Press Release Elec Steel Processing Industries

1 1 CARE Ratings Limited Press Release elec Steel Processing Industries February 06, 2018 Ratings Facilities Amount (Rs. crore) Ratings1 Rating Action Long Term Bank facilities (enhanced from ) CARE BB; Stable (Double B; Outlook: Stable) Reaffirmed Short Term Bank facilities (enhanced from ) CARE A4 (A Four) Reaffirmed Total Facilities (Rupees Twenty Five crore and Eighty Three lakh only) Details of instruments/facilities in Annexure -1 Detailed rationale The ratings assigned to the bank facilities of elec Steel Processing Industries (ESPI)

2 Continue to remain constrained on account of its moderate scale of operations, low profitability, weak debt protection metrics and moderate liquidity position in FY17 (refers to the period April 01 to March 31). The ratings further remains constrained on account of susceptibility of margins to fluctuations in raw material prices and foreign exchange rates and ESPI s presence into competitive transformer laminations industry with exposure to cyclicality inherent to the power sector.

3 The ratings, however, continue to derive comfort from successful completion of debt funded capex along withvast experience of partners in the transformer laminations industry, established business operations of the firm along with its strategic presence in the industrial cluster and moderate capital structure. ESPI s ability to increase its scale of operations, improve its profit margins and solvency position along with better working capital management are the key rating sensitivities. Detailed description of key rating drivers Key Rating Weaknesses Moderate scale of operations with low profitability During FY17, ESPI reported decline in Total Operating Income (TOI) of y-o-y and stood at crore during FY17 as against Rs.

4 Crore during FY16. PBILDT margin of ESPI stood moderate at in FY17 as against during FY16, while PAT margins declined to during FY17 as against during FY16. Weak debt protection metrics and moderate liquidity position The liquidity position of ESPI remained moderate marked by current ratio that stood at times as on March 31, 2017, while the working capital cycle remained elongated to 68 days during FY17. The average working capital limit utilization remained high at 90% for past 12 months ended December, 2017.

5 The debt protection metrics as marked by total debt to GCA remained weak at times as on March 31, 2017 while the interest coverage ratio remained at times during FY17. Susceptibility of margins to fluctuations in raw material prices and foreign exchange rates The main raw material of ESPI is cold-rolled grain oriented silicon Steel (CRGO) Steel sheets the prices of which is dependent upon international demand-supply scenarios. Furthermore, the majority of raw material requirement of the firm is being met through imports, thus, exposing ESPI to foreign exchange fluctuation risk.

6 Presence into competitive transformer laminations industry with exposure to cyclicality inherent to the power sector ESPI operates in a competitive segment marked by presence of large number of unorganized as well as international players. Further, CRGO Steel is a critical input for the making of distribution transformers used in the power sector; hence, the demand for transformer laminations is directly linked to growth in the power sector. Any slowdown in the power sector would directly impact demands for transformer and thereby transformer laminations.

7 1 Complete definition of the ratings assigned are available at and other CARE publications 2 CARE Ratings Limited Press Release Key Rating Strengths Successful completion of debt funded capex ESPI had decided to demolish and restructure one of its manufacturing unit in which ESPI replaced the machinery used for manufacturing goods. The total cost of project incurred stood at crore which was funded via term loan from different banks and NBFCs.

8 The commercial operations from the said unit have commenced by April, 2017 onwards. Experienced Partners with established business operations ESPI is managed by four partners Mr. Harshad Bagadia, Mr. Paras Bagadia, Mr. Vikram Bagadia and Ms. Jagruti Bagadia, who are family members. Mr. Harshad Bagadia is the key partner and holds experience of about four decades in the transformer laminations industry. With its established business operations of about two decades, ESPI has been able to establish strong relationship with its customers which include major players.

9 Presence in industrial cluster ESPI s manufacturing facility is located in Vadodara district of Gujarat which enjoys proximity to the end user Industries /markets, good road & rail connectivity leading to better lead time and facilitating delivery of finished products in a timely manner. Moderate capital structure The capital structure of ESPI as marked by an overall gearing ratio improved and remained moderate at times as on March 31, 2017 as compared to times as on March 31, 2016, on account of reduction in total level of debt coupled with an increase in the tangible net worth level.

10 Analytical Approach: Standalone Applicable Criteria Criteria on assigning Outlook to Credit Ratings CARE s Policy on Default Recognition Criteria for Short Term Instruments CARE s methodology for manufacturing companies Financial ratios Non-Financial Sector About the Firm Vadodara-based (Gujarat) ESPI is a partnership firm established in 1996 by Mr. Harshad Bagadia and his family members. However, during April 2014 reconstitution of partnership firm took place wherein one of existing partner namely Ms.