Rationale
The assigned ratings
favourably factor in Goodluck India Limited's (GIL) experienced management and
its long track record of operations in the downstream steel industry. It has a
diversified product mix, which includes a wide range of pipes and tubes (such
as black pipes, galvanised pipes, and precision tubes) along with cold rolled
sheets, forged components and structural engineering products. GIL remains well
diversified in terms of product mix, insulating it from the risk of slowdown in
any particular industry, and also in terms of geographical presence with
exports constituting a healthy share of GIL's overall revenue. Access to
overseas markets insulates GIL's revenue profile from demand fluctuations in
the domestic market and provides higher growth opportunities. The company's
technical expertise in manufacturing high precision and value-added products
like auto tubes, forged components and critical engineering structures
(comprising more than 50% of the total sales) ensured better pricing
flexibility over the years, strengthening the company's operating profile. The
ratings also draw comfort from the company's established relationship with a
reputed clientele comprising Larsen & Toubro Limited (rated
[ICRA]AAA/Stable/A1+), Hindustan Aeronautics Limited (rated
[ICRA]AA+/Stable/A1+) etc, which ensures repeat business and mitigates the
counterparty credit risk to a large extent. While assigning the ratings, ICRA
has also noted the company's ability to report profitable operations across
business cycles. The company reported a healthy financial performance in Q1
FY2022, posting its best quarterly performance in the recent years with a ~43%
quarter-on-quarter growth in operating profits. ICRA believes that GIL's
business outlook remains favourable for the remainder of FY2022 with resilient
demand from the end-user industries, which in turn is expected to support
higher asset sweating and consequently healthy earnings growth. The ratings
are, however, tempered by GIL's working capital intensive nature of operations
owing to high inventory requirements, high collection period, and prompt
payment terms with its suppliers. This led to a high reliance on working
capital borrowings and limited available headroom in working capital limits.
With modest margins, GIL had to depend on borrowings to fund its business
growth. Besides, sizeable debt-funded capex undertaken in the past, led to consistently
negative free cash flows over the years, resulting in an increase in the
overall debt levels relative to the size of the balance sheet. High debt levels
and moderate profitability resulted in modest debt coverage indicators for the
company. The ratings also factor in the susceptibility of GIL's profitability
and cash flows to the volatility in raw material prices. Besides, the
profitability remains susceptible to the prevailing competition in the market,
given the fragmented nature of the downstream finished steel conversion
industry. However, ICRA believes that such competition is mitigated to an
extent by the company's sizeable revenue generation from the high precision and
value-added segments, like auto-steel tubes and forgings, where margins remain
attractive. While assigning the ratings, ICRA has noted that the company's
incremental return on capital employed has remained subdued due to low asset
sweating of its new facility in Bhuj, Gujarat. The Stable outlook on the
long-term rating reflects ICRA's expectations that GIL will continue to benefit
from the favourable operating environment for its products, which will support
healthy earnings growth in the near to medium term.
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