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

-

-

June 2021

INR1,010 (reduced from INR1,783)

IND A-/Stable

Affirmed

Fund-based working capital limits

-

-

-

INR2,850

IND A-/Stable

Affirmed

Non-fund-based working capital limits

-

-

-

INR932

IND A2+

Affirmed

KEY RATING DRIVERS

Assured Cash Inflows Provide Debt Security: The affirmation reflects assured cash inflows from BMW’s take-or-pay agreement with Tata Steel Limited (TSL: ‘IND AA’/Stable) for conversion of hot-rolled coil into galvanised plain (GP/GC) sheets. As per the agreement, TSL has undertaken to buy minimum quantity of 160,000 metric tonnes per annum (mtpa) of the unit’s total capacity of 200,000mtpa. In case of a lower offtake, 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. BMW’s bank term loan of INR1,010 million at FYE19 is related to the conversion unit at Ghamaria, Jamshedpur. The minimum assured quantity from TSL provides revenue visibility of around INR3,000 million (30% of FY19 revenue of INR8,226 million) each year over FY20-FY24. In addition, BMW generates 15% of its revenue from other conversion works for TSL, for which there are no minimum offtake agreements.

Renewed TSL’s Agreement:
The company renewed its volume and price agreement with TSL until FY24, with take-or-pay agreements up to FY21. The plant has been strategically set up to serve TSL’s production of GP/GC sheets in Jamshedpur. There is modest 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 1.1x through the entire tenor of the term loans (until FY21), despite a likely reduction in the margins of the manufacturing business as steel prices are under pressure.

Sustained Improvement in Credit Metrics:
 Net adjusted leverage (total adjusted net debt/operating EBITDAR) improved to 2.6x in FY19 (FY18: 2.6x , FY17: 4.1x) due to progressive repayments on term loans. EBITDA interest coverage (operating EBITDA/gross interest expense) also improved to 3.6x in FY19 (FY18: 3.2x, FY17: 3.1x) as total debt reduced to INR3,715 million (INR4,350 million, INR5,066 million). Ind-Ra expects the credit metrics to improve further in the next couple of years on account of the scheduled repayment of the term loan and low capex. Further, BMW’s credit metrics are comfortable because of low debt servicing risk arising from the assured cash inflows from TSL until the term loan is repaid in full.

Margin Resilience: 
BMW generates around 50% 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.

Liquidity Indicator - Adequate:
 BMW had strong cash flow from operations (FY19: INR 1,380 million, FY18: INR867 million, FY17: INR1,077 million) and free cash flow (INR1,234 million, INR804 million, INR582 million). The average maximum utilisation of the working capital limits was around 88% and 64% for its fund-based and non-fund based limits, respectively, during the 12 months ended August 2019. It had unrestricted cash and equivalents of INR26 million at FYE19 with adequate unutilised limits of INR300 million-400 million. With the scheduled repayments of INR594 million and INR597 million in FY20 and FY21, respectively, Ind-Ra expects BMW’s debt service coverage ratio to remain comfortable at around 1.2x over FY20-FY21.

BMW has high customer concentration as TSL contributes about 45% to its total sales. However, TSL’s strong credit profile mitigates this risk to a large extent. The company’s debtor collection period elongated to around 86 days in FY19 (FY18: 80 days) as it extended credit period to customers to build its distribution network for branded manufactured products.

BMW got listed on BSE Limited in May 2019, thereby enhancing its financial transparency and flexibility for access to capital markets. The company does not have any track record in debt securities market while its financing needs were adequately met through a mix of bank funding through large public sector banks.  The company had unhedged foreign term loans of USD 5.9 million (about 8% of its net worth and about 25% of its annual EBITDA) as of March 2019, exposing BMW to low-to-moderate forex risk. The promoters had no shareholding pledged as on 30 June 2019. 

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 (FY19: 17.2%, FY18: 15.9%, FY17: 16.5%).

Working Capital-Intensive Nature of Business: 
BMW’s net cash cycle remains elongated at around 220 days in FY19 (FY18: 183 days, FY17: 186 days) mainly due to long inventory holding period of 151 days (131 days, 114 days). The company’s steel inventories are vulnerable to price volatility; hence, a decline in price may impact the company’s overall profitability. 


RATING SENSITIVITIES

Positive: An increase in revenue or a significant reduction in customer concentration, along with the 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. Also, any unexpected change in conversion terms with TSL and/or change in 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, thermo-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 more than two decades. It has five manufacturing facilities, of which two are in West Bengal and three in Jharkhand.

 

FINANCIAL SUMMARY


Particulars

FY19

FY18

Revenue (INR million)

8,226

9,447

EBITDA margin (%)

17.2

15.9

Interest coverage (x)

3.6

3.2

Net leverage (x)

2.6

2.9

Source: BMW, Ind-Ra

 

 


RATING HISTORY

Instrument Type

Current Rating/Outlook

Historical Rating/Outlook

Rating Type

Rated Limits (million)

Rating

14 June 2018

8 March 2017

Issuer rating

Long-term

-

IND A-/Stable

IND A-/Stable

IND A-/Stable

Long-term loan

Long-term

INR1,010

IND A-/Stable

IND A-/Stable

IND A-/Stable

Fund-based working capital limits

Long-term

INR2,850

IND A-/Stable

IND A-/Stable

IND A-/Stable

Non-fund-based working capital limits

Short-term

INR932

IND A2+

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

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. 

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. 

India Ratings is a 100% owned subsidiary of the Fitch Group.

For more information, visit www.indiaratings.co.in.

DISCLAIMER

ALL CREDIT RATINGS ASSIGNED BY INDIA RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTPS://WWW.INDIARATINGS.CO.IN/RATING-DEFINITIONS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE WWW.INDIARATINGS.CO.IN. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. INDIA RATINGS’ CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE.

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