Press Release South Malabar Steels and Alloys Private Limited February 11, 2021 Ratings Amount Facilities Rating1 Rating Action (Rs. crore) Revised from CARE BB; CARE BB-; Stable; Stable (Double B; Outlook: ISSUER NOT COOPERATING* Long -term Bank Facilities 7.52 Stable) and moved to (Double B Minus; Outlook: Stable; ISSUER NOT COOPERATING ISSUER NOT COOPERATING*) category CARE A4; Rating moved to ISSUER ISSUER NOT COOPERATING* NOT COOPERATING Short-term Bank Facilities 1.50 (A Four; category ISSUER NOT COOPERATING*) 9.02 Total Facilities (Rs. Nine Crores and Two Lakhs Only) Details of facilities in Annexure-1 *Based on best available information Detailed Rationale & Key Rating Drivers CARE has been seeking information, to carry out annual surveillance, from South Malabar Steels and Alloys Private Limited (SMSAPL) to monitor the rating(s) vide e-mail communications dated January 14, 2021, January 21, 2021, January 25, 2021, January 27, 2021 and numerous phone calls. However despite our repeated requests, the company has not provided the information for monitoring the requisite ratings. In line with the extant SEBI guidelines, CARE has reviewed the rating on the basis of the best available information which however, in CARE’s opinion is not sufficient to arrive at a fair rating. The rating on South Malabar Steels and Alloys Private Limited bank facilities will now be denoted as CARE BB-; Stable/CARE A4; ISSUER NOT COOPERATING. Further due diligence with the lender and auditor could not be conducted. Users of this rating (including investors, lenders and the public at large) are hence requested to exercise caution while using the above rating. The rating has been revised on account of non-availability of requisite information due to non-cooperation by SMSAPL with CARE’s efforts to undertake a review of the rating outstanding. CARE views information availability risk as a key factor in its assessment of credit risk. Detailed description of the key rating drivers At the time of last rating on November 26, 2019, the following were the major rating strengths and weaknesses: Key Rating Weaknesses Marginal decline in profitability margins during review period The profitability margins of SMASPL were thin during FY19. The PBILDT margin had marginally declined by 20 bps and stood at 2.17% in FY19 as against 2.37% in FY18 on account of fluctuating raw material costs along with fluctuation in foreign prices (USD). The company had achieved a PAT margin of 0.78% in FY19 as compared to 1.06% in FY18 as a result of increase in interest cost and depreciation. Deterioration in capital structure and debt coverage indicators The capital structure of the company was marked by an overall deterioration in gearing and stood at 2.54x as on March 31, 2019 as against 1.93x as on March 31, 2018 due to an increase in the total debt of the company. The debt coverage indicators of the company were moderate, but deteriorated, during the review period. Total debt/GCA of the company stood at 8.66x in FY19 as against 5.83x in FY18. TD/CFO of the company further deteriorated and stood negative at 8.28x in FY19 as compared to 3.15x in FY18. The PBILDT interest coverage ratio of the company had decreased and stood at 3.51x in FY19 as compared to 5.19x in FY18 on back of increase in interest costs over the period as a result of an increase in the usage of working capital facility and increase in term loans taken for the purchase of machinery. Geographic concentration risk SMSAPL is primarily located in the Kerala, as the company sells its products in southern region, which results in high geographical concentration risk. SMSAPL is also likely to face intense competition from well - established players as well. 1Complete definitions of the ratings assigned are available at www.careratings.com and in other CARE publications. 1 CARE Ratings Limited Press Release Highly fragmented and competitive nature of industry and foreign exchange fluctuation risk SMSAPL manufactures TMT steel bars, rods, flats, squares and ingots in a highly fragmented and competitive market segment marked by the presence of numerous players. Given the fact that the entry barriers to the industry are low, the players in the industry do not have pricing power and are exposed to competition induced pressures on profitability. Key Rating Strengths Experience of promoters for more than three decades in steel industry and established track record of the company Mr. K. P. Ummer, Managing Director of the company, is a commerce graduate who has more than three decades of experience in manufacturing of steel bars, rods, flats, squares and ingots. He has experience in steel rerolling mills of iron and steel industry. Smt. Naziya Ummer, Director, is a commerce graduate and has 20 years of experience in this business. They are involved in the overall operations of the company. SMSAPL has an established track record of 18 years in the steel industry. The company has established strong relationship with its customers and suppliers due to the long experience of the promoters. Increase in total operating income during review period The total operating income of the company had improved by ~27% and stood at Rs.119.56 crore in FY19 as compared to Rs.94.15 crore in FY18 on account of improving market conditions in the steel industry resulting in an increase in demand for TMT steel bars, rods, flats, squares and ingots. This had, in turn, led to an increase in the production and the price charged by ~10% as compared to the previous year. The net worth of the company, however had remained small, improved and stood at Rs.6.36 crore in FY19 as compared to Rs.5.43 crore due to accretion of profits to the reserves of the company. Comfortable operating cycle The operating cycle of the company was comfortable standing at 30 days in FY19 as against 20 days in FY18. The company generally maintains around two months of inventory for ensuring uninterrupted production line. In addition to raw material stock, inventory also includes work-in-progress as well as finished goods to meet the customers’ requirements. SMSAPL receives payment from its customers within 15-20 days resulting in comfortable average collection period of 27 days in FY19 over 24 days in FY18. The company uses foreign letter of credit (tenure up-to 90 days) to make payment to its foreign supplier which results in average creditors’ period of 45 -60 days during review period. The creditor days stood at 36 days in FY19. The average working capital utilization was 85% during the last 12 months ended September 30, 2019. Established relations with customers and suppliers SMSAPL, being established in 1996, has established good relations with its customers and suppliers. The company supplies the products to around 250 customers across two states; Kerala and Karnataka. The company has well established foreign and domestic suppliers and has maintained good relations with them, i.e. Al Fadhi Metal Scrap Trading, Kuttippulan Iron & Steels Co. Pvt Ltd etc. Analytical approach: Standalone Applicable Criteria Policy in respect of Non-Cooperation by Issuer Criteria on assigning Outlook and Credit Watch to Credit Ratings CARE's Policy on Default Recognition Rating Methodology – Manufacturing Companies Rating Methodology – Steel Industry Criteria for Short Term Instruments Financial ratios – Non-Financial Sector About the Company South Malabar Steel and Alloys Private Limited (SMSAPL) was incorporated in October, 1996 by Mr. K. P. Ummer and Smt. Naziya Ummer at Palakkad, Kerala. Mr. Ummer has three decades of experience in steel industry. SMSAPL is engaged in manufacturing of steel bars, rods, flats, squares and ingots which are used in construction industry. The company has an installed capacity of 30,000 Metric Tons Per Annum (MTPA) as on March 31, 2019. The company has licenses issued by the Bureau of Indian Standards to produce and mark their products as per the specification no. IS 1786:2008 (Fe 415) for TMT Bars and IS 2830:2012 (C20A) for MS Ingots. 2 CARE Ratings Limited Press Release Brief Financials (Rs. crore) FY18 (A) FY19 (A) Total operating income 94.15 119.56 PBILDT 2.23 2.60 PAT 0.99 0.94 Overall gearing (times) 1.93 2.54 Interest coverage (times) 5.19 3.51 A: Audited Status of non-cooperation with previous CRA: CRISIL has placed its rating under issuer not-cooperating category as per its press release dated January 30, 2020 due to non-submission of information by the client. Any other information: Not Applicable Rating History for last three years: Please refer Annexure-2 Covenants of rated instrument / facility: Detailed explanation of covenants of the rated instruments/facilities is given in Annexure-3 Complexity level of various instruments rated for this company: Annexure 4 Annexure-1: Details of Facilities Size of the Name of the Date of Coupon Maturity Rating assigned along with Issue Instrument Issuance Rate Date Rating Outlook (Rs. crore) CARE BB-; Stable; ISSUER NOT Fund-based - LT-Cash - - - 6.50 COOPERATING* Credit CARE A4; ISSUER NOT Non-fund-based - ST- - - - 1.50 COOPERATING* Bank Guarantees CARE BB-; Stable; ISSUER NOT Fund-based - LT-Term - - Dec 2023 1.02 COOPERATING* Loan *Issuer did not cooperate; Based on best available information Annexure-2: Rating History of last three years Current Ratings Rating history Date(s) & Date(s) & Date(s) & Name of the Type Rating Date(s) & Sr. Amount Rating(s) Rating(s) Rating(s) Instrument/Bank Rating(s) No. Outstanding assigned assigned assigned Facilities assigned in (Rs. crore) in 2020- in 2018- in 2017- 2019-2020 2021 2019 2018 1)CARE 1)CARE CARE BB-; Stable; 1)CARE BB; BB; Stable BB; Stable Fund-based - LT- ISSUER NOT Stable 1.