ICRA reaffirms ratings of B+ (Stable) and A4 on bank facilities of Ishwar Metal Industries

June 06, 2017

Ishwar Metal Industries

*Instrument details are provided in Annexure-1

ICRA has reaffirmed its long-term rating of [ICRA]B+ (pronounced ICRA B plus) on the Rs. 20.99- crore1fund-based bank facilities of Ishwar Metal Industries ('IMI' or 'the firm')2. ICRA has also reaffirmed its short-term rating of [ICRA]A4 (pronounced ICRA A four) on the Rs. 22.50-crore bank facilities of IMI. The outlook on the long-term rating is 'Stable'.

ICRA's rating reaffirmation takes into account the decline in the operating profitability in the past few years (operating profit margins was 3.69% in FY2017 against operating profit margin of 7.59% in FY2016). Most of the orders executed by IMI do not have price escalation clauses, exposing it to raw material price risk. Further, the ratings also take into account the stretched liquidity position, the increasing debt levels over the years and the negative cash flows. The firm's increasing scale of operations has been mainly debt funded by bank borrowings and unsecured loans from promoters. ICRA's ratings further takes into account the increase in working capital requirements as payments were stuck with debtors, leading to stretched creditor days. The company had a relatively high gearing of 1.72 times as on March 31, 2017 and moderate credit profile due to high interest charges, low profitability and high term loan repayments. The firm's business viability is dependent on its ability to successfully bid for government tenders as it is present in an intensely competitive industry. The ratings also take into account the risks inherent in a partnership firm, such as limited ability to raise equity capital, risk of dissolution and risk of withdrawal. Nevertheless, ICRA draws comfort from the robust growth in revenues in the last two years, which coupled with a strong order book position of Rs. 700 crore, gives medium term revenue visibility to the firm. ICRA also notes the long track record of the promoters' experience and their ability to support the business. IMI's ability to attain healthy revenue growth along with improvement in the profit margins and efficient management of working capital will be the key rating sensitivity.

1 100 lakh = 1 crore = 10 million

2 For complete rating scale and definitions, please refer to ICRA's websitewww.icra.in or other ICRA Rating Publications

• Experienced management with over two decades of experience in the electronics items and hotel industry

• Growth in turnover and cash accruals in FY2016 and FY2017 on account of favourable demand and increased orders inflow (group3turnover stands at Rs. 80.75 crore and Rs. 254.10 crore in FY2016 and FY2017 respectively)

• Strong order book position lends visibility to the revenues going forward

• Diversified product assortment mitigates product concentration risk

• Favourable demand outlook for power transmission infrastructure over the medium-to-long term supported by Government impetus in this sector is likely to result in healthy demand for the group

  Credit Weakness

• Fragmented industry structure characterised by intense competition; given its modest scale of operations and tender-based contracting system, the company has limited bargaining power with its customers

• SEBs constitute more than 50% of the total revenue; thus business certainty is dependent on its ability to successfully bid for government tenders

• Exposure of profitability to adverse fluctuations in raw material prices, particularly iron, steel, aluminium and copper because of absence of price variation clauses

• Stretched liquidity position as evident from the full utilisation of its fund based limits due to high debtor level and negative cash flows

• Weak financial profile marked by low profitability, high gearing, moderate debt protection indicators and low cash accruals

IMI has an extensive track record in the manufacturing of substation structures, cables and conductors. The company is a part of the Ishwar Group of Companies, which is present in the electronics and hotel industry. IMI had catered to state discoms of Rajasthan, Haryana, Punjab and Uttar Pradesh in the past. The company also has exposure to project execution risk since the order execution can be affected by delays on behalf of the client, thereby delaying the dispatch and subsequent receipt of payment for the orders. The company draws its business from tender bidding. The company's operating income depends on the order size and the delivery schedule, the availability of funds as well as the capacity, hence it often fluctuates. However, the firm has shown robust growth in revenue on account of healthy order inflows in FY2016 and FY2017. IMI has been successful in getting significant amount of orders from government and private entities in FY2018 and has an outstanding order book of Rs. 703.79 crore. The majority of the orders are for Rajasthan State Electricity Board. The firm is expected to complete these orders within the next two years, providing adequate revenue visibility in the medium term. The company operates in a highly competitive and fragmented industry, which is characterised by the presence of a large number of participants, on account of low entry barriers. This combined with lack of price escalation clauses in most

3 Group refers to Ishwar group of companies which includes Ishwar Metal Industries (IMI, rated at [ICRA]B+ (stable) and [ICRA]A4), Ishwar Cables Private Limited (ICPL, rated at [ICRA]B (Stable) and [ICRA]A4), and K S Infra Transmission Private Limited (KSIPL, rated at [ICRA]B (stable) and [ICRA]A4), because of the common management and similar line of business.

of the contracts have led to a decline in operating profit margins over the years. The increase in working capital requirements as a result of increase in turnover has been funded by an increase in the bank borrowings coupled with unsecured loans infused by the promoters. As a result, the capital structure of IMI remains highly leveraged with moderate credit profile. Favourable movement in future ratings hinges on its ability to generate enough liquidity, timely execute orders in hand and sustained improvement in its operating profitability.

For arriving at the ratings, ICRA has applied its rating methodologies as indicated below.

Corporate Credit Rating Methodology

IMI was established in 1985 as a partnership firm by Mr. Rahul Chaudhary and his family. The firm is involved in manufacturing and installation of substation structures, transformer tanks, core clamps, meter pillar boxes, cables and conductors, electronic meters and electric lamination. The manufacturing unit of the firm is located in Jaipur Industrial Area, Rajasthan.

IMI reported an operating income (OI) of Rs. 261.10 crore and a net profit of Rs. 1.02 crore in FY2017 on a provisional basis, as compared to an OI of Rs. 144.49 crore and a net profit of Rs. 0.76 crore in the previous year.

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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 websitewww.icra.in