Fitch Ratings has today assigned India's Unistar Galvaniser & Fabricators Pvt Ltd (UGFPL) a National Long-term rating of 'B+(ind)'. Also, the agency has assigned 'B+(ind)' National Long-term ratings to the company's INR140m long-term fund-based limits, as well as to its long term loans aggregating INR87.5m, and a 'F4(ind)' National Short-term rating to its INR100m short-term non fund-based limits. The Outlook is Stable.
UGFPL's ratings reflect the small scale of its operation in the fabrication industry with a limited track record, its inability to pass on fluctuation in raw material prices since most orders being on a fixed-cost basis. However, this is partly mitigated by management's raw material procurement policy based on firm orders in hand; this is reflected in high level of inventory days of 195 days in FY08 (FY07:199 days). The ratings are further constrained by the company's small order book of INR295.0m at 15 December 2008 which is 1.1x of FY08 revenues; out of the orders in hand, INR90.8m are from various group companies.
The ratings benefit from UGFPL's improved performance over the last two years post-acquisition by Adhunik Metaliks Limited (AML; 'A-(ind)/F1(ind)') in 2006 which is reflected by an increase in revenue to INR 266.4m in FY08 (FY06: INR12.8m) with EBIDTA margin improving to 17.5% in FY08 (FY06: 12.5%) and net leverage to 5.4x in FY08 (FY06: 6.0x).
Fitch notes UGFPL's diversified and strong clientele base as it has approvals from Power Grid Corporation of India Limited, National Thermal Power Corporation (NTPC), Bharat Heavy Engineering Limited (BHEL), Bangladesh Power Development board, Grid Corporation of India and several State Electricity Boards for power transmission and from the Department of Telecommunication for telecommunication towers.
A consistent improvement in the order book coupled with the maintenance of EBIDTA margins could act as a positive ratings trigger. Pressure on EBIDTA margins, resulting in net debt/EBITDA beyond 6.0x and interest coverage below 1.5x on a sustained basis, could act as a negative ratings trigger.
UGFPL has seen a 112% CAGR in revenues to INR266.4m in FY08 (FY04: INR6.2m). EBIDTA margin has shown consistent improvement to 17.5% in 2008 (FY07: 9.5%), and UGFPL had total debt of INR258.5m at FY08. The company had negative free cash flow over the last two years on account of capital expenditure and increasing working capital requirement. Fitch does not expect this trend to continue as the company has no major expansion plans. Although working capital and term loans have resulted in an increase in absolute debt levels, the impact on financial leverage was more than offset in FY08 by the substantial improvement in its EBITDA. As a result, net debt/EBITDA improved to 5.4x in FY08 (FY07: 9.4x).
AML acquired UGFPL's Kolkata unit in June 2006 and merged it with a group company, Neepaz Tubes Pvt Ltd (Jamshedpur unit). In November 2008, UGFPL hived off the Kolkata unit and transferred most of the plants and machineries to the Jamshedpur unit in a bid to consolidate activities and lower overhead costs.
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