ICRA Nepal has rated long term and short term loans of Pathibhara Steel Industries; loans worth Rs.800 Million rated

ICRA Nepal has assigned the long-term rating of [ICRA NP] LBB (pronounced ICRA NP L Double B) to the NPR 73.57-million long-term loans of Pathibhara Steels Industries Private Limited (PSI). ICRA Nepal has also assigned the short-term rating of [ICRANP] A4+ (pronounced ICRA NP A Four Plus) to the NPR 726.43-million short-term loans (including proposed limits) of PSI.

The rating considers positive demand outlook for steel products in Nepal and duty protection accorded to the domestic steel industries by the government of Nepal (GoN), through import barriers on finished steel products. This augurs well for growth and profitability of steel producers in Nepal, helping shield the local industry from the threat of cheaper finished steel imports. The ratings also factor in the strategic location of the project, close to the core market area in Jhapa and adjoining districts and lack of other competitors in the immediate vicinity. This remains a positive for future business growth prospect. The ratings also factor in promoter’s experience in processing and trading steel products and their network in the construction hardware retailing (trading) segment, providing established supply chain for pushing incremental sales.

However, the rating remains constrained by PSI’s small scale of operation and its lack of established track record, especially in thermo-mechanically treated (TMT) bar manufacturing. The ratings are also constrained by the company’s limited geographical and product diversification, and the cyclical nature of the steel business, exposing the company to volatile cash-flows. PSI has enhanced its manufacturing capacity by adding higher-capacity machinery in its rolling mill in Q1 FY2018 and has started manufacturing TMT bars from Q4 FY2018. PSI’s turnover has reported marked increase in FY2018, on less than 3 months of TMT sales. However, being a new entrant to the TMT segment, the plant capacity utilization has remained suboptimal thus far, and its ability to gain traction with customers, ramp-up production, and achieve targeted sales will be important. ICRA notes that PSI’s operations remain highly working capital intensive, which adversely impacts its liquidity profile, and increases its dependence on external financing to fund capacity ramp-up. Therefore, besides scaling up the business, achieving stability (especially managing its cash cycle) and establishing adequate control mechanism also remains to be seen.

On the funding side, PSI is yet to tie up its debt to support higher working capital requirement. Its ability to timely secure working capital financing will be important to achieve targeted growth. Rating concerns also emanate from forex risk because of the purchase of steel billet in US Dollars and sales revenue in domestic currency.

Pathibhara Steel Industries Private Limited (PSI) was incorporated in December 2012 as a partnership firm having six individual partners. The firm was converted into a private limited company in July 15, 2018; with same set of partners as shareholders. As of mid-July 2018, major promoters of PSI include Mr. Arjun Mainali, Mr. Kapil Bimali, Mr. Manorath Bhetwal, Mr. Hem Raj Sangraula and Mr. Om Prakash Bimali.