SEML is likely to continue providing the requisite support to SMAL in case of any shortfall in timely servicing of debt.
Weakness: Susceptibility to volatility in raw material prices and cyclicality in the ferroalloys industry: SMAL remains susceptible to fluctuations in raw material prices and cyclicality in the ferroalloys industry, which impacts both demand and realisations. Exports contribute 80-90% of total sales. However, these risks are partly offset by the favourable scenario in the domestic market, flexibility in altering the revenue mix between ferroalloys and power, and the ability to pass on the hike in raw material prices to customers.
Exposure to forex risk: Company is exposed to forex risk since it imports large part of the manganese ore and coal. This is partly hedged by the ferro alloys exports which accounts for more than 80% of the company’s overall sales (exports to more than 30 countries, predominantly Japan). SMAL uses financial instruments such as forward currency contracts to hedge part of its forex exposure and is exposed to risks related to large fluctuations in the forex rates for the unhedged portion. However, going forward, with substitution of imported coal with the domestic coal and increase in the exports post commissioning of the third furnace of ferro alloys, the forex risk is expected to reduce. |
Liquidity: Strong Expected net cash accrual of above Rs 100 crore should comfortably cover the term debt repayment, capex and incremental working capital requirements in fiscal 2023. Cash and equivalents were Rs 125 crore as on March 31, 2022. Fund-based bank limit utilisation averaged a mere 1% during the 12 months through March 2022. |
Outlook: Stable SMAL's operating performance will sustain owing to the integrated nature of operations and promoters financial and operational support. |
Rating Sensitivity Factors Upward Factors:
Downward Factors:
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About the Group SMAL was incorporated in October 2008, as a wholly-owned subsidiary of SEML. The company operates a 2x33-MVA ferroalloy plant, backed by an 80-MW captive thermal power plant. The power plant commenced operations in March 2013, and the ferroalloy plant in June 2014.
SEML, incorporated in 1973, is the flagship company of the Sarda group, and is a vertically integrated producer of steel with a captive iron ore and coal mines. It also manufactures and exports niche-grade manganese-based ferroalloys, with self-sufficient captive power from waste heat and coal. It also has interests in hydropower projects through special purpose vehicles, Madhya Bharat Power Corporation Ltd, Chhattisgarh Hydro LLP and Parvatiya Power Ltd. |
Key Financial Indicators (Standalone)*
*As per analytical adjustments made by CRISIL Ratings |
Any other information: Not applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
#Interchangeable with working capital demand loan, Bill discounting, export packing credit, packing credit in foreign currency *Interchangeable with standby letter of credit, bank guarantee for buyer’s credit, bank guarantee (Financial/Performance) |
| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| All amounts are in Rs.Cr. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annexure - Details of Bank Lenders & Facilities | |||
| Facility | Amount (Rs.Crore) | Name of Lender | Rating |
| Bank Guarantee | 6.8 | Bank of Baroda | CRISIL A1 |
| Bank Guarantee | 3 | RBL Bank Limited | CRISIL A1 |
| Bank Guarantee* | 3 | YES Bank Limited | CRISIL A1 |
| Cash Credit | 30 | Bank of Baroda | CRISIL A/Stable |
| Cash Credit | 10 | RBL Bank Limited | CRISIL A/Stable |
| Cash Credit# | 10 | YES Bank Limited | CRISIL A/Stable |
| Letter of Credit | 119.5 | Bank of Baroda | CRISIL A1 |
| Letter of Credit | 44 | RBL Bank Limited | CRISIL A1 |
| Letter of Credit* | 27 | YES Bank Limited | CRISIL A1 |
| Proposed Long Term Bank Loan Facility | 73 | Not Applicable | CRISIL A/Stable |
| Term Loan | 86.99 | Axis Bank Limited | CRISIL A/Stable |
| Term Loan | 6.23 | HDFC Bank Limited | CRISIL A/Stable |
| Term Loan | 56.97 | HDFC Bank Limited | CRISIL A/Stable |
| Term Loan | 24.65 | HDFC Bank Limited | CRISIL A/Stable |
| Term Loan | 78.86 | IDFC FIRST Bank Limited | CRISIL A/Stable |
This Annexure has been updated on 03-Feb-23 in line with the lender-wise facility details as on 27-Jan-23 received from the rated entity.
#Interchangeable with working capital demand loan, Bill discounting, export packing credit, packing credit in foreign currency
*Interchangeable with standby letter of credit, bank guarantee for buyer’s credit, bank guarantee (Financial/Performance)
Criteria Details
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