TEXT-Fitch revises Ambica Steels' outlook to positive

(The following statement was released by the rating agency)

Jan 19 - Fitch Ratings has revised India-based Ambica Steels Limited's (ASL) Outlook to Positive from Stable. Its National Long-Term rating has been affirmed at 'Fitch BB+(ind)'. A list of additional rating actions is provided at the end of this commentary.

The Outlook revision reflects ASL's improved financial performance in FY11 (end-March 2011) and H1FY12. Despite a decline in sales volume by 7.37% yoy to 45,967 tonnes in FY11, revenues increased by 21% yoy to INR3,998.88m due to stronger revenue per tonne for its products, supported by a high value-added product mix. The blended net revenue per tonne increased by 30% yoy to INR86,134 in FY11.

EBITDA margin also improved marginally to 6.8% in FY11 (FY10: 6.6%), as increased input costs were passed on to its customers. This along with a slight reduction in debt level to INR814.43m in FY11 from INR816.33m in FY10 led to financial leverage (total adjusted net debt/operating EBITDA) improving to 2.98x from 3.75x, which further improved to 1.95x (annualised) at 30 September 2011. ASL's exports also increased to INR1,211m in FY11 and was close to its previous exports peak of INR1,265m, after declining by 70% yoy in FY10 due to the economic slowdown and destocking by various steel majors.

The ratings are underpinned by ASL's experienced founders (promoters) and a diversified customer base. The ratings also factor in the highly working capital intensive nature of ASL's business and the volatility in input costs.

ASL is implementing INR276m capex to enhance the capacity of its bright steel bar plant to 24,000 tonnes per annum (tpa) from the existing 7,200tpa by setting up a combined peeling line and automating various operations. The project has been delayed from October 2011 to July 2012 due to the delays on the part of equipment supplier. Some facilities are expected to be completed by end-March 2012. The project has achieved financial closure and is being funded by a debt to equity ratio of 3:1. Post completion of the capex, Fitch expects ASL's revenue and profitability to improve due to a better product mix comprising high-value added products.

Positive rating actions may result from a significant improvement in the ASL's profitability resulting in financial leverage sustaining below 3.5x from FY12 onwards. Conversely, a decline in profitability and financial leverage exceeding 3.5x may result in the revision of Outlook back to Stable.

ASL is a closely held company engaged in the manufacturing of stainless steel products like ingots, billets, bright bars, round bars and flats. In H1FY12, it recorded net revenue of INR2,508.9m with an EBITDA margin of 7%.