By Shradha Saraogi

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 action is as follows:

Instrument Type

Date of Issuance

Coupon Rate (%)

Maturity Date

Size of Issue (million)

Rating

Rating Action

Long-term loan

-

-

March 2025

INR1,086.2 (increased   from INR1,010)

IND A-/Stable

Affirmed

Fund-based limits

-

-

-

INR2,200 (reduced from INR2,850)

IND A-/Stable

Affirmed

Non-fund-based limits

-

-

-

INR739 (reduced from INR932)

IND A2+

Affirmed

KEY RATING DRIVERS

Conversion Business Continues to Drive Cash Flows; Provides Debt Security: The affirmation reflects consistent cash flows from BMW’s agreement with its key customer Tata Steel Limited (TSL: ‘IND AA’/Negative) for conversion of flat products at its Gamharia unit, Jamshedpur at pre-determined rates. The agreement has a take-or-pay clause, wherein the customer has undertaken to buy minimum quantity of 160,000 metric tonnes per annum (mtpa) of galvanised plain/corrugated (GP/GC) sheets of the unit’s total capacity of 200,000mtpa, up to FY21, to provide assured coverage for financial obligations and other fixed costs for the Gamharia unit. Majority of the loan outstanding for the unit as on 31 March 2020 (65% of INR616.41 million), shall be repaid by FY21, while the balance is to be repaid in FY22. The minimum assured quantity from the key customer provides revenue visibility of around INR3,000 million for FY21.

Flat products’ conversion segment volumes increased to 169,000 tonnes in FY20 (FY19: 162,000 tonnes) and revenue to INR2,990 million (INR2,914 million),
despite a decline in the overall turnover to INR6,007 million (INR8,226 million) due to lower volumes in other businesses – manufacturing and processing job works. Flat products’ conversion segment accounted around 50% of the total revenue in FY20 (FY19: 35%) and contributed majorly to the total absolute EBITDA, thereby earning high and stable margins. Despite the COVID-19 led lockdown in April 2020, flat products’ conversion segment volumes was high at 78,304 tonnes in 1HFY21 (1HFY20: 83,139 tonnes) with increased share of revenue and EBITDA. BMW generated around 9% of the total revenue in FY20 (FY19: around 14%) from other flat products’ processing works for TSL, for which there are no minimum offtake agreements.

Removal of the take-or-pay clause from FY22 is unlikely to affect the offtake of GP/GC by TSL, given the past volumes have exceeded the minimum guaranteed quantity. Ind-Ra believes the flat products’ conversion works for TSL shall continue to earn adequate cash flows, although at 7%-8% lower rates, for BMW to service its other loans as the benefit of reduction in repayment obligations is passed on to the customer.

Renewed TSL Agreement:
 BMW, being associated with TSL since the last two decades, renewed its volume and price agreement with the latter for another five years until FY24. BMW’s Gamharia plant in Jamshedpur has been strategically set up in December 2013 exclusively to serve TSL’s production/conversion of flat products  into GP/GC sheets with a capital cost of over INR4,000 million. Proximity of BMW’s plant to TSL’s manufacturing location ensures lower logistics costs for the latter. As per management, the contract reasonably ensures continuity of BMW’s operations with TSL in the long term considering the capital cost involved, thus, creating an indirect entry barrier.

Change in Revenue Mix to Improve Margin Resilience: 
BMW’s management has increased its focus on the conversion/processing business. offering higher, more predictable and stable margins than the manufacturing segment. Conversion/processing customers  provide the key raw materials and the conversion charge is fixed on the basis of operational expenses. As a result, in the conversion division, BMW’s susceptibility to volatility in raw material and finished goods prices is lower, subject to the mix of conversion/processing services offered. On the other hand, the revenue share of low-margin manufacturing division reduced, wherein the margins remain susceptible to any volatility in prices of raw materials and finished products. The company has also re-deployed some of its manufacturing facilities for other processing job works for long products over own manufacturing.

A higher share of conversion income
owing to job-work nature and lower per unit realisation than manufacturing, led to reduced revenue scale in FY20 along with lower volumes in other businesses. Revenue reduction led to lower absolute EBITDA of INR1,078 million in FY20 (FY19: INR1,414 million). However, BMW’s EBITDA margins remained resilient at 17.95% in FY20 (FY19: 17.19%), supported by increased conversion income. While 1QFY21 production and sales volumes were significantly impacted due to the COVID-19 led lockdown leading to 62% yoy decline in turnover to INR624 million, the EBITDA margins improved significantly to 31.83% as increased share of sales was from high-margin flat products’ conversion works for BMW’s key customer. Although the revenue scale may be lower, Ind-Ra believes the scale in terms of volumes will improve over the medium term. Ind-Ra expects the EBITDA margins to remain between 17% and 25% over FY21-FY23.

Credit Metrics Remain Comfortable Despite Marginal Deterioration:
After adjusting for non-cash write-offs and fair value adjustments on prepayments of certain non-current borrowings during the year, the interest coverage (EBITDA/gross interest expense) deteriorated slightly to 3.81x in FY20 (FY19: 4.02x; FY18: 3.23x) due to a reduction in absolute EBITDA, while the adjusted net leverage (adjusted net debt/EBITDA) remained comfortable at 2.36x (2.37x, 2.89x) due to progressive debt repayments. Ind-Ra expects the credit metrics to improve over FY21-FY22 on account of the scheduled repayments of term loans and low capex.

Liquidity Indicator – Adequate:
 BMW has been generating strong cash flow from operations (FY20: INR968 million, FY19: INR720 million, FY18: INR867 million) and free cash flow (INR749 million, INR542 million, INR804 million). The company’s average utilisation of the fund-based (INR2,200 million) and the non-fund-based limits (INR739 million) was around 79% and 69%respectively, for the 12 months ended September 2020, providing moderate buffer to meet its short-term requirements. The company has requested the banks to reduce the fund-based limits to INR1,900 million by March 2021, due to lower requirement. BMW has only been incurring maintenance and improvisation capex over FY18-FY20 and does not have any major capex plans in the medium term. It had availed interest moratorium on working capital limits, and interest and principal moratorium on existing term loans during March to August 2020, as well as COVID-19 term loans of INR212.7 million under the Reserve Bank of India’s regulatory package to add cushion to its liquidity. BMW’s free cash balance was low at INR25 million at FYE20 (FYE19: INR26 million, FYE18: INR5 million).

Ind-Ra expects BMW’s debt service coverage ratio to remain adequate at above 1.1x for the scheduled principal repayments of INR506 million, INR503 million and INR219 million over FY21, FY22 and FY23, respectively.

BMW was 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 promoters had no shareholding pledged as on 30 September 2020.

Diversified Product Profile: 
The company has a diversified product portfolio including long as well as flat products – thermo-mechanically treated bars, structural steel, steel pipes and GP sheets. High value-added products such as structures and GP sheets constituted around 60% of the total revenue in FY20. As a result of its product mix and conversion business, the company is able to generate robust EBITDA margins. However, the company’s manufacturing division’s volumes have reduced gradually (FY20: down 43% yoy, FY19: down 20% yoy) following its decision to exit/reduce supplies in sectors and to customers which are under pressure (towers, structures, among others), to protect its cash flows and avoid extended payment cycles. The company has prudently controlled its sales to such sectors after writing off receivables outstanding for over six months of about INR168.92 million in FY20 (FY19: INR142.93 million, FY18: nil) from its own manufacturing segment.

Working Capital-Intensive Nature of Business: 
BMW’s net cash cycle is elongated further to 222 days in FY20 (FY19: 183 days, FY18: 183 days), mainly due to a long inventory holding period of 153 days (113 days, 131 days). Liquidation/dispatch of inventory at FYE20 was hindered due to the lockdown, leading to increased inventory holding. While cost of zinc (around 25% of total inventory) for conversion segment is reimbursed by TSL, the company’s steel inventories for own manufacturing segment are vulnerable to price volatility. Hence, decline in prices may impact the company’s overall profitability. Furthermore, debtor collection period reduced to 74 days in FY20 (FY19: 86 days, FY18: 81 days) following the bad-debt write offs. TSL comprises majority (FYE20: around 41%) of debtors, indicating high concentration but low counterparty risk due to its strong credentials. The share of TSL in debtors shall increase, considering the management’s focus on conversion business, thus, improving the overall debtor profile. Also, due to the pandemic, the key customer has increased its payment cycle from 30 days to 75 days.


RATING SENSITIVITIES

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

Negative:
Lower-than-expected EBITDA, leading to weakening of the debt servicing indicators and the net adjusted leverage increasing above 4.0x, all on a sustained basis, could lead to a negative rating action. Also, any unexpected change in the conversion terms with its key customer and/or stretch in debtors collection period, leading to stretched liquidity would result in a negative rating action.


COMPANY PROFILE

Incorporated in 1981, BMW manufactures mild steel, long and flat products such as tubular poles, thermo-mechanically treated bars and structures. It is also engaged in galvanisation of structures. The company has been processing, slitting, shearing, levelling, pickling and scrap handling of steel on behalf of TSL for almost three decades. It has five manufacturing facilities, of which two are in West Bengal (own manufacturing) and three in Jharkhand (dedicated for conversion works from TSL). BMW’s  registered office is in Kolkata, West Bengal.

 

FINANCIAL SUMMARY

Particulars

FY20

FY19

Net revenue (INR million)

6,007

8,226

EBITDA (INR million)

1,078

1,414

EBITDA margin (%)

18.0

17.2

EBITDA interest coverage (x)

2.39

2.51

Net adjusted leverage (x)

2.73

2.61

Source: BMW, Ind-Ra


RATING HISTORY

Instrument Type

Current Rating/Outlook

Historical Rating/Outlook

Rating Type

Rated Limits (million)

Rating

23 September 2019

14 June 2018

8 March 2017

Issuer rating

Long-term

-

IND A-/Stable

IND A-/Stable

IND A-/Stable

IND A-/Stable

Long-term loan

Long-term

INR1,086.2

IND A-/Stable

IND A-/Stable

IND A-/Stable

IND A-/Stable

Fund-based limits

Long-term

INR2,200

IND A-/Stable

IND A-/Stable

IND A-/Stable

IND A-/Stable

Non-fund-based limits

Short-term

INR,739

IND A2+

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. 

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Applicable Criteria

Analyst Names

  • Primary Analyst

    Shradha Saraogi

    Analyst
    India Ratings and Research Pvt Ltd Room No. 1201, 12th Floor Om Towers 32, Chowringhee Road Kolkata 700 071
    +91 33 40302509

    Media Relation

    Ankur Dahiya

    Manager – Corporate Communication
    +91 22 40356121