India Ratings and Research (Ind-Ra) has upgraded Adhunik Industries (AIL) long-term issuer rating to 'BBB' from 'BBB-'. The outlook is stable.

The upgrade reflects the improvement in interest coverage of AIL to 1.9x in FY15 (FY14: 1.35x) due to a reduction in interest cost. The interest cost declined due to lower bill discounting charges as well as lower interest on long-term debt and unsecured loans.

Ind-Ra expects a further improvement in the credit metrics of AIL in FY16 with net leverage improving to below 2.5x (FY15: 2.68x) and maintenance of the interest cover around 2x. The improvement will be based on a reduction in long-term debt due to schedule repayments and repayments of unsecured loan and stable profitability. Also, interest cost is likely to decline further in FY16 due to lower bill discounting charges and lower interest on long-term debts.

AIL has maintained its profitability at 7%-8% since FY12 which increased to 9.37% in FY15 as the company benefitted from high discounts on the bulk purchase of raw materials. However, the margins are likely to be around 8% in FY16.

The ratings are also underpinned by the likely improvement in AIL’s liquidity on the back of an increase in working capital limits by INR115.5m during FY16. The average maximum use of the working capital limits was around 95% over the 12 months ended November 2015.

AIL’s revenue declined to Rs 4,112.3 million in FY15 (FY14: Rs 4,409 million, FY13: Rs 4,137 million) due to a decline in price realisation because of weak demand.

The ratings are, however, constrained by the company's highly working capital intensive nature of business with a net cash conversion cycle of around 100 days. The ratings also remain constrained by the highly competitive and commoditised nature of the iron and steel business.