ICRA Nepal has assigned the short-term rating of [ICRANP] A2 to the existing as well as proposed short-term loans (including non-fund-based limits) worth Rs.6,590 Million of Rajesh Metal Crafts Private Limited (RMC).
RMC is a secondary steel producer, involved in manufacturing steel pipes and sheets (galvanized and color coated) among other products. RMC imports hot rolled coils (HRCs) as primary raw material, processes it into cold rolled coils (CRCs) in its cold-rolling mill and manufactures finished goods. The HRCs are imported from primary steel producers in India. RMC mainly caters to the domestic market which accounted for ~99% of company’s sales in FY2018, with negligible portion of sales as exports to neighboring Indian states across the Indo-Nepal boarder.
The assigned rating factors in RMC’s established track record (operating since 1993) and good market positioning in the steel pipe and sheet manufacturing segment. The rating also considers positive demand outlook for steel products in Nepal and duty protection accorded to the domestic steel industry by the Government of Nepal (GoN), through import barriers on finished steel products. ICRA notes that the presence of limited number of players in Nepal in the pipe and sheet segment, duty protection against imports, and a favorable growth in demand (especially for sheets) after the April 2015 earthquake has led to higher sales realization, healthy operating margin and net profitability for the company in the last few years.
The rating action also takes into consideration RMC’s good capitalization levels and absence of long-term debt resulting in low gearing level. Moreover, strong profitability of RMC and moderate debt-burden has resulted in healthy debt coverage indicators for the company. RMC has retained a major portion of its internal accruals in the last four to five years, thereby reducing its reliance on external working capital financing. Absence of long-term debt and a decline in reliance over external working capital financing is likely to increase RMC’s financial flexibility and enable the company to better withstand industry cyclicality associated with the steel business. The rating further takes comfort from the promoter groups’ long experience in the steel industry.
The ratings, however, are constrained by the company’s exposure to regulatory risk. Any reduction in import tariff by the government will have an adverse impact on the profit margin and financial indicators of RMC, and therefore remains a key rating sensitivity. ICRA notes that the pipes and sheets segment is expected to see fresh capacity creation over the medium term following the entry of new players, leading to an increase in competitive intensity, and consequently, this is likely to moderate industry margins going forward. The rating is also tempered by the company’s limited product diversification (~95% revenues accounted for by sheets and pipes), and the inherent cyclicality associated with the steel industry, exposing the company to volatile cash-flows. RMC is also exposed to the forex risk, with the raw material purchases in US Dollars and sales realization in the domestic currency. This has also been factored into the assigned rating.