By Akash Krishnatry

India Ratings and Research (Ind-Ra) has affirmed BMW Industries Ltd’s (BMW) Long-Term Issuer Rating at ‘IND A-’. The Outlook is Stable. The instrument-wise rating actions are given below:

Instrument Type

Date of Issuance

Coupon Rate

Maturity Date

Size of Issue (million)

Rating/Outlook

Rating Action

Long-term loan

-

-

December 2018 - June 2022

INR1,783 (reduced from INR2,181)

IND A-/Stable

Affirmed

Fund-based working capital limits

-

-

-

INR2,850 (increased from INR2,380)

IND A-/Stable

Affirmed

Non-fund-based working capital limits

-

-

-

INR932 (increased from INR631.5)

IND A2+

Affirmed

KEY RATING DRIVERS

Assured Cash Inflows Providing Debt Security: The affirmation reflects assured cash inflows from BMW’s take-or-pay agreement with Tata Steel Limited (TSL; ‘IND AA’/Rating Watch Evolving) for conversion of hot-rolled coil into galvanised plain (GP/GC) sheets. As per the agreement, TSL has undertaken to buy minimum quantity of 160,000mtpa of the unit’s total capacity of 200,000mtpa. In case of a lower off-take, TSL will compensate BMW by paying a pre-determined amount as compensation which will cover the latter’s interest and principal obligations for the unit’s debt and fixed costs. About 90% of BMW’s total term debt of INR1.63 billion at FYE18 is on account of this conversion unit at Ghamaria, Jamshedpur. The minimum assured quantity from TSL provides revenue visibility of around INR2.5 billion over FY19 (around 25% of FY18 total revenue of INR9.4 billion). In addition, BMW generates 15% of its revenue from other conversion works for TSL, for which there are no minimum offtake agreements.

Sustained Improvement in Credit Metrics:
 Net adjusted leverage (total adjusted net debt/operating EBITDAR) improved to 2.9x in FY18 (FY17: 4.1x, FY16: 4.9x) due to progressive repayments on term loans and increase in EBITDA to INR1.5 billion (INR1.24 billion, INR 1.16 billion). Despite this, EBITDA interest coverage (operating EBITDA/gross interest expense) improved marginally to 3.2x in FY18P (FY17: 3.1x, FY16: 2.5x) due to an increase in interest expense, resulting from unsecured loans from the promoter. Ind-Ra expects the net adjusted leverage to improve further in the next couple of years on account of the scheduled repayment of the term loans. BMW’s credit metrics are comfortable because of low debt servicing risk, arising from the assured cash inflows from TSL. However, any delay or adverse changes in the conversion agreement may pressurise the credit metrics beyond FY19.

Higher Stability; Protection from Price Volatility: 
BMW generates around 40% of its revenue from conversion works for TSL (FY18: 42%, FY17: 41%), wherein TSL provides the key raw materials and the conversion charge is fixed on the basis of operational expenses. As a result, BMW’s susceptibility to volatility in raw material and finished goods prices is lower, as reflected in its range-bound EBITDA margins in the conversion division; while margins in the manufacturing division remain susceptible to any volatility in prices.

Adequate Liquidity:
 BMW had positive cash flow from operations (FY18: INR867 million, FY17: INR1,077 million) and free cash flow (INR804 million, INR582 million). The average maximum utilisation of the working capital limits was around 92% during the 12 months ended May 2018.

Diversified Product Profile: 
The company has a diversified product portfolio including thermo-mechanically treated bars, structural steel, steel pipes and GP sheets. High value-added products such as structures and GP sheets constitute 40%-45% of the total revenue. As a result of its product mix and conversion business, the company is able to generate robust EBITDA margins (FY18: 15.9%, FY17: 16.5%).

TSL Agreement Due for Renewal:
The agreement with TSL is valid until March 2019 and the management expects it to be renewed as the plant has been strategically set up to serve TSL’s production of GP/GC sheets. Ind-Ra also notes favourable demand of GP/GC sheets in the medium term due to increased government spending on the housing and infrastructure sectors. The company’s overall debt service coverage ratio is likely to be comfortable with a minimum of 1.3x through the entire tenor of the term loans (until FY22), despite a likely reduction in the conversion charges at the time of renewal in FY20.

Working Capital Intensive Nature of Business: 
BMW’s net cash cycle was long at 183 days in FY18 (FY17: 186 days) mainly due to high inventory holding period of 131 days (114 days). The company’s steel inventories are vulnerable to price volatility; hence, a decline in price may impact the overall profitability. 


RATING SENSITIVITIES

Positive: An increase in revenue or a significant reduction in customer concentration, along with net adjusted leverage reducing below 2.5x on a sustained basis could lead to a positive rating action.

Negative:
 Lower-than-expected EBITDA leading to weakening of debt servicing indicators and the net adjusted leverage increasing above 4x on a sustained basis could lead to a negative rating action. Any unexpected change in conversion terms with TSL and/or non-renewal of the take-or-pay contract would lead to review of the ratings.


COMPANY PROFILE

BMW was incorporated in 1981 as Bansal Mechanical Works Pvt. Ltd., and was later changed to Bansal Mechanical Works Ltd. in 1984 and subsequently to BMW in 1999. The company manufactures mild steel, and long and flat products such as tubular poles, thermos-mechanically treated bars and structures. It is also engaged fabrication of power transmission and telecom towers, and galvanisation of structures.

The company has been processing, slitting, shearing, levelling, pickling and scrap handling of steel on behalf of TSL for the more than two decades. It has five manufacturing facilities, two in West Bengal and three in Jharkhand.

FINANCIAL SUMMARY
 

Particulars

FY18

FY17

Revenue (INR billion)

9.4

7.5

EBITDA margin (%)

15.9

16.5

Interest coverage (x)

3.2

3.1

Net leverage (x)

2.9

4.1

Source: RML, Ind-Ra 


RATING HISTORY

Instrument Type

Current Rating/Outlook

Historical Rating/Outlook

Rating Type

Rated Limits (million)

Rating

8 March 2017

Issuer rating

Long-term

-

IND A-/Stable

IND A-/Stable

Long-term loan

Long-term

INR1,783

IND A-/Stable

IND A-/Stable

Fund-based limits

Long-term

INR2,850

IND A-/Stable

IND A-/Stable

Non-fund-based limits

Short-term

INR932

IND A2+

IND A2+


COMPLEXITY LEVEL OF INSTRUMENTS

For details on the complexity level of the instruments, please visit https://www.indiaratings.co.in/complexity-indicators.

 

SOLICITATION DISCLOSURES

Additional information is available at www.indiaratings.co.in. The ratings above were solicited by, or on behalf of, the issuer, and therefore, India Ratings has been compensated for the provision of the ratings. 

Ratings are not a recommendation or suggestion, directly or indirectly, to you or any other person, to buy, sell, make or hold any investment, loan or security or to undertake any investment strategy with respect to any investment, loan or security or any issuer.

ABOUT INDIA RATINGS AND RESEARCH

India Ratings and Research (Ind-Ra) is India's most respected credit rating agency committed to providing India's credit markets accurate, timely and prospective credit opinions. Built on a foundation of independent thinking, rigorous analytics, and an open and balanced approach towards credit research, Ind-Ra has grown rapidly during the past decade, gaining significant market presence in India's fixed income market. 

Ind-Ra currently maintains coverage of corporate issuers, financial institutions (including banks and insurance companies), finance and leasing companies, managed funds, urban local bodies, structured finance and project finance companies. 

Headquartered in Mumbai, Ind-Ra has seven branch offices located in Ahmedabad, Bengaluru, Chennai, Delhi, Hyderabad, Kolkata and Pune. Ind-Ra is recognised by the Securities and Exchange Board of India, the Reserve Bank of India and National Housing Bank. 

Ind-Ra is a 100% owned subsidiary of the Fitch Group.

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Applicable Criteria

Analyst Names

  • Primary Analyst

    Akash Krishnatry

    Senior Analyst
    India Ratings and Research Pvt Ltd DLF Epitome, Level 16, Building No. 5, Tower B DLF Cyber City, Gurgaon Haryana 122002
    0124 6687263

    Media Relation

    Namita Sharma

    Manager – Corporate Communication
    +91 22 40356121