Fitch afrms Goyal Energy at 'Fitch B+(ind)'

Tue Jan 31, 2012

Jan 31 - Fitch Ratings has affirmed India-based Goyal Energy & Steel Pvt. Ltd.'s (GESPL) National Long-Term rating at 'Fitch B+(ind)'. The Outlook is Stable. A list of additional ratings is provided at the end of this commentary.

The affirmation reflects improvements in GESPL's net financial leverage (net adjusted debt/EBITDA) to 6.2x in the financial year ended March 2011 (FY11) from 9.6x in FY10, as its EBITDA margins increased to 4.7% from 2.5%. This is mainly due to higher average sales realisation per tonne of angles and channels at the company's rolling mill compared with previous year's and also because of partial backward integration through an ingots manufacturing facility.

The ratings, however, remain constrained by the company's tight liquidity position, as reflected through its continuous 100% utilisation and occasional over-utilisation of the fund-based limits by 0.5%-1%. The ratings are further constrained by the price volatility risk because GESPL buys its raw materials from the open market.

Positive rating guidelines include an improvement in GESPL's liquidity position in the next two quarters along with the maintenance of the current financial profile. Negative rating guidelines include any significant debt-funded capex leading to a decline in EBITDA margins and hence deterioration in net leverage to 10x.

In FY11, GESPL reported revenue of INR1,222.9m (FY10: INR1,160.4m). Its total adjusted debt increased to INR367.9m in FY11 (FY10: INR305.0m), while free cash flow (FCF), though improved, remained negative at INR126.5m (FY10: negative INR135.6m). Fitch expects FCF to remain negative in FY12 mainly due to the company's higher working capital requirements because of increased volume of business.

Fitch has also affirmed GESPL's bank facilities as follows:

- INR32.8m term loans: affirmed at 'Fitch B+(ind)'

- INR395m fund-based limits (increased from INR245m): affirmed at 'Fitch B+(ind)'

(sourced Reuters)