Scanned by CamScanner

India Ratings Downgrades Uttam Galva Steels to IND D; Off

RWN

22

By SudarshanShreenivas
IndiaRatingsandResearch(IndRa)hasdowngradedUttamGalvaSteelsLtds(UGSL)LongTerm

APR2016

IssuerRatingtoINDDfromINDBBB+whileresolvingtheRatingWatchNegative(RWN).The
agencyhasalsodowngradedtheratingsonUGSLsvariousbankfacilitiestoINDDfromIND
BBB+/RWNandINDA2/RWN.Afulllistofratingactionsisattheendofthiscommentary.
The downgrade is driven by UGSLs ongoing delays in debt servicing since February 2016. The
delays are a result of the liquidity stress currently being faced by the company given the
challenging operating environment and its inability to refinance its longterm borrowings
accordingtoitsearlierproposedrefinancingscheme.Theagencyhastakenaconsolidatedview
ofUGSLanditssubsidiaries.

KEY RATING DRIVERS

Delays in Debt Servicing: One of UGSLs lenders has confirmed to the agency about the companys continuous
overutilisation of the fundbased lines in excess of 30 days in March 2016. This occurred due to the company
debitingitscashcreditaccountonthedevolvementofaletterofcreditinFebruary2016forwhichitwasunableto
makepaymentswhendue.Thecompanyisalsodelayingservicingofitstermdebtobligations.Thedelaysindebt
servicinghavebeenbecauseofUGSLsconstrainedcashflowsandinabilitytorefinanceitstermdebtobligationstill
date. In its previous rating action commentary dated 24 November 2015, the agency had stated that a further
downgrade could result from UGSLs inability to refinance its term loans, leading to heightened liquidity pressure
becauseofhighdebtservicingrequirementsandinadequatecashflow.Thecompanyisintalkswithitslendersfor
refinancing under the 5/25 scheme, but there continues to be an uncertainty with regard to the timeline by when
thesamecanbeachieved.

DeteriorationinOperatingEnvironment:ThedemandsupplysituationforsteelinIndiaremainedweakin
FY16duetomutedindustrialactivityandlargescalecheapimports.Thepricesofhotrolledcoils(HRC)aswellas
downstream products steadily dropped till January 2016, despite the safeguard duty of 20% on HRC imports
imposed in September 2015. Largescale imports of HRC, cold rolled coils and colour coated steels into India and
othermarketsfromcountriessuchasChinaandRussiakeptglobalpricesofthesecommoditiesatlowlevels.Against
thisbackdrop,UGSLhadcontractedtoimportlargequantitiesofHRCfordeliveriesin3QFY16.Itslandedcostrose
significantlyinthequarterduetothesafeguarddutyandasaresultwasmuchhigherthanHRCpurchasedbyothers
on spot basis from international suppliers for delivery in this period. Moreover, in 3QFY16 the landed cost of
imported finished goods (for instance cold rolled coils) was lower than that of HRC after safeguard duty, due to
which traders and manufacturers who had entered into contracts for largescale imports of HRC suffered inventory
writedowns.

NoBenefitofMinimumImportPrice:UGSLisnotlikelytobenefitmateriallyfromtheimpositionofminimum
importprice(MIP)inJanuary2016asthiswouldprimarilybenefitintegratedsteelcompanies.Whilethelandedcost
forsteelimporterswouldbeequaltoMIP,domesticintegratedsteelproducerswillhavetheflexibilitytopricetheir
offerings even below MIP, to remain competitive. As a result, the benefit that the company earlier had from the
importofHRC(itsmainrawmaterial)atcompetitiverateshasnowbeenlargelyeroded.

SharpDeteriorationinQuarterlyFinancials:TheexpectedimprovementinUGSLsoperatingprofitabilityfrom
thecostreductionstrategiesimplementedduringFY16wascontingentonnofurtherdropinproductprices
whereassteelpricesdeclinedsharplyintheyear.Asaresult,UGSLsEBITDAmarginsdeclinedtonegative
8.36%in3QFY16from7.6%intheearlierquarter(8.5%in1QFY16).

RATING SENSITIVITIES
Threeconsecutivemonthsoftimelydebtservicingcanresultinaratingupgrade.

COMPANY PROFILE
Incorporatedin1985,UGSLmanufacturescoldrolledsheets,coldrolledcloseannealedsheets,galvanisedplainand
corrugatedsheetsandcolourcoatedlines.
UGSLsratingsareasfollows:
LongTermIssuerRating:downgradedtoINDDfromINDBBB+offRWN
INR28.4bnlongtermloans:downgradedtoINDDfromINDBBB+offRWN
INR4bnfundbasedlimits:downgradedtoINDDfromINDBBB+offRWN
INR24.4bnnonfundbasedlimits:downgradedtoINDDfromINDA2offRWN
INR1bnshorttermdebt:downgradedtoINDDfromINDA2offRWN
INR2bnstandbylimits:downgradedtoINDDfromINDA2offRWN
ProposedINR2bnnonfundbasedlimit:downgradedtoProvisionalINDDfromProvisionalINDA2offRWN

SOLICITATION DISCLOSURES
Additional information is available at www.indiaratings.co.in. The ratings above were solicited by, or on behalf of,
theissuer,andtherefore,IndiaRatingshasbeencompensatedfortheprovisionoftheratings.
Ratings are not a recommendation or suggestion, directly or indirectly, to you or any other person, to buy, sell,
make or hold any investment, loan or security or to undertake any investment strategy with respect to any
investment,loanorsecurityoranyissuer.

DISCLAIMER
ALL CREDIT RATINGS ASSIGNED BY INDIA RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS.
PLEASE

READ

THESE

LIMITATIONS

AND

DISCLAIMERS

BY

FOLLOWING

THIS

LINK:

HTTPS://WWW.INDIARATINGS.CO.IN/RATINGDEFINITIONS. IN ADDITION, RATING DEFINITIONS AND THE TERMS

OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE WWW.INDIARATINGS.CO.IN.
PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. INDIA
RATINGS CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE,
ANDOTHERRELEVANTPOLICIESANDPROCEDURESAREALSOAVAILABLEFROMTHECODEOFCONDUCTSECTION
OFTHISSITE.

Rating Outstanding

(Ason25/Apr/2016)

LongTermIssuerRating

INDD/RatingWatchOff

FundBasedWorkingCapitalLimit

INDD/RatingWatchOff

INR4000m

NonFundBasedWorkingCapitalLimit

INDD/RatingWatchOff

INR24360m

NonFundBasedWorkingCapitalLimit

ProvisionalINDD/RatingWatchOff

INR2000m

Other

INDD/RatingWatchOff

INR2000m

ShortTermDebt

INDD/RatingWatchOff

INR1000m

Termloan

INDD/RatingWatchOff

INR28400m

NonConvertibleDebenture

INDWD

INR1000m

Termloan

INDWD

INR1500m

Applicable Criteria
CorporateRatingMethodology

Analyst Names
PrimaryAnalyst
SudarshanShreenivas

Director
IndiaRatingsandResearchPvtLtdWockhardtTowers,4thfloor,WestWingPlotC2,GBlock.
BandraKurlaComplexBandra(East),Mumbai400051
+912240001783

SecondaryAnalyst
MahaveerJain

AssociateDirector
+912240001768

CommitteeChairperson
SreenivasaPrasanna

SeniorDirector
+914443401711

MediaRelation
MihirMukherjee

ManagerCorporateCommunicationsandInvestorRelations
+912240356121