Fitch Ratings has today assigned India's Sahyogi Distributors Limited's (SDL) non-fund based limits aggregating INR100.0m a National Short-term rating of 'F4(ind)'.
SDL is a trading company dealing in diversified finished steel products, acting as the authorised dealer and sub-dealer with various secondary steel manufacturers in the eastern region of the country. The company carries limited inventory price risk as it enters into buying agreements only upon receipt of confirmed orders from customers, with supplies directly routed to the customer from its vendors. SDL manages its overall working capital cycle well through its creditor days. With no funded limits from the banking systems, the occasional requirements for meeting its cash flow mismatches are met by way of unsecured loans from its group companies. Fitch also notes that SDL is a part of the Impex Group of companies, a renowned integrated steel manufacturer in eastern region of India, although the agency has assigned the rating on a standalone basis.
The rating is constrained by SDL's limited track record and relatively small size of operations in the steel trading business, as well as the pressure on its margins due to the downturn in the steel sector. Although SDL has been in operation for the past four years and has exhibited consistent revenue growth by increased trading volumes, Fitch remains concerned about its low margins, which are expected to remain subdued in the short- to medium- term in line with the agency's outlook on the steel sector.
Fitch notes that a significant increase in sales volume and sustaining EBITDA margins over 2%, along with maintaining a low financial leverage zero debt will be a positive ratings trigger. Conversely, any significant increases in debt, resulting from reduced EBITDA margins below 1% and/or increased working capital requirements, will be reason for a ratings downgrade.
SDL had total debt of INR68.9m at FY08, which was repaid in FY09. Over the past three years, the company has seen growth in revenues to INR533.9m in FY08 from INR178.1m in FY06. The EBITDA margin has been quite volatile, with 2.2% in FY08, 0.8% in FY07 and 1.6% in FY06 due to the inherent nature of business and changing market scenarios.
Note to editors: Fitch's National ratings provide a relative measure of creditworthiness for rated entities in countries with relatively low international sovereign ratings and where there is demand for such ratings. The best risk within a country is rated 'AAA' and other credits are rated only relative to this risk. National ratings are designed for use mainly by local investors in local markets and are signified by the addition of an identifier for the country concerned, such as 'AAA(ind)' for National ratings in India. Specific letter grades are not therefore internationally comparable.
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