By Rohit Sadaka

India Ratings and Research (Ind-Ra) has upgraded Usha Martin Limited’s (UML) Long-Term Issuer Rating to ‘IND BBB+’ from ‘IND BB+’ while resolving the Rating Watch Positive (RWP). The Outlook is Stable. The instrument-wise rating actions are as follows:

Instrument Type

Date of Issuance

Coupon Rate (%)

Maturity Date

Size of Issue (billion)

Rating/Outlook

Rating Action

Term loan

 

 

December 2025

INR3.25 (reduced from INR28.09)

IND BBB+/Stable

Upgraded; Off RWP

Fund-based working capital limits

 

 

 

INR3.0 (reduced from INR6.0)

IND BBB+ /Stable

Upgraded; Off RWP

Non-fund-based limits

 

 

 

INR1.50

WD

WD (paid in full)

Non-fund-based working capital limits

 

 

 

INR0.25

IND A2+

Assigned


Analytical Approach: Ind-Ra continues to take a consolidated view of UML and its subsidiaries to arrive at the rating in view of the strong operating linkages between the entities as they are in the same line of business. 

The upgrade and RWP resolution reflect the successful completion of a major portion of the slump sale transaction of UML’s steel division, which has led to a decline in debt, and the improved operating performance of the continuing business (wire and wire rope (WWR) division). Consequently, Ind-Ra expects a significant improvement in UML’s credit metrics in FY20. The agency expects the net leverage to sustain below 3.0x and interest coverage to rise to around 3x over the near-to-medium term at the consolidated level.


KEY RATING DRIVERS

Deleveraging Through Sale of Steel Division: The ratings reflects UML’s significant deleveraging post the sale of its steel division to Tata Sponge Iron Limited (TSIL, ‘IND A1+’; subsidiary of Tata Steel Limited, ‘IND AA’/Stable) for a consideration of INR45.25 billion on a debt-free, cash-free and nil working capital basis. Of the total amount, UML received INR34.69 billion (including cash against outstanding bank guarantee of INR0.15 billion and adjustment of net working capital of INR4.31 billion transferred to TSL) in April 2019. The balance consideration of INR6.40 billion had been held back by TSIL due to procedural delays in transfer of mines, some land parcels and working capital. Of this amount, INR4.37 billion was released in July 2019 owing to the transfer of iron ore mine, coal mine and net working capital adjustments. The balance hold-back amount of around INR1.6 billion against land parcels is likely to be transferred by end-2QFY20. The proceeds have been used to pay off debts to banks, leaving INR1.27 billion as a hold-back loan.

For the continuing business, the consolidated credit metrics improved due to growth in the EBITDA to INR2.96 billion in FY19 (FY18: INR2.18 billion) on the back of higher sales realisations. The company’s interest coverage improved to 2.61x in FY19 (FY18: 2.36x) and net leverage improved to 11.81x (18.31x).

On a standalone basis, the interest coverage improved to 2.61x in FY19 (FY18: 1.98x) due to the increase in the EBITDA and lower interest cost for the continuing business. The net leverage remained high but improved to 14.08x (25.01x) owing to the repayment of debt and higher EBITDA.  With the sale of the steel division, the net leverage is likely to improve to around 2.5x and the interest coverage is likely to improve to around 3x in FY20.

Range-Bound EBITDA Margin: UML’s consolidated margins are driven by its standalone margins. The consolidated EBITDA margin rose to 12% in FY19 (FY18: 10.43%) due to an improvement in UML’s standalone margins to 13.9% (10.7%) on account of higher sales realisations. In FY19, UML’s consolidated revenue increased to INR24.69 billion (FY18: INR20.99 billion) owing to the increase in sales realisations. On a standalone basis, UML’s revenue grew by 19.2% to INR16.9 billion in FY19 (FY18: INR14.18 billion).

The standalone EBITDA margins of the continuing operations ranged between 10%-14% over FY13-FY19 based on market price based transfer of wire rod from steel division. This is likely to be sustained in the future, considering UML will have to procure wire rod from the open market. UML has entered into agreement with TSIL for the supply of 100,000TPA of wire rods from the Jamshedpur unit for the next five years; this ensures raw material availability for around 50% of the requirement. For the balance requirement, the company will have to rely on other domestic players. The EBITDA per tonne was in the range of INR9,000-INR13,000 during FY13-FY19. The agency expects the EBITDA per tonne to hover at around INR10,000-INR11,000 over FY20-FY21.

Considering its market presence, product approvals and close association with large end user industry, UML is expected to maintain its profitability over the medium term.

Value Added Products: With the hiving-off of the steel division, UML will only be engaged in the manufacturing of value-added wire and wire rope products. UML would not be present across the entire value chain and would procure wire rods from the open market. Wire ropes are not commodity products and are customised as per the consumer’s requirement.

Adequate Liquidity: Post the sale of the steel division, UML’s working capital utilisation was low at around 80% during the three months ended June 2019. The cash flow from operations rose to INR4.27 billion in FY19 (FY18: INR3.52 billion) and the free cash flow increased to INR3.5 billion (INR2.8 billion) on account of the sales of assets and release of working capital.

UML is likely to continue to report positive free cash flow and cash flow from operations in FY20 and FY21 as the company does not have any major capex plans and has tied up funding requirements for working capital. The debt repayment obligation in FY20 and FY21 stands at INR5.98 billion (including hold back loan of INR5.84 billion to be paid off from INR6.40 billion hold back amount from TSIL on account of mines and other asset transfer) and INR0.23 billion, respectively.  The DSCR is expected to be comfortable at around 2x in FY20 -FY21. UML’s overall liquidity position is likely to improve significantly over the medium term, as the sale proceeds were used to reduce debt, leading to a reduction in interest outflow.

Leading Player in WWR business; High Geographic Diversification: UML is a market leader in India and amongst the top five leading manufacturer globally. The company has two manufacturing plants in India and three in overseas locations through its foreign subsidiaries.

Ability to Pass on Volatility in Raw Material Prices: With the hiving-off of the steel division to TSIL in April 2019, UML will be a re-roller engaged in the manufacturing of wire and wire rope products with no backward integration and will rely on the procurement of key raw material from the open market. However, as most of the production is order-based, UML might be able to pass on any volatility in raw material prices, albeit with a lag, as reflected in its range-bound margins for the WWR division.

Crystallisation of Contingent Liability: UML’s continuing business has a contingent liability of INR5.82 billion on account of disputed tax and duty (including INR1.72 billion on account of fuel surcharge, mining dispute and land compensation) and the Central Bureau of Investigation’s enquiry in respect of the sale of iron ore from its captive mines over FY06-FY10. According to the management, the presence of a clause in the mining lease authorises the company to dispose of iron ore/fines from its mine and an order from the Jharkhand High Court validates the same. However, Ind-Ra believes that any adverse court order will cause UML’s liquidity to deteriorate sharply and put further pressure on the ratings.

Uncertainty around Governance Structure: There have been significant differences between UML’s two promoter groups over the past couple of years. Despite this, the company managed to successfully complete the steel division transaction in April 2019. While the resolution of the impasse between the promoters would provide comfort to rating, any significant escalation of differences between the groups could lead to an adverse action. Ind-Ra would continue to monitor the situation for any potential impact on the company’s operating or financing plans.

 


RATING SENSITIVITIES

Positive: Maintaining of the EBITDA margin in the range of 10%-12%, leading to the net leverage falling below 2.75x at a consolidated level, on sustained basis, and resolution of the issues constraining the governance structure could lead to a positive rating action.


Negative:
Any decline in the EBITDA margin or crystallisation of the contingent liability, leading to the net leverage staying above 3.5x at a consolidated level, could lead to a negative rating action.



COMPANY PROFILE

Founded by the Kolkata based Jhawar family, UML commenced operations in 1960. It is an integrated steel producer with captive iron ore mines in Jharkhand.

 

FINANCIAL SUMMARY

 

Particulars (Consolidated – Continuing Operation)

FY19

FY18

Net revenue (INR billion)

24.69

20.99

EBITDAR (INR billion)

2.96

2.18

EBITDAR margin (%)

12.0

10.39

EBITDAR interest coverage (x)

2.61

2.36

Net Leverage (x)

11.81

18.31

Source: UML, Ind-Ra


RATING HISTORY

Instrument Type

Current Rating/Outlook

Historical Rating/Outlook/Rating Watch

Rating Type

Rated Limits (billion)

Rating

17 October 2018

12 February 2018

20 December 2016

Issuer rating

Long-term

-

IND BBB+/Stable

IND BB+/RWP

IND BB+/RWN

IND BBB-/Negative

Long-term loan

Long-term

INR3.25

IND BBB+/Stable

IND BB+/RWP

IND BB+/RWN

IND BBB-/Negative

Fund-based limits

Long-term

INR3.0

IND BBB+/Stable

IND BB+/RWP

IND BB+/RWN

IND BBB-/Negative

Non-fund-based Limits

Long-term

INR1.5

WD

IND BB+/RWP

IND BB+/RWN

IND BBB-/Negative

Non-fund-based limit

Short-term

INR0.25

IND A2+

-

-

-


COMPLEXITY LEVEL OF INSTRUMENTS

For details on the complexity levels 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

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 and project finance companies. 

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Applicable Criteria

Analyst Names

  • Primary Analyst

    Rohit Sadaka

    Director
    India Ratings and Research Pvt Ltd Room No. 1201, 12th Floor Om Towers 32, Chowringhee Road Kolkata 700 071
    +91 33 40302503

    Media Relation

    Namita Sharma

    Manager – Corporate Communication
    +91 22 40356121