Siddhi Laxmi Steels Private Limited looking to raise debt worth Rs.2.51 Arba; ICRA Nepal grades the issue

ICRA Nepal has assigned a long-term rating of [ICRANP] LB+ to the NPR 1,260 million long-term loans of Siddhi Laxmi Steels Private Limited (SLS). ICRA Nepal has also assigned a short-term rating of [ICRANP] A4 to the existing and proposed short-term loans of NPR 1,250 million (including non-fund based limits).

The assigned rating factors the positive demand outlook for steel products in Nepal and duty protection accorded to the domestic steel industry by the Government of Nepal (GoN), through import barriers on finished steel products. The rating also considers SLS’s promoter group’s established reputation in the domestic business arena; albeit not in the steel sector. The rating further takes comfort from SLS’s management team with extensive experience in the steel and cement industry. ICRA Nepal notes the locational advantage available to SLS from its proximity to the Indian border and the national (east-west) highway for raw material import from India as well as product distribution (TMT bars) across the country.

The rating is, however, constrained by the project execution risk, albeit mitigated by the advanced stage of project development. Off-take of the manufactured product remains the key risk for SLS, given the highly fragmented and competitive TMT segment, lack of established supply chain and limited experience of the promoters in this sector. Smooth off-take remains paramount for SLS’s debt repayment capacity, given the high gearing of the project. Further, the company’s exposure to regulatory risks also remains a key rating sensitivity, as any reduction in import tariff by the GoN will have an adverse impact on the profit margin and financial indicators of SLS. The rating is also tempered by the company’s limited product diversification (100% revenues expected from TMT bars in the near term and ~90% in the medium term) and the inherent cyclicality associated with the steel industry, thus exposing the company to cash flow volatility. SLS is also exposed to forex risks, with its raw material (billet) purchases in US Dollar terms and sales realization in the domestic currency. This risk has also been factored into the assigned rating.

Promoted by the Laxmi Group, Siddhi Laxmi Steels Private Limited was established in 2017 as a private limited company. It is a family-owned business, with Mr. Ganesh Bahadur Shrestha and his three sons, Mr. Anjan Shrestha, Mr. Nirakar Shrestha and Mr. Niranjan Shrestha, holding the entire equity stake (through Laxmi Holding Private Limited, an SPV).

SLS is setting up a rolling mill for manufacturing TMT steel bars (under the brand name, “Samriddhi Steels”) using billets that are mainly imported from India. With an annual installed production capacity of ~200 K metric tonne (MT), the factory is located in the Ramgram Municipality of Nawalparasi. The estimated total project cost is ~NPR 1,642 million (~NPR 1,350 earmarked for TMT line) out of which NPR 1,260 million was debt-funded (~NPR 1,000 million earmarked for TMT line) and the rest equity funded. As of April 2019, ~90% of the project’s financial progress had been achieved. In terms of physical progress, the project is in the advanced/final stage of completion and is expected to be operational by July 2019. SLS mainly plans to cater to the domestic demand for TMT bars.

Source: ICRA Nepal