Mahavir Coal Resources Private Limited

Mahavir Coal Resources Private Limited Ratings Facilities Amount (Rs. crore) Ratings 1 Rating Action Long-term Bank Facilities 25 (enhanced from Rs.11.25 crore) CARE BB; Stable (Double B; Outlook: Stable) Reaffirmed Total Facilities 25 (Rupees Twenty Five crore only) Rating Rationale The rating of Mahavir Coal Resources Pvt. Ltd. (MCRPL) continues to be constrained on account of the continued de-growth in the scale of its coal trading business, and its working capital intensive nature of its operations. The rating is also constrained on account of MCRPL s exposure to price risk associated with its coal trading business especially in the light of auction driven process for procurement of coal along with weak financial risk profile of some of its key customers. The rating however, continues to derive strength from promoters experience and established operations in the coal trading and logistics business, improvement in profitability with higher proportion of revenue from logistics business and its comfortable debt coverage indicators. MCRPL s ability to increase the scale of its operations, both in logistics and coal trading businesses, and improve its profitability while effectively managing the risks associated with coal prices along with efficient working capital management are the key rating sensitivities. Background Incorporated in 2008, Mahavir Coal Resources Private Limited (MCRPL) is engaged in trading and transportation of coal. MCRPL was originally established in 1990 as a proprietorship concern by Mr Uttam Chand Jain and the firm was reconstituted as a private limited company in 2008. MCRPL procures coal mainly through e-auction route from Coal India Ltd. (CIL) and its subsidiaries and sells to companies such as Jaypee Cement Ltd, Ambuja Cements Ltd, and Reliance Group. In its transportation business, MCRPL provides services to companies such as Essar Power, Lanco Power, DB Power, L&T Power Limited, etc. MCRPL s warehouses are located in Katni (Madhya Pradesh), Bilaspur (Chhattisgarh), and Nagpur (Maharashtra). Credit Risk Assessment Experienced promoters MCRPL was established as a proprietorship concern by Mr. Uttam Chand Jain having an experience of over three decades in the coal trading and logistics. MCRPL was incorporated in 2008 by reconstituting the firm as a private limited company. Presently, MCRPL is managed by Mr. Anurag Jain and Mr. Anuj Jain, the sons of Mr. Uttam Chand Jain. Both of them have been involved in the business since the last two decades. Apart from MCRPL, the promoters have been involved in related businesses including operating coal washeries and logistics business through other associated entities. Growth in scale of transportation business and better operating profitability, but reduction in coal trading volumes leading to lower total operating income (TOI) MCRPL primarily procures coal from Coal India Ltd. (CIL) and its subsidiaries operating in Central and Eastern India. Over the last three years ended FY17, MCRPL witnessed a constant decline in its coal trading volumes, due to lower demand from its key customers including Jaypee, Lanco and Abhijeet groups due to their own financial problems. A snapshot of MCRPL s coal trading volume is given below: Coal trading business FY15 FY16 FY17 Sales Value (Rs. Crore) 233.61 147.31 103.95 Sales Quantity (MT) 765,940 435,415 304,047 Sales Realization (Rs. per MT) 3,050 3,383 3,419 This decline in the coal trading volume has led to lower TOI for MCRPL over the last few years. To offset this decline, MCRPL has focused on logistics services and coal washery business for its clients which have a higher operating profitability compared to its trading business. MCRPL invested around Rs.23 crore over the last 3-4 years in these businesses (around Rs.16 crore in logistics infrastructure and around Rs.7 crore in other capex related to coal sizing and coal crushing plants). A snapshot of overall revenue of MCRPL is given below: 1

Particulars FY15 FY16 FY17 Total Operating Income (Rs. Crore) 268.50 172.29 150.16 Coal Trading 233.61 147.31 103.95 Coal Transportation and Other Income 34.89 24.97 46.21 Proportion in TOI (%) Coal Trading 87 86 69 Coal Transportation and Other Income 13 14 31 PBILDT Margin 5.08 6.36 9.97 PAT Margin 2.42 3.06 5.33 The increase in share of transportation in the overall revenue also translated into better operating profitability for MCRPL. It further plans to invest another Rs.8.95 crore in establishing a coal washery at Singrauli in Madhya Pradesh through which it would provide coal washing services to power plants and other consumers located nearby. The project is expected to be funded through term loan of Rs.5.00 crore and balance through unsecured loans from promoters. Established operations but weak financial risk profile of key customers MCRPL has a long track record of operations in coal trading business of over three decades. MCRPL procures coal from various subsidiaries of CIL and its warehouses are located in the vicinity of the mines which translates into savings in upfront logistics costs. Besides this, MCRPL also provides services of timely movement of coal from colliery to processing plants and onwards to customer s premises. For this, MCRPL owns a fleet of around 70 trucks & Loaders and has tie-ups with other small-scale transporters. However, some of the key clients of the company including Jaypee group, Abhijeet group and Lanco group have a weak financial risk profile, translating into risk of elongated receivables or bad debt for the supplies/services to these entities. As on March 31,, MCRPL had outstanding receivables of Rs.56.33 crore and around 55% of total receivables were from these entities. Price risk associated with coal trading operations, especially in the light of auction based procurement with inherently thin profitability MCRPL procures coal from the auction of coal supplies by CIL and its subsidiaries, which translates into risk of non-receipt of desired quantity and quality of coal along with inherently thin profitability. MCRPL s gross margin for its coal trading business remained in the range of 8.00% to 15.00% during the last three years ended FY17. Further, the volatility in the price of coal also exposes MCRPL to any adverse movement in the prices which it is not able to pass on to its customers. The price of domestic coal in the market is largely governed by the supply in the domestic market, with CIL controlling a majority of the mining operations and schedule and it also exhibits volatility in line with that in the international market. Further, there are no market instruments available to hedge the price exposure, providing no ready avenue to hedge the risk. In its transportation business also, the operating profitability remains limited owing to the intense competition, fragmented industry and presence of a large unorganized sector. However, with increased contribution of logistics operations in MCRPL s revenue, the profitability also showed an improving trend. Working capital intensive nature of operations The operations of MCRPL are working capital intensive in nature with investment required primarily in receivables along with some inventory holding. In its trading business, MCRPL keeps a ready inventory of desired grades of thermal coal to supply to its clients operating power plants in the vicinity. It also extends a credit period of around 190 days for realization of the payment, translating into an elongated collection period. However, it receives a credit period of only 75 days from its nonauction suppliers (other traders and logistics services providers), collectively translating into an elongated operating cycle. During FY17, the collection period elongated due to delay in receipt of dues from some key customers. The utilization of the fund based working capital limits of MCRPL remained high at 85-90% during the last 12 months ended September. Comfortable capital structure and debt coverage indicators owing to improvement in operating profitability While MCRPL s TOI has continuously declined over the last three years ended FY17, its operating profitability improved with higher share of income from its transportation business, which has better profitability along with some expansion in the spread for its coal trading business. MCRPL s debt coverage indicators were comfortable marked by an overall gearing of 0.71x as on March 31,. The overall borrowings availed by MCRPL remained low primarily on account of reduction in scale of operations over the last two years and an increasing networth base due to accretion of profits to networth. The total debt/gca also remained at a comfortable level. Performance during H1FY18: As per unaudited results of H1FY18, MCRPL has achieved TOI of Rs.101.98 crore. 2

Financial Performance (Rs. Cr) For the period ended / as at March 31, 2015 2016 (12m, A) (12m, A) (12m, P) Working Results Net Sales 233.61 147.31 103.95 Total Operating income 268.50 172.29 150.16 PBILDT 13.63 10.96 14.97 Interest 3.70 3.58 3.67 Depreciation 0.40 0.86 1.48 PBT 9.66 8.43 11.44 PAT (after deferred tax) 6.50 5.27 8.01 Gross Cash Accruals 7.26 6.81 9.49 Financial Position Equity Share Capital 0.98 0.98 0.98 Networth 36.13 41.38 52.82 Total capital employed 69.51 74.81 92.20 Key Ratios Growth Growth in Total income (%) 117.32 (35.83) (12.84) Growth in PAT (after D.Tax) (%) 171.87 (18.89) 51.81 Profitability PBILDT/Total Op. income (%) 5.08 6.36 9.97 PAT (after deferred tax)/ Total income (%) 2.42 3.06 5.33 ROCE (%) 21.00 16.65 18.09 Average cost of borrowing (%) 12.34 11.16 10.55 Solvency Long-term Debt Equity ratio (times) 0.13 0.14 0.24 Overall gearing ratio (times) 0.90 0.77 0.71 Interest coverage (times) 3.69 3.06 4.08 Term debt/gross cash accruals (years) 0.62 0.85 1.32 Total debt/gross cash accruals (years) 4.46 4.67 3.98 Liquidity Current ratio (times) 1.01 1.25 1.75 Quick ratio (times) 0.74 1.02 1.57 Turnover Average collection period (days) 60 123 191 Average creditors (days) 45 83 75 Average inventory (days) 28 41 36 Operating cycle (days) 43 81 151 A Audited; P Provisional Annexure - I Details of Rated Facilities 1. Long-term bank facilities 1.A. Fund-based working capital limits (Rs. Cr) Sr. No. Name of Lender Amount Remarks 1. Union Bank of India 25 Cash Credit limit Total 25 Total Long-term bank facilities (1.A.) Total Bank Facilities (1) Rs.25 crore Rs.25 crore 3

Analyst Contact: Name: Mr. Harshveer Trivedi Tel: 079 4026 5610 Mobile: 85111 90020 Email: harshveer.trivedi@careratings.com (This follows our brief rationale for entity published on 28 November, ) Disclaimer CARE s ratings are opinions on credit quality and are not recommendations to sanction, renew, disburse or recall the concerned bank facilities or to buy, sell or hold any security. CARE has based its ratings/outlooks on information obtained from sources believed by it to be accurate and reliable. CARE does not, however, guarantee the accuracy, adequacy or completeness of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. Most entities whose bank facilities/instruments are rated by CARE have paid a credit rating fee, based on the amount and type of bank facilities/instruments. In case of partnership/proprietary concerns, the rating/outlook assigned by CARE is based on the capital deployed by the partners/proprietor and the financial strength of the firm at present. The rating/outlook may undergo change in case of withdrawal of capital or the unsecured loans brought in by the partners/proprietor in addition to the financial performance and other relevant factors. 4

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