CRISIL reaffirms ratings of Vardhman Special Steels Limited, revises outlook

CRISIL Ratings has revised its outlook on the long-term bank facilities of Vardhman Special Steels Limited (VSSL) to 'Stable' from 'Negative' while reaffirming the rating at 'CRISIL AA'. The rating on the short-term bank facility and debt programmes has been reaffirmed at 'CRISIL A1+.

The outlook revision reflects better than expected operating performance in fiscal 2021 with recovery in demand for passenger vehicle and two wheeler segment, which drives about 75% of the company's revenue. The second half of the fiscal will witness positive growth leading to overall revenue decline limited to 10% for the year compared to earlier expectation of more than 20% decline. Further operating margins are expected to improve at 5.5-6.0% for fiscal 2021 on the back of price hikes taken by the company and higher capacity utilisation. Over the fiscal 2022 and 2023, growth of 12-15% is expected and margins to improve to 7-8% level.

Going forward, the operating performance of VSSL will be benefitted through technical know-how of Aichi Steel Corporation, Japan (ASC, a Toyota Group Associate). In August 2019, VSSL entered into a technical assistance agreement with which also acquired 11.46% in VSSL for Rs 50 crore. The tie up intends to reduce operational costs, improve the product quality and improve process efficiencies. Also VSSL will benefit from access to the clientele of ASC. The equity infusion of Rs 50 crore has also improved the financial risk profile of the company and the proceeds would be utilised for funding any capex under this collaboration. Annual capex of Rs 20-30 crore is expected over the medium term.

Financial risk profile is marked with improving debt protection metrics. Gearing is expected to improve to about 0.5 time in fiscal 2022 while Interest coverage to remain about 3.5 times in fiscal 2022 compared to 2 times in fiscal 2021. The liquidity remains comfortable at Rs 80 crore at November end (Rs 50 crore in the form of cash & equivalents while Rs 30 crore in unutilized bank lines). Cash accruals are expected in the range of Rs 40-50 crore per annum over the fiscal 2022-23 to be sufficient to cover annual debt obligations of Rs 25-30 crore.

The ratings of VSSL continue to reflect the parentage of the Vardhman group, whose flagship company, Vardhman Textiles Ltd (VTXL; rated 'CRISIL AA+/FAAA/Stable/CRISIL A1+') is the largest shareholder in VSSL. The ratings also factor in established market position coupled with considerable backward integration as well as average albeit improving financial risk profile. These rating strengths are partially offset by susceptibility to cyclicality in end-user industries.

Shares of VARDHMAN SPECIAL STEELS LTD. was last trading in BSE at Rs.119.8 as compared to the previous close of Rs. 114.1. The total number of shares traded during the day was 8019 in over 198 trades.

The stock hit an intraday high of Rs. 119.8 and intraday low of 111.2. The net turnover during the day was Rs. 940474.

Source : Equity Bulls

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