SMC Power Generation Ltd.

March 22, 2018

Summary of rated instruments

Current Rated Amount
Instrument Rating Action
(Rs. crore)
Term Loan 90.50 [ICRA]BBB (Stable); Assigned
Cash Credit 80.00 [ICRA]BBB (Stable); Assigned
Non-fund based facilities 27.50 [ICRA]A3+; Assigned
Total 198.00

Rating action
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ICRA has assigned a long-term rating of [ICRA]BBB (pronounced ICRA triple B) to the Rs. 90.50-crore term-loan facilities
2
and Rs. 80.00-crore cash-credit facilities of Power Generation Ltd. (SPGL) . The outlook on the long-term rating is ‘Stable’.
ICRA has also assigned a short-term rating of [ICRA]A3+ (pronounced ICRA A three plus) to the Rs. 27.50-crore non-fund
based facilities of SPGL.

Rationale
The assigned ratings favourably factor in the extensive experience of the promoters and the established track record of
the company. The ratings also take into account the integrated nature of operations and the proximity to raw-material
sources, which positively impact its cost structure. The capital structure remained comfortable with a gearing of 1.0
times as on March 31, 2017. The ratings are, however, constrained by the company’s exposure to the cyclicality
associated with the steel industry which keeps its profitability and cash flows volatile. The ratings are also tempered by
the limited geographical diversification with sales restricted to Odisha and the sizeable debt obligations in the near term.
ICRA, however, notes that debt-coverage indicators of the company have improved with interest cover increasing from
1.66 times in FY2016 to 2.48 times in FY2017 and Total Debt/OPBITDA declining from 4.87 times in FY2016 to 3.25 times
in FY2017. Further improvement is expected in the current year given the buoyancy in the steel market. However, on an
absolute basis, the overall credit profile is expected to remain modest. While assigning the ratings, ICRA has also taken
note of the established position of the Group in the value-added dairy business in the northern part of India.

Outlook: Stable
ICRA believes that SPGL will continue to benefit from the extensive experience of its partners and its healthy operating
profile. The outlook may be revised to 'Positive' if substantial growth in revenue and profitability, and better working-
capital management strengthen the financial risk profile. The outlook may be revised to 'Negative' if cash accrual is lower
than expected, or deterioration in working-capital cycle, results in liquidity stretch.

1
100 lakh = 1 crore = 10 million
2
For complete rating scale and definitions, please refer to ICRA's website www.icra.in or other ICRA Rating Publications

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Key rating drivers

Credit strengths
Experience of the promoters in the steel industry and established track record of the company – SPGL, a company of
the SMC Group, was promoted by Mr. Mool Chand Aggarwal, (Chairman & Managing Director of SPGL), who has
experience of more than 37 years in steel and other businesses. Despite its medium scale of operations, SPGL is an
established player, offering quality products under its brand ’SMC TMT’.

Integrated nature of operations - SPGL’s manufacturing facilities are vertically integrated. It produces sponge iron which
is captively consumed to manufacture billets, which in turn is used to produce TMT bars. SPGL also has a 33-MW captive
power plant which fulfils its power requirements. The vertical integration in operations lends considerable operational
efficiency. Moreover SPGL is located in Odisha, in close proximity to raw-material sources like iron and coal, which
provides access to key inputs and also leads to saving in transport costs.

Moderately leveraged capital structure; increasing scale of operations – The capital structure of the company is
moderately leveraged as reflected by a gearing of ~1.0 times as on March 31, 2017, given the scheduled repayment of
existing term loans and accretions to reserves. However, ICRA notes that the total debt of the company includes loans
from promoters / directors and their related parties of ~Rs. 57.41 crore. ICRA understands that such loans would
continue to remain going forward. Notwithstanding the fluctuation in steel prices, the operating income of the company
has increased at a CAGR of ~12% in the last five years to reach Rs. 515 crore in FY2017, driven by a rise in sales volumes.
The favourable demand outlook in the steel industry augurs well for SPGL.

Credit challenges
Substantial debt-repayment obligations in the near term - SPGL’s debt repayment has a ballooning structure and the
company has substantial debt-repayment obligations in the near term, which are likely to limit the extent of
improvement in debt-coverage indicators from the current levels. Debt-coverage indicators have witnessed some
improvement in FY2017 on account of improvement in profitability, with interest cover increasing from 1.66 times in
FY2016 to 2.48 times in FY2017, Total Debt/OPBITDA declining from 4.87 times in FY2016 to 3.25 times in FY2017. While
further improvement is expected, on an absolute level, it would still remain modest.

Moderately high working-capital intensity of business - The company’s working-capital intensity was moderate at ~26%
in FY2017, primarily driven by elevated inventory days. The average working-capital utilisation has also remained high,
with respect to available drawing power in the last one year.

Limited geographical diversification – Around 95% of SPGL’s total revenue is accounted by Odisha, reflecting limited
geographical diversification, which in turn exposes the company to geographical-concentration risk. However, the
company is trying to foray into other markets like Andhra Pradesh, West Bengal and Jharkhand.

Exposure to the cyclicality associated with the steel industry – SPGL is exposed to the inherent cyclicality in the steel
industry, which keeps its profitability and cash flows volatile to an extent. The operating profit margin (OPM) has
witnessed some volatility in the past. Subdued steel prices led to moderation in OPM, particularly during the period
FY2012-2014 wherein OPM dropped below 5%. However, from FY2015, OPM has witnessed a steady increase to 13.68%
in FY2017 on the back of efficiency arising out of backward integration. Net profitability in the past has been supported
by considerable non-operating income, however, ICRA understands that trading in unrelated businesses have been
discontinued in the recent past.

Analytical approach: ICRA has applied its rating methodologies as indicated below.

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Links to applicable criteria:

Corporate Credit Rating Methodology

Rating Methodology for Entities in the Ferrous Metals Industry

About the company:

Incorporated in November, 2000, SPGL is a closely-held public limited company, promoted by members of the SMC
Group family, which has diversified interests including dairy product companies by the name of SMC Foods Ltd. and
Creamy Foods Ltd. SPGL has an integrated steel plant in Jharsuguda (Orissa), manufacturing sponge iron, billets and TMT
bars along with captive power generation with an annual installed capacity of 200,000 TPA, 250,000 TPA, 180,000 TPA
and 33 MW, respectively.

In FY2017, SPGL reported a net profit of Rs. 25.22 crore on an operating income of Rs. 514.91 crore compared to a net
profit of Rs. 22.80 crore on an operating income of Rs. 459.29 crore in FY2016.

Key financial indicators (audited)

FY 2016 FY 2017
Operating Income (Rs. crore) 459.29 514.91
PAT (Rs. crore) 22.80 25.22
OPBDIT/ OI (%) 10.18% 13.68%
RoCE (%) 11.57% 11.73%

Total Debt/ TNW (times) 1.11 1.00

Total Debt/ OPBDIT (times) 4.87 3.25
Interest coverage (times) 1.66 2.48
NWC/ OI (%) 25% 26%

Status of non-cooperation with previous CRA:

CRA Status of Non-cooperation Date of Press Release

CARE Migrated to non-cooperating category: CARE BB+; ISSUER February 19, 2018
NOT COOPERATING /A4+ ISSUER NOT COOPERATING

The agency has reviewed on the basis of best available

information as the company has not provided the requisite
information for monitoring the ratings.

Any other information: None

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Rating history for last three years:
Chronology of Rating History for the
Current Rating (FY2018) past 3 years
Date & Date & Date &
Date & Rating in Rating in Rating in
Amount Amount Rating FY2017 FY2016 FY2015
Rated Outstanding December August
Instrument Type (Rs. crore) (Rs Crore) March 2018 - 2015 2014
1 Term Loan Long- 90.50 90.38 [ICRA]BBB - [ICRA]B [ICRA]B
Term (Stable) suspended upgraded
assigned
2 Cash Credit Long- 80.00 NA [ICRA]BBB - [ICRA]B [ICRA]B
Term (Stable) suspended upgraded
assigned
3 Non-fund based Short- 27.50 NA [ICRA]A3+ - [ICRA]B [ICRA]B
facilities Term assigned suspended upgraded
4 Unallocated Long- [ICRA]B [ICRA]B
Term suspended upgraded

Complexity level of the rated instrument:

ICRA has classified various instruments based on their complexity as "Simple", "Complex" and "Highly Complex". The
classification of instruments according to their complexity levels is available on the website www.icra.in

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Annexure-1: Instrument Details
Amount
Instrument Date of Issuance / Coupon Maturity Rated Current Rating and
ISIN No Name Sanction Rate Date (Rs. crore) Outlook
NA Term Loan Jan-13 - FY20 8.97 [ICRA]BBB(Stable)
Nov-13 FY21 5.77
Mar-15 FY21 5.40
Jun-16 FY22 7.86
Mar-17 FY23 7.50
Apr-13 FY20 5.20
Jan-13 FY20 10.90
Jan-14 FY21 6.20
Oct-14 FY21 22.60
Feb-13 FY20 3.70
Mar-14 FY20 1.90
Apr-14 FY20 4.50
NA Cash Credit - - - 80.00 [ICRA]BBB(Stable)
Non-fund
NA - - - 27.50 [ICRA]A3+
facilities
Source: SMC Power Generation Limited

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ANALYST CONTACTS
Jayanta Roy Kaushik Das
+91 33 7150 1120 +91 33 7150 1104
jayanta@icraindia.com kaushikd@icraindia.com

Subholakshmi Bose
+91 33 7150 1219
subholakshmi.bose@icraindia.com

RELATIONSHIP CONTACT
Jayanta Chatterjee
+91 80 4332 6401
jayantac@icraindia.com

MEDIA AND PUBLIC RELATIONS CONTACT

Ms. Naznin Prodhani
Tel: +91 124 4545 860
naznin.prodhani@icraindia.com

Helpline for business queries:

+91-124-2866928 (open Monday to Friday, from 9:30 am to 6 pm)

info@icraindia.com

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Today, ICRA and its subsidiaries together form the ICRA Group of Companies (Group ICRA). ICRA is a Public Limited
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For more information, visit www.icra.in

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