ICRA Nepal has assigned a long-term rating of [ICRANP] LB+ to the NPR 1,645 million of long-term bank loan limits of Sarbottam Steels Private Limited (SSPL). ICRA Nepal has also assigned a short-term rating of [ICRANP] A4 to the short-term bank loan limits of NPR 1,955 million (interchangeable between fund-based and non-fund-based facilities).
The rating factors in the promoter group’s adequate track record in the steel and cement industry, which partly mitigates the project execution and offtake risk. The assigned rating also considers the positive long-term demand outlook for steel products in Nepal, despite the temporary capacity overhang situation existing in the industry. Duty protection accorded to the domestic steel industry by the Government of Nepal (GoN), through high import duties on finished steel products also remains a rating positive. SSPL’s plan of in-house billet production vis-à-vis its import is likely to bring in cost efficiencies, which could aid the company’s survival over the medium term in the intensely competitive TMT1 segment. ICRA Nepal also notes the locational advantage available to SSPL from its proximity to the Indian border and the national (east west) highway for raw material import, primarily from India as well as product distribution (billet and TMT) across the country.
The rating is, however, constrained by the project execution and stabilization risk associated with SSPL’s manufacturing unit. The project is in the middle stages of development and any significant delay in its commissioning could adversely impact its cash flows. SSPL’s gearing is expected to remain high over the medium term, given the debt-funded capex and working capital-intensive nature of business. This, coupled with the erosion in industry margin amid competitive pressure are likely to exert pressure on the debt coverage metrics of SSPL. The promoters’ ability for timely infusion of fresh equity to support any cost-overrun and support the working capital requirement before project stabilization will also have a bearing on SSPL’s financial profile. Although backward integration of SSPL into billet manufacturing is expected to help SSPL’s margins vis-à-vis standalone rolling mills, the company’s ability to contain the conversion cost while producing billets and thereby generate cost efficiencies and improve the margins remains to be seen. Further, its exposure to regulatory risks also remains a key rating sensitivity, as any reduction in import tariff by the GoN on finished steel products will have an adverse impact on the profit margins as well as the financial indicators of SSPL. ICRA Nepal also takes note of the inherent cyclicality associated with the steel industry, thus exposing the company to cash flow volatility. SSPL will also remain exposed to forex risks, as raw materials are largely procured in US dollars while sales realization is made in domestic currency.
Incorporated in 2017and promoted by the Saurabh Group, Sarbottam Steels Private Limited (SSPL) is a closely held company. Mr. Bishnu Prasad Neupane, chairman and the managing director of the company, holds 52% of the paid-up capital while the rest is held by 12 individual shareholders, each holding less than 6% of the paid-up capital.
SSPL is setting up a factory for manufacturing billets and TMT with an installed capacity of ~264,000 MT (metric tonne) and ~235,000 MT respectively. The production facility will use locally purchased scrap iron and imported (mainly from India) sponge to produce the finished goods (billets and TMT). SSPL’s production facility, in Beluwa of Parsa district, is at the mid-stage of commissioning and is expected to commence operations by the end of December 2020.
Source: ICRA Ratings Nepal